INDIA: AN IMITABLE ECONOMY ECO311A/ECO735A: DEVELOPMENT ECONOMICS SUBMITTED TO DR. DEBAYAN PAKRASHI

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1 INDIA: AN IMITABLE ECONOMY ECO3A/ECO3A: DEVELOPMENT ECONOMICS SUBMITTED TO DR. DEBAYAN PAKRASHI SUBMITTED BY ROLL NO NAME DEPT GROUP NO 3 OJASWEE KUMAR DHAYAL ECO 6 3 RAKESH JANGID ECO 6 60 SHIV RATAN TIWARI ECO 6 SIGN DATE OF SUBMISSION: APRIL, 0 PERCENTAGE OF PLAGIARISM INDIAN INSTITUTE OF TECHNOLOGY KANPUR

2 . Introduction Growth of economies has always been a topic of research because it is crucial to grow for countries belonging to all level of incomes. For low level income countries, it is a problem of achieving the growth while High level income countries have to put in great efforts to sustain their high-level income and to keep the growth rate also at the maximum possible level. India is one of the fastest growing economies of the world at the point of time. India is growing in the service sector directly taking a shortcut from being an agrarian economy to service based economy. For most of the countries it is not the way they grow. Most of the countries have firstly grown in Agricultural sector then developed in industrial sector and finally they proceeded to grow in service sector. This paper intends to study the growth using example of India s growth in services sector. India was a rich country in the pre-british era having full-fledged Primary sectors like Agriculture and Handicraft sector. As soon as the British and the other Europeans invaded in the country and established their business empire, India started falling. By the time, India had become merely a colony of Britain. Indian Handicraft sector was falling due to Industrialization in invading countries. India had become just a supplier of raw material and importer of finished products. British bureaucrats made policies to fulfil only their own means. They developed here Rail network as an important infrastructure but that was also developed to give new heights to their commercial means. At the time of freedom, Indian economy was suffering from the problems that had rooted their legs during British rule. In initial years, we adopted Harrod Domar model and focused on development of agriculture sector and took some good steps like Green revolution and tried to be a self-sufficient economy which led to continue the trend of low levels of growth. Later on, when we adopted globalization policies, investments from other countries helped us. Then revolutionary reforms of 99 happened and major policy changes took place which boosted the economy making functional as well as structural changes in the economy. Now a days, it is always in headlines that India is doing well in Service sector and China is heading the Manufacturing sector. Recently, in World Bank s new classification, India is removed from Developing countries classification. Now India is in Lower Middle Income Country according to new classification. We wanted to dig into the data to find out from which time India started growing in service sector. We are also interested in finding out the contribution of service sector in strengthening the economy of India. The results of this study would be helpful for the developing countries to make plans

3 to grow fast and sustain it for long period of time. India s growth story is not giving the message of only focusing on the services sector but it is showing that finding the individual optimal solutions to the unique individual problems is important. India is second largest in terms of population in world and it is predictable not to change the scenario significantly in near future. In such situations, it was a wise decision to focus on service sector and utilize the human capital available in abundance in the giant economy. It is an example for other lower income countries to learn from and focus on the areas where they could be strong. The objective of this study is to show how India is an imitable economy for the developing countries. This would be shown by proving two facts, that are- (a) Service sector has a great contribution in Indian GDP growth. (b) It is necessary to grow using the service sector to sustain the growth. In this study, we analyzed the impact of different sectorial growth on overall GDP growth rate of India over the years and have showed how trends in India have shifted from agriculture to service sector.. Literature Review: A vast literature on Indian economy s growth is available. A number of papers are also published on the topic of sustaining the growth. Arvind Virmani has showed in his study that per capita GDP growth is positively correlated with savings, Investment, FDI inflow and amount of trade. So, downward trends in any of these variables can slowdown the growth. Policies which tend to change the investment environment in country and improve its ability to bear external shocks, can play major role in sustaining growth. He also stats that a market determined exchange rate and more openness is going to help India in sustain growth. Alok Kumar Pandey established a relationship between exports and economic growth and measured the effects of globalization on India. Arpita Mukherjee investigated different trends and issues in service sector in India and provided some policy measures for inclusive growth and more employment generation in service sector so that India s competitiveness in services keep on increasing. Prasad and Satish (00) in their working paper on Indian services analyzed trade in services and openness of economy. They remarked that service sector is not only helping economy to attain desired growth levels but it is also increasing our ascendancy at world level. G. Ramakrishna in his study investigates different sources for growth in service sector and finds out that income elasticity of demand and open policies are major players in this scenario. He also analyzed growth

