Madan Sabnavis: The services sector mirage

The predominance of unorganised elements vitiate the sector's performance.

The services story is the most happening thing in India today. Or so it seems. And why not, considering that services account for 60 per cent of our GDP and has grown by over 8.5 per cent per annum in the last five years. It is not surprising that we have a lot of foreign interest in this segment because the market is large as almost everyone consumes services in the country in some form or the other. The IT prologue is only a part of the big picture that is being displayed from all corners. But, if you pause and reflect, and look deeper, you will realise that something is missing somewhere.

Economic history always has some lessons for the survivors; and patterns seldom change, and if they do, we need to do the questioning. The RBI annual report for 2005-06 has highlighted the fact that the predominance of the service sector is an anomaly because the rules set by history have been violated. Economies start of with an agrarian revolution, graduate with an industrial revolution and then mature to become services driven as their sophisticated forms move in tandem with the other sectors.

We have not had an agrarian revolution and the Green Revolution seems to be more a part of our mythology for the present generation. The industrial revolution has not asserted itself in a definite manner though there is reason to believe that it may be on the way. We have then transited from an agrarian to a services driven economy since independence, which is a violation of the law of economic transition.

Further, if you look at the services sector, it is not like the service sector we see in the western developed countries. We may have a scattered Big Bazaar or a Café Coffee Day or a Hyatt Regency in the metros, but the prevalence of a Wal-Mart which dominates your vision across the US is missing. The same holds for the other segments.

The unique feature of our service sector is the dominance of the unorganised sector. Close to 50 per cent of the services sector is in the unorganised sector. This adds a new dimension to the meaning of this sector. The accompanied table provides a closer look at this sector.

Some interesting thoughts come to mind from this table. First, we do not see much of the IT sector here. That is so because IT receipts are in the form of foreign exchange and are included in the current receipts of the balance of payments and are not technically production in the country. Nasscom has valued the receipts at $36 billion, which if included, would increase the share of overall services to around 62 per cent in GDP. Curiously, if software exports are on CDs or floppy diskettes, then they get included under "other services". If the same is done overseas, it is treated as any other "non-factor service".

Second, the government has an important role to play in increasing the size of the services sector. The larger the administrative expenses, the greater would be the size of this sector. Intuitively, it can be seen that high fiscal deficits which are spent on defence or any other public good gets included in the services component.

Third, the issue with the unorganised sector dominating the GDP is the question of getting reliable data. There are no official records to talk of the value added in these sectors. The output estimates are based on imputations which could be outdated. There would be a tendency for overstatement in these cases, and hence, we have had situations where high services growth has been associated with low industrial and agricultural activity.

Last, a dominant unorganised sector makes comparison with the services sector of developed countries difficult. Our own kirana shops or 20-year-old pollution emitting trucks cannot be compared with the supermarkets, department stores and transport companies of the west. The same holds for the hotels and restaurants where value addition is coming from the large number of dhabas and tea stalls which cannot really be clubbed with the cafés and starred hotels. In fact, a large number of these services are being provided by people who are bordering on the infamous poverty line.

The predominance of the unorganised element in the services sector does vitiate to a large extent its performance as the high growth rate witnessed in the last few years loses the luster. If we are thinking of being on par with, say, the developed nations, we need to have a vibrant service sector where infrastructure services are dominated by the organised sector: we need more malls, apartments, financial supermarkets, organised retailing and transportation, hotels and so on. There is certainly a long way to go.

The writer is Chief Economist, NCDEX Ltd