Low employment rate in the service sector cannot sustain high growth rate for long

By Indra Giri on September 16, 2016

The service sector is one of the fastest growing sectors in India. Contribution of this sector in gross value addition in Indian economy was 52.97% during the financial year 2014-15 (Planning Commission 2015). India witnessed a rapid expansion in this sector after the liberalisation of the economy in 1991. The main reason for such rapid growth is due to the huge knowledge base and high inflow of foreign investment (Mukherjee 2013). Foreign direct investment has a great role to play in the overall development of the Indian economy. It brought technological gradation with it and encouraged the growth of several sectors including the service sector (Sirari & Bohra 2011).

Growth of service sector before 1991

Post-independence the government of India took policies that protected the economy of the country from colonialism with strong emphasis on import substitution and self-reliance. The service industry grew eventually even though the government concentrated mainly on the agricultural and the industrial sector during the first and the second five year plan (Mukherjee 2013). In 1980’s there was a huge growth acceleration of the service sector with a maximum growth rate of 7.9%. However the growth declined followed by a depression due to the Gulf War (Chanda & Gupta 2011).

Annual growth rate in percentage of service sector before 1991 (Source: Planning Commission 2015)
Annual growth rate in percentage of service sector before 1991 (Source: Planning Commission 2015)

The contribution of service sector to employment was 16 percent of the total labour force in 1970-71 which was a total mismatch to the growth rate of the economy. Most of the employees were engaged in the low productive agricultural sector. The unskilled labour was not absorbed by the service industries resulting to the low rate of employment in this sector.

Rapid growth after 1991

The finance minister and the financial committee during 1991 reformed the Indian economy allowing foreign investment in various sectors of the Indian economy. After 1991, the service industry emerged as the hub of foreign investors leading to the immense growth. The reforms benefited both foreign and locally-owned manufacturing firms but the effects on foreign firms tended to be stronger.

Annual growth rate (in percentage) of service sector after 1991 (Source: Planning Commission 2015)
Annual growth rate (in percentage) of service sector after 1991 (Source: Planning Commission 2015)

An increase in the aggregate index of services liberalisation resulted in a productivity increase of 11.7% for domestic firms and 13.2% for foreign enterprises (Singh 2014). After 2005 the growth rate of India has crossed several countries ranking to 11th and giving a tough competition to them. The employment rate increased from 30-34% in 2005 (Nayyar 2009)  to 42% in 2015 (Bansal 2013).

Contribution to the Indian economy before liberalisation

Before the liberalisation in 1991 the contribution of the service sector in the Indian GDP was fluctuating with sharp fall and rise showing instability due to the lack of modernisation in the different sectors. The figure 1 shows the contribution of this sector in Indian economy. It shows that the contribution in GDP has been fluctuating in the pre-liberalisation period.

Contribution (in percentage) of the service sector to the GDP (Source: Handbook of Statistics)
Contribution (in percentage) of the service sector to the GDP (Source: Handbook of Statistics)

It is evident that till the 1990’s the service sector was overshadowed by the industrial sector and the pace of growth has been more or less stagnant with overall GDP keeping the shares of the industry stagnant as well (Eichengreen & Gupta 2011).

Major contribution to the economy after liberalisation

After the liberalisation the service sector was opened to modernised ideas of globalisation with the entrance of new technology enhancing the growth of the sector with a larger contribution to the GDP. The trend is a smooth increasing pattern depicting the eventual growth of the service sector after the introduction of FDI in the Indian economy.

Contribution (in percentage) of service industry to the GDP
Contribution (in percentage) of service industry to the GDP
(Source: Handbook of Statistics)

The GDP from the total service sector grew at 7.7% from 1996‐97 till 2004‐05, highlighting the banking and the insurance service sector. Even trade grew in 1995-1996 to 2004-2005 period with the arrival of highly modernized service to an annual growth of 10.7% (Pais 2014). Recently in 2010-2015 the service sector grew 10% a year with a global service export of 3.2%. Consistent, inflow of foreign direct investment in the economy with special focus to the service sector incurred growth for the service sector. Similarly and it consequently had an immense effect on the gross domestic product of India. Due to the availability of a greater capital in this sector, it was able to attract skilled labour enhancing the efficiency of the sector. Thus, leading a hand to the growth of the economy (Bansal 2013).

Major service industries before 1991

Between 1950 and 1970, there was no major change in the shares of hotels, restaurants and railways. However there was increase in the shares of road transport sector which increased from 4.5% to 7.4%. Similarly the banking sector also grew from 2.4% to 3.3% during this period. Sectors, such as public sector units and the sectors under the state government displayed a huge growth especially in education sector that grew from 4.1% to 7.3% (Tiwari 2011). During the period between 1970-1990 the priority of the sub-sectors took an amendment. During this period sectors such as public administration, trade, dwellings, road transport, education services, banking and railways contributed  68% to the total growth of the service sector (Pais 2014).

Percentage of growth in major sub-sectors of service before 1991.
Percentage of growth in major sub-sectors of service before 1991.
(Source: Pais 2014)

The trade to the foreign countries, housing sector, public administration and defense are the major service sectors that flourished before 1991 (Pais 2014). The scenario changed after the liberalisation and with the development of technology the focus shifted mainly towards the telecommunication and the banking & finance sector.

Major service industries after 1991

The major sectors that emerged after the 1990’s liberalisation was the telecommunication sector with a stable growth in the sector since its advent in 1995. Foreign enterprises also made entry in the Indian service industry. With presence of the foreign commercials, the Indian telecommunication service industry showed growth of 74% in 2010. The policies and the licensing liberalisation availed the entry of FDI that brought the expansion of this sub sector. Therefore, lending a hand to the overall growth of the service sector (Chanda & Gupta 2011).

Percentage of growth in the major sub-sectors of service after 1991
Percentage of growth in the major sub-sectors of service after 1991
(Source: Pais 2014).

After 2010 the service sector grew as a whole with focus to the financial and real estate services, financial services, transport and communication services. Figure 5 resembles the share of the sub-sector and therefore displaying the importance of the sub-sectors as a whole.

Growth of major sectors in rupees after 2010
Growth of major sectors in rupees after 2010 (Source: Planning Commission of India).

Sustaining high growth rate with low employment rate

The growth of the service sector in India is contributing to its GDP with the aid of foreign direct investment. However, the employment structure of the sector is inclined towards low productive and labor intensive segment of wholesale and retail trade, hotels and restaurants. Elasticity of employment with respect to GDP growth rate in the service sector was found to be declining (Pattanaik & Nayak, 2011). This was attributed to relatively small number of jobs created by the highly productive segments of real estate, insurance, business, finance, transport sector and abundance of low productive jobs that mainly absorbed unskilled labor. Unorganized segment had more than four fifth of the service sector employment in the financial year 2009-10 (Mukherjee, 2013). Also most of the people engaged in low return agricultural sector are unaware of the vacancies in the tertiary service sector. This lack of information regarding job vacancy and lack of skill development do not allow for absorption of labor in the organized employment of the sector. An improvement in the growth rate of service sector can be brought through employing skilled labor force.


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