4 in sub-service sectors like communication, banking, insurance and trade services. Gordon and Gupta have shown the contribution of reforms and liberalization on growth of the service sector. New policy measures and sector specific government plans introduced to boost this sector. According to Seema Joshi (00) change in traditional perception of Indians made India a land of knowledge workers. IT and telecom services brought evolutionary changes in their mindset. She also provides an overview of prospects and problems in service sector. She remarks India as Service hub of the world. Steffen Lehndorff describes new government policies which have substantial impact on working conditions and also bring diversity in service activities. He points out the problem of labor shortage in service sector which lead to market failure. This should be confronted with assessment of value of services and new social awareness programs. Jonakin (006) describes service sector as an informal sector because of unprotected nature of jobs in the sector and also due to inclusion of major proportion of domestic workers in the sector. Nagraj (99) observed in his study that steady growth from 90s and strong base since then are the reasons for boom in service sector rather than being a sudden spurt of the 90s. 3. Data Trends Primary sector had the major share in the economy at the time of freedom. From Agricultural production had a whopping.3% share in total GDP. It started declining with time while manufacturing and service sector started blooming. Manufacturing sector almost became stagnant after 0s, but service sector did not look down and flourished. In the decade of 90-90, service sector surpassed primary sector in terms of share of GDP and became the largest sector. It was very awkward that at any point of time, Manufacturing was not the major sector in Indian Economy. Table : Average share of different sectors in India s total GDP Sector Primary Secondary Tertiary Source: National income accounts, CSO, MOSPI 3

5 Share of total GDP Average share of different Sectors in India s total GDP Time Period Primary Secondary Tertiary Note: Here in Table, 90 represents the financial year 90- and similar notation is used for other years also. Primary Secondary and Tertiary sectors represent Agriculture, Industry and Services respectively. Data trends about workforce distribution in various sectors show that a large amount of Indian population is still dependent on Agricultural sector, it is continuously decreasing at a very low rate. Manufacturing sector had a better growth in getting the workforce (increment from.% to.%) from 993 to 00, so it gives an inference that this is a sector which is creating more jobs but their share in GDP had a mediocre growth (reached at level of.% in against 3.3 % in ). Besides, in service sector, growth of share in GDP has been better compared to other sectors (from period s.% to 3.% in ) but in creating jobs, this sector was lagging behind till 00 having a low growth (from % in to.3% in 009-0) in workforce involved compared to their share in GDP s exceptional growth. Service sector has flourished even more after 00 and in creating jobs also it showed a great growth in time period of to 03- (.% of total jobs against.3%). Despite all those achievements by the service and manufacturing sector, Agriculture is the sector where a large chunk of Indian population is still involved.

6 % of Workforce Percent of total workforce working in different sectors Time Period Agriculture Industry Services Table : Percent of total workforce working in different sectors Years Agriculture Industry Services Source: National sample survey of India In Indian economy, all three sectors have noted positive growth as resultant output growth in period and later on also. But TFP growth is what, that makes the difference. In the time period of 960-0, service sector had a 0.% of TFP growth while the Agriculture and Manufacturing sectors noted a negative growth rate in TFP (-0.% and -0.% respectively). By the point of view of TFP, all sectors done a better job after 90s because of increased openness in economy and evolutionary reforms of 99. Openness resulted in installment of better technology and made the TFP growth positive for all sectors of economy (.%,.0%, and.9% for Agriculture, Industry and Service sector respectively). Still, Service sector had the highest TFP growth in

7 Growth Growth Total Factor Productivity (TFP) In Two Periods Total Economy Agriculture Industry Services Sector TFP Growth TFP Growth Output Growth in Two Periods Total Economy Agriculture Industry Services Sector Output Growth Output Growth Table 3: Total Factor Productivity (TFP) and output growth trends Period Sectors Output Growth TFP Growth Output Growth TFP Growth Total Economy Agriculture Industry Services Source: Reserve Bank of India Reports 6

8 . Methodology In econometric analysis, this paper calculates and analyzes the effect of various sectors growth rate on the overall GDP growth rate of the country. This study is done on two different time domains to check if the role of different sectors in affect the GDP growth is changing or not. Data of different sectors growth and GDP growth are taken from Planning Commission Website for the financial years starting from 9- to 03- on annual basis. Two steps used in Analysis are shown below: i. First part of the analysis is done taking the data for years 9- to 99-9 having in mind that ii. many reforms were done in 99. Secondly the effect of growths of sectors on GDP growth is calculated for the whole set of years for which data is collected. In both cases, to get the effects of various sectors growth rates on GDP growth rate, Multiple Linear Regression Model is used. The four sectors which are taken to be affective to GDP growth are- Agriculture, Mining and Quarrying, Manufacturing and Services. According to these assumptions, following model is used for regression: GDPgr = β 0 + β A + β MQ + β 3 M + β S Where β 0, β, β, β 3, β are constants to be estimated using regression. GDPgr represents Growth in Gross Domestic Product in the financial year with respect to last year s GDP at current prices. The variable A, MQ, M and S represent growth of Agricultural sector, Mining and Quarrying sector, Manufacturing and Services sector respectively. After applying the Regression model to data and checking the requirements for significant results, the coefficients of various sectors β 0, β, β, β 3, β in both cases results are compared to check the dependence of GDP growth on growth of various sectors in both cases that are before reforms and overall scenario after independence.. Results In the econometric analysis, it is found that some trends of the results are very similar as they are related to the structure and mechanism of the economy either we take into consideration the data till reforms or the data till 03- while there are some changes also in the strengths of different sectors in affecting

