2 min read.Updated: 05 Jul 2020, 09:58 PM ISTVivek Kaul
In 2004-05, services constituted 43.5% of the economy. By 2019-20, the proportion had jumped to 50.4%. Given this, any recovery can only happen with the revival of services. Mint takes a look.
The importance of services in the Indian economy has gone up over time. In 2004-05, services constituted 43.5% of the economy. By 2019-20, the proportion had jumped to 50.4%. Given this, any recovery can only happen with the revival of services. Mint takes a look.
Historically, it has been seen that countries first develop a vibrant manufacturing sector before creating a vibrant services sector. As Ruchir Sharma writes in The Rise and Fall of Nations: “As factories pop up around cities, service businesses emerge to cater to the needs of the growing industrial middle class... The manufacturing share of gross domestic product rises steadily before peaking between 20%-35%." However, Indian economy has not followed the historical development formula. The size of manufacturing sector has varied between 15%-16% of the economy in the last decade and a half.
How do you explain growth of services?
As Sharma writes: “Building factories generates funds for upgrading them, which then increases pressure to invest in improving roads, bridges, ports, railroads, power grids, and water systems." All this creates jobs, which pay people and give them the purchasing power to demand services. With the manufacturing sector not creating enough jobs, people have had to fend for themselves to earn a living. This is reflected in the informal services sector, with the huge number of street vendors and small businesses seen across cities. The number of people trying to make a living like this is huge.
What other activities form part of services?
Everything from trade, hotels, transport, financial services, real estate and public administration come under services. Ever since the imposition of covid-induced lockdown, most of these sectors have either been asked to remain shut or norms of social distancing have ensured that people are staying away. Cinema halls are shut and people have stopped going out to eat.
Services form half of the economy. As Care Ratings points out in a research note: “[Two-thirds] of the economic sectors would broadly be operating at 50-70% capacity by end Q3 [December]… The balance may not even reach this state this year. In particular, services like hospitality, tourism, travel, entertainment, would take a much longer time… to [reach] anywhere close to normal." Hence, as long as social distancing norms are to be followed, services (including the self-employed) will continue to remain unviable.
What concerns need to be addressed?
As the Report on Fifth Annual Employment-Unemployment Survey (2015-16) has pointed out: “67.5% of self-employed workers had average monthly earnings [of] up to ₹7,500." Even four years later, things could not have improved much. Hence, the ability of the self-employed to survive is limited. Given that most of them haven’t done much business since end- March, economic revival is not possible unless these individuals get back to business.
Vivek Kaul is the author of Bad Money.
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