ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Is Services Sector Output Overestimated? An Inquiry

India's services sector-led growth since the 1990s remains a puzzle - it has taken place at a low level of per capita income, without a proportionate transformation in the workforce, and amidst a deceleration in agriculture and a stagnation in industry. This paper argues that the output of services is perhaps overestimated since computing value added in services and finding suitable price deflators for them is difficult even in the best of circumstances. The answer to the puzzle, therefore, lies (at least partially) in the deterioration in economic statistics, and the use of a widely acknowledged faulty methodology. More specifically, services output seems overestimated due to (i) the inflated estimate of the growth of the private corporate sector, (ii) a slower rise in the services deflator, and in particular (iii) of an overstatement of the decline in the prices of communications services.

India's Recent Economic Growth: A Closer Look

The Indian economy turned around after 2002-03, clocking a growth rate of 8.7 per cent per annum, based on an industrial recovery, a sustained growth in services (especially communications and business services), and growing exports during a boom in world trade. However, the poor and deteriorating quality of statistics seem to question the extent of the upswing. But the fact that growth has been underpinned by an unprecedented rise in the fixed investment to gdp ratio cannot be denied. For the first time, consumer credit in a low interest rate regime has boosted the demand (sweetened by fiscal concessions) for consumer durables and housing. However, the deceleration in agriculture (particularly foodgrains) and a decline in the share of fixed investment in infrastructure and industry cast doubt prima facie on the optimism about the future.

Indian Investments Abroad

The Tata-Corus and Videocon-Daewoo deals are the most recent and largest of Indian investments and acquisitions abroad, but the trend has been in evidence since the early 2000s. There are domestic reasons and international factors propelling Indian outward flows; and industry specific factors have also contributed to the trend. Success, however, is not guaranteed.

Public Sector Performance since 1950

Since the mid-1980s, the public sector's share in domestic investment has been nearly halved, but its output share has remained roughly constant at about a quarter of GDP, suggesting a sustained rise in productivity over nearly two decades. The improvement in performance is also evident from (i) a rise in physical efficiency in electricity generation; (ii) a fall in public sector employment growth; and (iii) an increase in central public sector enterprises' profitability (even after excluding the petroleum sector). Yet public sector finances have remained adverse. Why? In electricity, passenger road transport and railways the revenue-cost ratio is less than one, and has declined since the early 1990s. Moreover, over the last 40 years, the public sector price deflator declined by 17 percentage points, relative to the GDP deflator. Hence, correct pricing and collecting user charges are probably key to setting public sector finances right.

Industrial Growth in China and India

Using independent estimates of China's industrial output, this paper compares the performance of the manufacturing sectors in China and India over the past half century at a disaggregated level. It finds that China's industrial growth rate is close to one and half times that of India's over the entire period, with the gap widening gradually. But Indian growth has been more stable. China's superior performance seems understandable in terms of its faster agricultural and exports growth. Does it mean there is little prospect of India catching up with China in the foreseeable future? China seems to suffer from huge excess capacity, misallocation of resources and a gross wastage of capital - as evident from the persistently high capital-output ratio. China's impressive industrial edifice seems to be built on somewhat shaky microeconomic and institutional foundations. In comparison, India's relatively strong foundations and domestic entrepreneurial capital seem to have the potential to improve performance, with a sounder macroeconomic environment: a step up in fixed investment to augment infrastructure supply and agricultural productivity, revival of long-term finance to boost industrialisation, and easier credit delivery to small and medium enterprises.

Fall in Organised Manufacturing Employment

About 15 per cent of workforce in the organised manufacturing sector lost their jobs between 1995-96 and 2000-01. This note briefly describes the broad dimensions of the job losses, explores possible reasons for it, and suggests its implications for the labour market reforms.

Industrial Policy and Performance since 1980: Which Way Now?

Since 1980-81, manufacturing sector output has grown at 7 per cent per year, with economic reforms making little difference to the trend in the 1990s. But growth has decelerated over the last seven years, after peaking in 1995-96. Why is this so? The reforms have narrowly focused on policy-induced restrictions on supply, ignoring the demand constraint due to the cut in public infrastructure investment since the late 1980s, and indifferent agricultural performance in the 1990s. These issues have to be squarely addressed to revive industrial growth, and to reap the benefits of the investment boom in organised manufacturing in the last decade.

Foreign Direct Investment in India in the 1990s

This paper documents the trends in foreign direct investment in India in the 1990s, and compares them with those in China. Noting the data limitations, the study raises some issues on the effects of the recent investments on the domestic economy. Based on the analytical discussion and comparative experience, the study concludes by suggesting a realistic foreign investment policy.

How to Improve India's Industrial Statistics

It is widely accepted that the quality of official industrial statistics has deteriorated. Why did this happen? This study argues that the administrative mechanism for recording the inception and closure of factories and firms and gathering their production and investment information on a regular and reliable basis has gradually decayed over the years - in response to industrial change and a variety of policy initiatives. This problem needs to be squarely addressed to make any tangible difference.

Indian Economy since 1980

It is widely believed that India's economic growth in the 1990s accelerated - in response to the orthodox economic reforms initiated in 1991 - mainly on account of a faster growth in the tertiary sector. There is also a growing consensus that (i) the improved growth since 1980-81 reduced poverty, and (ii) the reforms in the 1990s increased the growth rate further, without dampening the process of poverty reduction. This study seeks to verify these propositions. Further, it examines some dimensions of income distribution - a neglected issue in the recent times - to assess if the developments during the last two decades led to a diffusion of growth - or a polarisation in the economy.


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