9 the GDP growth rate according to the growth rate of that particular sector of economy. In both regression lines we get the agriculture sector and the service sector as major deciding factors. Another sector that has a significant capacity of changing the value of growth rate of GDP is manufacturing sector. Mining and Quarrying is a very small sector in the giant economy so it does not have a large contribution in deciding the direction of the economy. Regression Statistics Multiple R R Square Adjusted R Square 0.90 Standard Error Observation s 0.0 ANOVA df SS MS F Regression.3 3 Residual 36. Total Significanc e F.9E-30 Coefficient s Intercept -0. Agriculture Standar d Error t Stat P-value Lower 9% E Upper 9% Lower 9.0% Upper 9.0% Mining and Quarrying Manufacturing 0.39 Services E E

10 Comparing the regression data of pre-reform and after independence, we find that dependency of GDP growth on Agriculture sector is lesser in the case of taking all years into account as the % change in agricultural growth results in a change of 0.3% change in GDP growth for this case against that of 0.3% in case of pre-reforms time. In contrast to it, the coefficient of manufacturing sector has grown from 0. to 0.6 while regression line is fitted on the data till 03- instead of till Services has shown a significant change from 0. in pre-reform period to 0.6 in total period of time. Overall for the years after independence: Regression Statistics Multiple R 0.96 R Square Adjusted R Square Standard Error Observation s 63 ANOVA Regression Residual Total 6 df SS MS F Significanc e F 6.E-39 Coefficient s Intercept Agriculture 0.36 Mining and Quarrying Manufacturing 0.00 Services Standar d Error t Stat P-value Lower 9% E Upper 9% Lower 9.0% Upper 9.0% E E

11 6. Conclusion It is clear evident from the above study that service is the fastest growing sector in India and contributing the highest in the GDP growth of the country. High growth trajectory is being expected from the sector in the upcoming years. India upholds comparative advantage in many services across the world. Better quality services are helping to boost the economy through better trade patterns and higher FDI inflows. Data shows that service sector is now the largest sector on basis of share in GDP and second largest on the basis of share of workforce involved. This sector is giving high number of jobs now and has the highest TFP compared to other sectors in India hence can be called most efficient sector. So, other developing countries can also follow this strategy of India of developing the service sector, this can also be applied by these countries which are a bit lagging in the area of natural resources. As service sector is based on human capital, it would sustain a good standard of living for the citizens until technology replaces all the human works that is not going to happen in near future, so it would be a good bet for the developing world to develop human resources and try to develop using services sector which would increase their productivity also. In case of India, things are great, but nothing is perfect in the world and evolution is always there in the picture, so India also have to find out the areas where improvements can be made. As of now, low employment share of service compared to its contribution in GDP is a matter of concern that is getting better in recent years but still need to be improved. Government need to identify the domestic and global factors which are affecting the growth and quality of services and put on some new initiatives to generate new opportunities in the sector and improve the productivity of the sector. Few initiatives adopted by the government of India in recent years are liberalizing visa regime to increase service exports and launch service portals to provide a seamless access to health, education and other important services. 0

12 . References G. Ramakrishna (00) Open Policies and Service Sector Growth in India: Does Service Sector Growth Influence Economic Growth of India?, Osmania University (OU) - Department of Economics, 00 Arpita Mukherjee, Services Sector in India: Trends, Issues and Way Forward, 0, World Economic Outlook, Pp -3. Prasad and Satish, 00, Policy for India s Service sector, Department of Economic Affairs, Ministry of Finance, Government of India, Working Paper no., Pp -. Gordon, Jim and Poonam Gupta, 003, Understanding India s Services Revolution, Paper prepared for the IMF-NCAER Conference, A Tale of Two Giants: India s and China s Experience with Reform, November -6, 003, New Delhi. Steffen Lehndorff (00) The governance of service work - changes in work organisation and new challenges for service sector trade unions, a European review of labour and research, 00,vol.,no.3,-3. Jonakin Jon (006) Cycling between Vice and Virtue : Assessing the Informal Sector s Awkward Role under Neoliberal Reform Review of International Political Economy, Vol.3, No., pp 90-3 Nagaraj R. (99) Excess Growth of Tertiary Sector? Economic and Political Weekly, Vol. 6, No., pp. - Shivani Gupta (0) A Comparative Study of Indian Economy in Pre and Post Reform period: An Econometric Analysis Jesim Pais (0) Growth and Structure of the Service Sector in India Barry Eichengreen and Poonam Gupta (00) The Service Sector as India s Road to Economic Growth?