Column: Manufacturing slump drags services

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SummaryWith rising interlinkages, revival of services sector growth hinges on policy measures to boost manufacturing

When the Central Statistical Organisation released the first-quarter estimate of GDP growth last month, the stagnation in industrial production, with a contraction in manufacturing output, caught most of the attention.

What came as a bigger surprise, however, was the sustained slowdown in the services sector, which drives almost 58% of India’s GDP.

The global economic slowdown has often been cited as being majorly responsible for the decline in India’s services sector output. But this is only partially true, because the bulk of the slowdown is home-grown.

As the accompanying chart shows, domestic demand-dependent sectors today contribute more than 90% of the services sector output. And since FY12, growth in these largely domestic-demand-dependent sectors has slowed sharply, bringing down overall services growth to average 7.7% in FY12 and FY13. That’s nearly a 200-basis-point fall from the 9-10% rates seen through the second half of the last decade.

Sectors such as trade, hotels & restaurants, transport, communication, and real-estate services saw average growth falling more than 500 basis points to nearly 8.5% from 14.5%.

While the weak external environment contributed, the dominant reason was the prolonged decline in industrial growth and slippage in private consumption.

Looking back, India’s services sector story really took off in the 1990s. Over time, all its sub-sectors outpaced overall GDP growth, with the fastest ones driven by domestic demand. To be sure, high growth in information technology services played a significant role during this decade.

In other words, the story emerged in response to both rising domestic demand for services as industry started picking up, and the opportunities germinating abroad.

Now cut to the current milieu: while industry is looking down, growth fatigue has caught up with services. Conversely, the global setting is much better than what it was at the height of the financial crisis 4-5 years back.

Services sector growth, which once nudged 10%, fell to 7.1% last fiscal, which was the lowest in a decade. The weakness continues, with the first quarter coming up with 6.6%; the trend is unlikely to improve this fiscal.

Once again, the drag emanates from a steep decline in domestic-linked businesses such as trade, hotels, transport and communication, which contribute close to half of the services sector output. This segment, which had grown at an average 8.7% in the past five years, fell to a low of 3.9% in the first quarter of the current fiscal.

Another interesting insight is gleaned from the community, personal and social

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