The rising share of services in India?s GDP is an important structural change that has occurred in the economy with some degree of persistence over the past two decades. While this has been taken as a reflection of a paradigm change in the economy?s growth path, it also raises questions on how predictable such phenomena are. The traditional view that economies would make the transition from primary to secondary and then tertiary sectors has not applied here. What, then, led to this shift? Is it that agriculture and manufacturing failed to take off due to policy ineffectiveness while services opened up because of policy absence? It is an attractive explanation often offered, but is not entirely convincing.
Favourable macroeconomic conditions do lead to growth, but the structure of this growth would determine how rapid and sustained the growth would be. Supply constraints in the face of increasing demand for any services or goods clearly lead to price rise and pressures on releasing these supply constraints. This is one way that policies may be influenced into being effective. In the case of infrastructure, including urban infrastructure, these pressures have always been there. The policy desire to release these constraints was also apparently there, if one were to look at the policy documents of the past. It was, however, the choice of instruments to meet these policy goals that was restricted mainly to the public sector. The key change in approach now is the larger space given to the private sector to meet this rising demand. The net effect may well be greater speed in converting plans into action.
Growth of the services sector has been as much a reflection of positive or negative policies affecting services and the other sectors, as of the emergence of technologies that made quicker expansion of many services possible. The expansion of the financial sector and communications has been a result of both adoption of new technologies and positive policy frameworks. A range of services has become globally tradable, and therefore new demand has emerged for them across the world.
Thus, it is not merely the dynamics of preferences and resource endowments, but also technologies and policies that drive structural changes. It is interesting that despite the many unfavourable conditions, the economy has found a way to grow at an aggregate level rapidly. Is this only a narrow window of opportunity that?s likely to close soon? Predicting either technology changes or policy changes is difficult. Also, policy priorities alone may not tell us much about the implications. Policy instruments are as important in assessing the impact of these policies as are the priorities.
What is the next set of structural changes that are likely? Would it be a revival of the manufacturing sector accompanied by a transformation of agriculture? Within manufacturing, would labour intensive sectors take off? These changes have not taken place so far in the current phase of reforms and growth. Two major factors often cited as blocking these changes are India?s labour and infrastructure policies. The manufacturing push through various export promotion measures and financial sector reforms has not been enough to bring about sustained growth in this sector. Although progress on labour reforms is likely to be slow, in the case of infrastructure, more investments have appeared. While these changes are likely to push manufacturing growth, services have not yet reached their potential demand. In other words, the relative attractiveness of services will remain even with the improvement in infrastructure.
If services continue to grow driven by external demand and technological changes, the pressure on policies to make dramatic changes in either labour or infrastructure policies would not be strong. Yet, the imperative is job growth. We need a larger proportion of the labour force to be in jobs, and with higher wage rates, too. But what would force such policies to take effect? Slow growth is likely to be one such factor. It is also likely that perceptions of the growth potential of higher value-added sectors will exert more pressure on the governance system for pro-growth policies. For example, the automobile sector and consumer electronics sector have received policy attention. These sectors need to be large enough for their potential for delivering higher paying jobs to be realised. A selective approach that can identify and nurture sectors with promise would, however, require considerable foresight, and an over-reliance on this approach may also snuff out sectors that may actually deliver more jobs.
It is also not very clear that we need pro-sector policies for expansion. A neutral position may also let promising sectors prosper. Among neutral policies, infrastructure development and investment in health and education are the most critical. Neutral policies may also mean emphasis on aggregate indicators rather than winners and losers. If these policies succeed in bringing about respectable growth rates, as is the case now, structural changes will be determined more by external factors such as technology changes.
Shashanka Bhide is senior research counsellor, NCAER. These are his personal views