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.

Schettkat and Yocarini 2006).

8.5 7.8 7.2





Official estimate

Our efforts to indicate the magnitude of the overestimation of estimated using CMIE is more realistic, its annual growth rate the domestic output yielded the following results: gets reduced by 0.5% to 5.5% between 1993-94 and 2005-06, and

  • (1) Assuming the services deflator grew at the same rate as the by 0.8% to 5.8% between 2002-03 and 2004-05. GDP deflator (as was the case in the previous four decades), the It is not possible to find the combined effect of the forgoing reservices sector’s annual growth gets reduced by 0.7%, between visions for lack of consistent data on all the required categories. 1999-2000 and 2006-07– from 8.5% to 7.8% per year. But, the magnitudes of the alternative estimates shown above are
  • (2) Assuming the decline in the prices of communication services large enough to make a serious dent in the official estimates. If were the same as in the US, the annual growth rate shrinks by our arguments are persuasive and the evidence credible, then the 8.1% per year between 1999-2000 and 2006-07 – from 25.7% per answer to the question posed in the title of the paper is “yes”. It year to 17.6%. perhaps warrants a careful review of the output estimation pro
  • (3) Assuming that the value added in the private corporate sector cedures; and also, for a fresh look at the recent growth experience.
  • Notes

    1 The services sector includes (i) trade, hotels and restaurants, (ii) transport, storage and communications, (iii) financing, insurance, real estate, and business services, and (iv) community, social and personal services.

    2 Analysing the growth of the 1950s, K N Raj as early as in 1961, alluded to the problem of overestimation of services sector output due to an underestimation of the rise of their prices. See Mody (2006).

    3 It is worth recalling Robert Solow’s famous quip that the effect of computers is everywhere, except in productivity estimates. The dispute in the US is now settled after improvements in the measurement methods. However, with little comparable efforts in India it is hard to expect a similar changes in the measured productivity in such a short time; therefore the output estimates are likely to be faulty.

    4 Ideally, China is the best comparator. But the Chinese statistics are probably a bigger minefield than ours.

    5 The US data is from the Bureau of Labour Statistics; data for Japan and Korea are from DataStream. We thank Bobray J Bordelon of Princeton University library services for providing the data.

    6 Some may fault our comparison since these economies witnessed price declines in telecom services earlier than in India. But efforts to deflate with the earlier years do not alter our finding. Between 1992-93 and 2006-07, communications deflator declined annually at 5.7 % in India, but only 1.5 % in the US.

    7 To minimise the problem of price indices in services, the Central Services Organisation apparently uses physical indicators to estimate the real output. But what if the physical indicators are poor, as in the case of the number of direct telephone lines, which is probably overestimated. Further, what if the revenue per telephone line falls within the spread of access, as seems to be the case recently. Therefore, there is no short cut to estimating accurately the number of lines in operations and the price of the service.

    8 The CMIE dataset is not a panel; the number of companies included in it has gone up from about 2,000 in 1993-94 to about 6,000 in 2005.

    9 To quote from a CMIE document: “The set of companies selected for this study is based on the availability of the audited unabridged annual accounts. … The first step in selecting companies was the identification of a global set on which all further selections would be performed. These were companies which had at least one account available during the period April 1998 and March 2006, and which were operational. By ‘operational’ we mean companies which had at least some sales. This excludes companies which had accounts but had not begun commercial activities” (CMIE 2006: 288).

    january 31, 2009 EPW Economic & Political Weekly

    hotels and restaurants) on the current

    prices estimates.

    17.35 The estimates of value added from Railways and Communication in public sector are based on up-to-date and reliable information. For the private sector, the estimates are not that robust as these are compiled mostly through indirect methods using proxy indicators, such as number of telephone connections or extrapolating with inter-survey growth rates in workforce (CSO 2007: .

    Schettkat, Ronald and Lara Yocarini (2006): “

    Private Organised Sector: Estimates of GVA relating to private corporate sector are prepared by using the results of the RBI study of the finances of a sample of companies. GVA of the sample companies is inflated by the ratio of paid-up capital (PUC) of all the companies engaged in trading activity (data obtained from the Ministry of Corporate Affairs) and PUC of sample companies. The constant-price estimates of private corporate segment are obtained by applying the GDP implicit deflator (GDP excluding the GDP of Trade,

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