India,
the government would have us believe, is the new growth
''miracle'' in the developing world. According to
official figures, GDP growth has accelerated from
its ''Hindu rate'' origins of around 3.5 per cent
in the 1970s and earlier to 5.4 per cent in the 1980s,
6.3 per cent during the decade starting 1992-93 and
an annual average rate of more than 8 per cent during
the three years ending 2005-06. Since this acceleration
has occurred in a context of limited inflation, the
government is now targeting a further rise to 9 and
even 10 per cent over the Eleventh Plan.
Chart 1 >>
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However, in the
midst of the celebration over the acceleration of
growth, certain features of the growth trend that
call for caution are often ignored. To start with,
the 8 per cent rate of the last three years, which
is the first real evidence of India's transition to
''miracle'' status, may be more an exception rather
than the rule. High annual rates of growth of between
7 and 8 per cent were recorded even during the three-year
period 1994-95 to 1996-97, only to be followed by
a slump in rates to within the 4-6 per cent range
over the subsequent six years. As a result, the trend
rate of growth fell from 7.1 per cent during 1992-93
to 1996-97 to 5.3 per cent during 1997-98 to 2002-03.
Moreover, the GDP figures for the last three years
are still provisional, and are likely to be revised
downwards, even if marginally. Unless there are strong
reasons to believe that the growth rates they reflect
are robust and sustainable, it may be prudent to hold
back on the celebration, which declares that higher
growth is the result of accelerated reform and calls
for pushing ahead with policies that increase economic
vulnerability.
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A second feature of significance is the structure
of this growth. For some time now the rate of growth
of services GDP has been much higher than the rate
of growth of overall GDP. As a result the share of
services in GDP, which was around a third in the mid-1970s,
had risen to more than a half by 2004-05. More than
sixty per cent of the increment in GDP during the
period 1993-94 to 2004-05 was due to an increase in
GDP from services.
Services have also contributed significantly to the
recent acceleration of the growth rate, with rates
of growth of services GDP touching 8.2, 9.9 and 10.1
respectively in the three years ending 2005-06. Though
construction has performed even better, with corresponding
figures of 10.9 12.5 and 12.1 per cent respectively,
given the high share of services in overall GDP, that
sector would account for an overwhelming share of
the higher rate of growth.
This trajectory does make India's growth experience
unusual, if not unique. The sharp increase in the
share of services in GDP in India has occurred at
a much lower level of per capita income than characterised
the developed countries when they experienced a similar
expansion. There are, of course, reasons why growth
in developing countries today would reflect a premature
expansion of services. To start with, globally manufacturing
units today rely as much or more on management and
control as on technology to raise productivity and
reduce costs. This has increased the services component
in manufacturing GDP. The pressure to reduce costs
leads to the outsourcing of many of these functions,
resulting in the services component of manufacturing
GDP appearing as a separate revenue stream and generating
a consequent increase in services GDP. Inasmuch as
liberalisation leads to a faster adoption of imported
best practice technologies in developing countries,
they too would tend to reflect this tendency. Secondly,
the communications revolution has cheapened the cost
of communication services, resulting in a much greater
and earlier use of such services. Not surprisingly,
the reach of and revenues from communication services
has increased substantially in developing countries,
contributing to an increase in GDP from services.
Finally, the shift in emphasis in government spending
from participation in production to provision of a
range of public services tends to increase the share
of public administration (not to mention defence)
in GDP. Overall, these factors could trigger a diversification
of economic activity in favour of services at an earlier
stage of development than that expected on the basis
of the historical experience of the developed countries
of today.
However, even these factors cannot explain the Indian
experience, wherein unlike many other similarly placed
developing countries GDP from services now exceeds
50 per cent of the total. Services must be growing
faster than warranted by the above factors. What seems
to matter at the margin, is an increase in the exports
rather than domestic supply (and consumption) of services.
Services were earlier considered non-tradables since
they required in most cases the presence of the supplier
at the point of provision. But modern developments
have made a number of services exportable through
various modes of supply, including cross-border supply
through digital transmission.
Chart
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Such exports do seem to play an important role in
India. Exports of software services, which amounted
to an average of 7.1 per cent of services GDP during
2000-01 to 2002-03, stood at an average of 11.2 per
cent during 2003-04 to 2005-06 and close to 14 per
cent in 2005-06. Software and business (largely IT-enabled)
services dominate services exports, accounting for
52.8 per cent of the total during 2004-05, 56.1 per
cent in 2005-06 and a massive 66 per cent in the first
quarter of 2006-07. There is reason to be sceptical
about the sustainability of this process of services-driven
growth, based on exports that are overwhelmingly directed
at one or a few markets. New alternative suppliers
may arise increasing competition and reducing India's
dominant market share in the outsourcing business.
The threat of job losses in the developed countries
may trigger a protectionist response against outsourcing
of services, as is already happening in some countries.
Or, a slowing of growth in the developed countries
may curtail corporate spending and therefore the demand
for outsourced services.
Finally, there is reason to believe that the services
surge is indeed triggering inflation, which is not
always reflected in the movement of whole sale price
indices. The annualised month-to-month increase in
the consumer price index for industrial workers, which
was at or below 5 per cent for all but one of the
16 months starting January 2005, has averaged 6.8
per cent during May to September this year. Moreover,
the deficit on the current account of India's balance
of payments, which stood at $10.6 billion in 2005-06,
when oil prices were still ruling high, has touched
$6.1 billion in the first quarter of financial year
2006-07 alone. This has prompted even The Economist
to declare that India's economy is overheating and
that the ''recent acceleration largely reflects a
cyclical boom, thanks to loose monetary and fiscal
policy.'' In its view, ''India cannot grow as fast
as China without igniting inflation because of its
lower investment rate, particularly in infrastructure,
and labour bottlenecks.'' That note of caution, which
predicts that the acceleration in GDP cannot last,
is unusual for a source that has repeatedly lauded
the performance of a country it sees as a tiger uncaged
by liberalisation. Fortunately, there is some respect
for the evidence rather than the hype at least in
some quarters.
