People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 25

June 20, 2010

Capitalism “Indian-style”

C P Chandrasekhar


TO those fearful of any challenge to private property and the unbridled accumulation of capital, India’s recent growth experience serves as a new “model”. The evidence indicates that in most poor countries modern industry is unequal to the task of ensuring adequate employment to support the diversification of economic activity away from agriculture. But, these sections argue, India's recent growth trajectory proves that services can offer an alternative. Despite the country's low per capita income, its relatively high GDP growth rates of between 8 and 9 per cent per annum have been driven substantially by services. Given the historical experience with the diversification of economies at different levels of per capita income, this is unusual. The diversification away from agriculture in terms of sectoral shares in national output and employment is expected, at India’s level of per capita income, to result in a predominant shift towards manufacturing rather than services.


In the past, a premature increase in the share of services was considered an aberration because services were conventionally seen as activities characterised by lower levels of productivity and lower rates of increase in productivity. A country intent on raising productivity and per capita income was not expected to rely excessively on services. Further, services were conventionally treated as non-tradables, since their mode of delivery required the presence of the service provider at or near the point of provision. Hence, rapid GDP growth based on services in a reasonably open economy was expected to be destabilising. Growth would be accompanied by increased imports of food, raw materials and manufactured goods, but would not deliver the export revenues needed to finance this growth.


The Indian experience seems to belie these arguments. Services growth especially that of modern services such as communication services, financial services and IT and IT-enabled services, is not accompanied by a proportionate growth in employment, reflecting an increase in labour productivity. This makes India’s trajectory more acceptable from the productivity angle, even if not the most advantageous from the point of view of unemployed and underemployed workers in a labour-surplus economy. Moreover, technological changes and developments have made a number of services exportable through various modes of supply, including cross-border supply through digital transmission. Thus, in the case of IT and IT-enabled services in India, the expansion of output is driven by the expansion of exports, with positive balance of payments implications.




The growth of services of these kinds are seen as explaining the domination of  services as a group in the Indian economy, accounting for more than half its GDP and contributing an overwhelming share to its recent relatively high rate of growth. The rise in the share of services (excluding construction) in GDP has been particularly sharp since 1996-97, amounting to 6.8 percentage points over the subsequent ten years as compared with just 1.9 percentage points during the previous ten years.


This shift in favour of services occurred at a time when globally there was a technology-facilitated increase in the exports of services. India’s transition to being a predominantly service economy was at least partly because it benefited from this increase in the global exports of services with its share in world exports of services rising from 1.1 per cent in 2001 to 2.6 per cent in 2006. As a result India was ranked 11th among the world’s leading exporters of services. The only other developing country that contributed more than India was China.


Within exports of services, Software and Non-software miscellaneous services dominate. Thus, by 2001, software services and Non-software miscellaneous services accounted for 60 per cent of total services exports and this figure had risen to 64 per cent by 2007-08. Clearly, software services exports and business process outsourcing (BPO) were responsible for India’s success as a services exporter.


According to the Reserve Bank of India’s (RBI’s) balance of payments data, gross exports of software, business, financial and communication services amounted to 5.3 per cent of GDP at market prices in 2007-08, with software services exports touching 3.4 per cent of GDP. These figures compare with a merchandise exports to GDP ratio of 14.2 per cent. These sectors are, therefore, not just important sources of growth but also of foreign exchange earnings, supporting the balance of payments and making up for the fact that liberalisation has yet to trigger a commodity export boom from the country.


India's export success in the IT and IT-enabled services area has also contributed to an increased presence of these sectors within the domestic economy. In absolute and relative terms the size of the IT sector in India is now impressive. The Central Statistical Organisation has estimated that the share of ICT services in total GDP has increased from 3 per cent in 2000-01 to 6 per cent in 2007-08. ICT services dominate the ICT industry as a whole accounting for 90 per cent of GDP. And ICT services have increased their share in service sector GDP from 6 per cent in 2000-01 to 10 per cent in 2007-08. All this makes ICT services an important segment of the non-agricultural sector and gives rise to the impression that modern and more productive services are responsible for the dynamism of services and it contribution to GDP growth.




However, a closer look at the evidence suggests that there is still little reason to celebrate India’s post-liberalisation version of capitalist growth. Even now a large part of the services economy consists of low productivity services offering low paying, informal and insecure “employment”. India’s “new” and unusual growth trajectory has not delivered what is needed most: employment and a reasonable standard of living for the poor majority.


According to the data collated by consulting firm Global Insight on value added revenues generated in the knowledge-intensive services sectors, despite rapid growth, the absolute size of the sector in India remains small. Measured in 2000 constant price dollars, the global value added revenues from market-oriented, knowledge intensive services rose from $2.9 trillion in 1985, to $3.7 trillion in 1990, $4.4 trillion in 1995, $5.6 trillion in 2000, and $6.8 trillion in 2005. During this period, India’s share of these services rose from just below one half of one per cent to just above one per cent. That is, India was and remains a small player in this sector when global revenues from domestic sales and exports are taken into account.


But market-oriented knowledge intensive services (consisting of Communications, Financial and Business Services) are a growing presence within the Indian economy. The ratio of value added revenues from these services in 2000 constant price dollars to GDP in 2000 constant price dollars rose from 5.30 per cent in 1985, to 8.64 in 1995 and 11.96 per cent in 2005. This does point to a significant role for these services in the national economy, especially when compared with the corresponding values for ‘non-market oriented’, knowledge-intensive services (consisting of education and health services). Those values were 5.97, 4.81 and 5.72 per cent respectively in those years.


However, the figures suggest that the knowledge-intensive services sectors together (market and non-market oriented) accounted for 17.7 per cent of GDP. Adding on the 8 per cent contributed by Railways and Public administration and defence (as per the official National Accounts Statistics), the total comes to 25.7 per cent. That leaves almost half of the services sector unaccounted for, which presumably would consist substantially of unorganised services. This makes the argument that services are reflective of a new dynamism in India that much less convincing.


Thus, while modern services do play an important role in the Indian economy, so do traditional unorganised services offering extremely low earnings, which grow because of the inadequate employment opportunities in the primary and secondary sectors, especially those providing a reasonable wage and decent work conditions. What is disconcerting is that even in 2004-05, 41 per cent of the workforce in the tertiary sector was in the rural areas, which are unlikely to be in the nature of modern, productive services.




Further, despite the expansion of services, the growth of employment in this sector has been limited. According to figures from the National Sample Survey Organisation, tertiary sector employment in 2004-05 amounted to only 25 per cent of the work force despite the fact that more than 50 per cent of GDP came from this sector. Moreover, between 1999-00 and 2004-05, employment in the tertiary sector increased by only 22 per cent, whereas GDP at constant prices contributed by the service sector expanded by 44 per cent. This was possibly because high productivity services that delivered substantially in terms of GDP growth contributed little in terms of employment. 


A typical example is the IT sector, the contribution of which to employment does not compare with its role in the generation of income and foreign exchange. Going by NSS figures, employment in Computer related activities (Category 72 of National Industrial Classification 2004) which increased from 314 thousand in 1999-00 to 963 thousand in 2004-05, accounted for 0.2 per cent of the work force. If we consider categories 65 to 74 which covers all business services including Financial intermediation, and Real estate, renting and business activities, the share of employment in that sector is just 1.7 per cent. This explains in large measure the lack of correspondence of GDP and employment figures. Clearly, the high share of services in GDP is no cause for celebrating capitalism “Indian-style”.