Services drive growth in poor states

Services drive growth in poor states
The Financial Express, January 11, 2010, Page 1

KG Narendranath, Gireesh Chandra Prasad, New Delhi

Service sectors are proving to be the principal growth drivers in India’s conventionally backward states like Bihar, Madhya Pradesh, Orissa and Rajasthan. Construction, telecommunications, banking and insurance, tourism and real estate have led the growth in these states in the five years up to 2008-09, helping them to come out of the morass.

What’s even more heartening is that the spectacular growth in these sectors has been propelled by extensive inputs from low-skill labour. This explodes the myth that service sectors have limited ability to generate such jobs, crucial for greater inclusive growth of the country.

An analysis of the Central Statistical Organisation data by FE shows that construction growth in Bihar between 2004-05 and 2008-09 was 38.1% while it was 14.2% between 2000-01 and 2004-05. Contrast this with the real overall state domestic product (SDP) growth of 11% in the later period and 6% in the earlier.

In Orissa too, there was a jump in construction growth from 1.6% to 13.8%, while the real state domestic product growth rates for the periods were 6.5% and 8.7%, respectively. Similarly, communication services in Jharkhand grew at a robust 24.2% in the later period as against the earlier 14.5%. The real state domestic product growth rates were 8.7% and 6.5%, respectively. Similar trends are apparent in case of other economically backward states as well (see graph).

But for the presence of construction, the biggest user of unskilled service jobs, the growth of industry SDP of these states would have looked less rosy. Besides construction, industry SDP comprises manufacturing and mining, among others.

Of course, the difference in manufacturing and service SDP growth rates between the two periods is not stark. But analysts reckon that high-end manufacturing had contributed in more to the relevant SDP growth in the five years up to 2008-09 than in the previous period, and therefore, the employment-intensity of manufacturing could be on the decline. This confirms that service sectors are already a destination for most of the estimated 2.8 million people entering the country’s labour market every year.

Says JP Morgan India chief economist Jahangir Aziz, “The notion that manufacturing is more employment-intensive is being proven wrong. Formal manufacturing increasingly uses high-end robotised machines. Service industries, on the other hand, do use a lot of unskilled and semi-skilled labour. The boom in construction, communication and tourism industries in Bimaru states has led to the growth of several employment-generating services — security, travel and catering services for example.” Illustrative of this is the fact that Bihar’s per capita net SDP clocked 9.6% growth between 2004-05 and 2008-09, as against 3.6% between 2000-01 and 2004-05, while the corresponding figures for Gujarat, where a large number of new manufacturing units have come up in the later period, were 9.2% and 4.6%.

As per the CSO data, there was a healthy 17.3% growth between 2004-05 and 2008-09 of the trade, hotels & restaurants segment in Bihar, while the growth between 2000-01 and 2004-05 was just 13.2%. The corresponding figures were 10.1% and 6.4% for banking and insurance, and 17.3% and 10.8% for communication services.

According to an analysis by the National Council of Applied Economic Research, communication services — mobile connections, which contributed under 6% to the country’s GDP till 2007-8 — will grow its share to 15.4% by 2014-15 to become the largest contributor to the GDP, ahead of even trade and registered manufacturing.

Says Rajesh Shukla, senior fellow, NCAER, “The services sector, especially communications, has been a big economic growth driver in the last 10 years. Explosion in telecommunications infrastructure has given a huge growth fillip to related service sectors such as IT, BPO and other IT-enables services.” The share of communications services in total employment is also expected to leapfrog, from just over 0.5% in early 2000s to over 3.5% in the next five years, according to NCAER.

Aziz also believes service sectors will continue to lead the country’s growth rate for some time to come. “You cannot expect the manufacturing sector to suddenly become a big player in India as we lack the services that are necessary for its competitiveness, such as infrastructure, banking and government services,” he says. According to HDFC chief economist Abheek Barua, the pick-up in GDP growth in states like Bihar (where growth is higher than the national GDP) could be attributed to a large extent to increased construction activity led by government programmes like Bharat Nirman, which have seen an improved standard of implementation in the recent years. Barua, however, cautions that although this strategy has helped generate jobs in the backward states, it would hardly be a permanent solution as the government cannot continue to bridge the gap between demand and supply for labour. “If the demographic dividend that we talk about has to be really an asset rather than a liability, we should work hard for more permanent solution to the distress in the heartland. Radical changes in the sphere of education and industrial planning are necessary. New industrial corridors being planned ought to be closer to backward regions,” he says. There are, in fact, concerns over the quality of employment — in terms of remuneration and job security — in many of the emerging service sectors. The organised sector, which is believed to be providing decent employment, account for less than 15% of the total workforce in the country.

—(With inputs from Shailesh Dobhal)