Services passé; farm, factory need to drive GDP

The lynchpin of the Indian economy in the last two decades has been its booming services sector, contributing about two-thirds of growth.

That needs to change, said Duvvuri Subbarao, governor of the Reserve Bank of India, while concurring with the views of the India Report released by the Indira Gandhi Institute of Development Research (IGIDR) on Monday.

“We can’t depend on the services sector to drive our growth. We need to focus on manufacturing and, more importantly, on agriculture for sustainable growth,” he said. Simply because the services sector is less employment intensive compared with agriculture.

“If agricultural productivity goes up to 4% as we want, it will engender about 100-150 million jobs. Obviously the services sector cannot find that many productive jobs.”

Subbarao said both in terms of share of gross domestic product (GDP) and contribution to GDP, the services sector has been unique. Today services sector is 65% of GDP. It used to be 50% in the 1990s and contribution to growth of services sector is over 70%, he said.

“But now questions have been raised whether this model of services-led growth is sustainable.”

Economists agree the role of the farm has turned crucial.
“Growth of the agricultural sector leads to supply and
employment opportunities,” said Abheek Barua, chief economist, HDFC Bank. “It is already happening, as is evident from the fact that productivity and wages of the agriculture sector are improving.”

But this can’t happen immediately, said Indranil Pan, chief economist, Kotak Mahindra Bank. “There are many bottlenecks there,” he said, underscoring the need for major reforms. “Only then can it be a future growth driver.”

One trick to do that, said Rupa Rege Nitsure, chief economist, Bank of Baroda, is to reduce the dependence on monsoon in agriculture and improving the infrastructure related to it.

“That will lead to the agriculture sector becoming the driver of future growth,” she said.

Samiran Chakrabarty, chief economist with Standard Chartered Bank, said the expectation is that the manufacturing sector will be able to employ more people compared with the sevices sector, where usually the educated class gets the better jobs.

“India is expected to see a democratic boom over the next 20 years which will see close to 200 million new people joining the workforce. Meaning, there will be a requirement for that many jobs going ahead,” he said.

“Some of the changes from services to manufacturing will be natural as an increase in demand will require to be addressed, which creates job opportunities. The rest will depend on the policy side. The new manufacturing policy is expected to be unveiled soon, and hopefully a lot of these things will be addressed in that.”