Is the rising share of services in the national income of Indian economy a
discouragement to a firm wishing to make invest...
energy, transport and telecommunication sectors but owing to the huge investment required for
the expansion of capability ...
Effects of the rise of services sector in India on the manufacturing sector:
The bright side:
Due to the removal of hard r...
Over the past many years, service sector has overtaken the manufacturing sector in
terms of growth and expansion as the la...
Indigenous country liquor
Growth
Total size of this industry in India is $35 billion and is showing a CAGR growth rate of ...
The inter relationship between agriculture, manufacturing and services sector in
the economy.
The inter relationship betwe...
Fig.4 (Sector-wise average growth trends in Indian economy)

Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009
A ...
Fig.5 (Volatility in growth across different sectors as measured by Coefficient of Variation)
(Percent)

Source: Gunjeet K...
The Link:
To start with the interdependency of the three sectors of economy, it can easily be understood
that the demand i...
(manufacturing sector) output and 0.020 of service output was utilized. Similarly to produce one
unit of product of servic...
demand in the year 1979-80, an increase in demand in the industry (manufacturing) sector by one
unit, the demand is increa...
Reference:
1. Bas,M(2013) ‘Does services liberalization affect manufacturing firms' export performance?
Evidence from Indi...
Upcoming SlideShare
Loading in …5
×

Is the rising share of services in the national income of Indian economy a discouragement to a firm wishing to make investment in manufacturing sector?

3,365 views
3,136 views

Published on

Is the rising share of services in the national income of Indian economy a discouragement to a firm wishing to make investment in manufacturing sector?

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
3,365
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
32
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Is the rising share of services in the national income of Indian economy a discouragement to a firm wishing to make investment in manufacturing sector?

  1. 1. Is the rising share of services in the national income of Indian economy a discouragement to a firm wishing to make investment in manufacturing sector? There are several points of view through which the above argument can be viewed and perceived, but before delving into the analysis of the argument, firstly lets discuss as to what are different types of sectors. Primarily there are three kinds of sectors which contribute to the growth of Indian economy: 1. Primary sector This sector includes the activities which is largely dependent upon the exploitation of natural resources. Agriculture and related activities are the examples. 2. Secondary sector The activities related to manufacturing of physical goods come under secondary sector. 3. Tertiary sector This sector comprises of the activities which are aimed towards providing intangible goods such as services. Telephony, financial consultancy, management counseling are few examples. (www.excellup.com, 2009) The earliest time of economy were dominated by primary sector and was concerned about the production of food, but slowly and gradually when the production of food became surplus, people started to develop needs for different products and this need gave birth to the secondary sector. Secondary or manufacturing sector saw a boom during the industrial revolution of the 1800s. Later, a system was needed to support the manufacturing sector, i.e. transport and shops, so as provide mobility and communications and hence the tertiary sector sprang into existence. It gradually evolved from just being limited to transportation and selling of goods manufactured by the secondary sector directly, to a more indirect form of tuition and administrative services. (www.excellup.com, 2009) The second last decade of the 20th century was marked by the autonomy of state owned enterprises in India. Service (Tertiary) sector was characterized by several entry barriers and restrictions for both domestic private as well as international players. The market structure in the sector of telecommunication was that of monopoly and was dominated by National Telecom Company. Transport sector witnessed the rule of state owned firms, whether it be roadways or airways. Further, the shipping industry was dominated by public companies and electricity was owned by Central government. Followed by the ‘Balance of Payment Crisis’ in the 1990s, several IMF regulatory reforms were applied in the economic structure of the country. Subsequent reforms took place by the 1950s in
  2. 2. energy, transport and telecommunication sectors but owing to the huge investment required for the expansion of capability and improvement of quality of the services sector, it was opened up for private investments. The main objective of this reform was to maximize the potency of service sector. (Bas, 2013) Fig.1 (A comparison in the value of sectors in 1970s and 2000s) Source: (www.excellup.com, 2009) Two major reforms included: The reduction of entry barriers and restrictions for private domestic firms The ease of entry for international players. (VOX,2010)
  3. 3. Effects of the rise of services sector in India on the manufacturing sector: The bright side: Due to the removal of hard restrictions and heavy barriers to the entry of private domestic and international players, many new players entered the market which in turn raised the competition between service sector firms to a higher level. This competition compelled the players to lower down their pricing so as to gain an edge over their competitors and this low pricing of services ultimately lead to the reduction in the cost incurred by the manufacturing industries, hence enabling them to produce more goods. Low cost of manufacturing has enabled even the small firms to export their goods as there are now able to afford it. Further the firms which were already exporting have given the ability to expand their market abroad. Technological advancement is another byproduct of liberalization. Owing to the tough competition in the market, firms adopt or even develop new technologies to make the production more efficient and less cumbersome. (www.business.mapsofindia.com, 2010) The downside: Even with the above mentioned beneficial effects the rapid growth of services sector which, in one way is supporting the manufacturing sector, is also militating against the growth factor of the same which in turn is discouraging firms to invest in the secondary sector. Fig.2 (Sectoral share in GDP in Indian economy) Source: (Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009)
  4. 4. Over the past many years, service sector has overtaken the manufacturing sector in terms of growth and expansion as the largest sector in the present world economy. Service sector constitutes around 50% of the GDP in developing countries and 70% in the developed countries and is still growing at a faster pace(36%) than the secondary sector(20%). Adding to these data, starting and/or running a service has become far more economical than manufacturing tangible goods. Large and established firms find it quite hefty to hire employees and monitor them when they can hire services itself, for example outsourcing, which makes running a firm easier. Many firms are even into outsourcing innovations and have managed to decrease the risk and cost of it by upto 90%, subsequently decreasing cycle times. (Cycle times means the total time utilized in the completion of one batch of a specified manufacturing and allied operations.) The returns to scale in services sector is more than that of manufacturing sector. This occurs because the services provided by the tertiary sector involves a labor who is causing the return of an industrial size without many variables which could change the output rate, but in manufacturing sector the output depends on the efficiency of labors, business environment, business services under a decreasing returns technology. So it could be concluded that the exponential growth in the service sector is generating a great number of employments across varied platforms but it is quite strange to observe that tertiary sector is growing faster than the sector it has been derived from (secondary sector), and to a degree it is indeed discouraging investors in putting in money into the manufacturing sector. (Mukherjee, 2012) Indian Alcohol Industry Introduction The manufacturing, distribution and retail sale of alcoholic drinks and beverages is taken care by the alcohol industry. Indian alcohol industry is among the fastest growing industries in the world. It currently occupies the 3rd rank in the field of consumption all over the world and is also a big contributor to India’s GDP. This industry is marked by giant players like Heineken, SAB Miller, Pernord Ricard. The products manufactured by this industry can be classified as follows: Foreign liquor bottled in Origin (BIO) Foreign liquor bottled in India (BII) Indian Manufactured Foreign Liquor (IMFL) Wine Beer
  5. 5. Indigenous country liquor Growth Total size of this industry in India is $35 billion and is showing a CAGR growth rate of 8% annually. With the rise of Indian economy and the increase in the customers’ disposable income, this industry is expected to rise in the future as well.Since the liberalization of Indian economy, many international players have made tie ups with the domestic ones to maintain their stronghold in India. These tie ups have contributed majorly in the growth of this industry. Despite of strong government regulations and restrictions preventing new players entering the market, the alcohol industry haven’t slowed down since the 1990s, on the contrary this industry has become a typical example of oligopoly. (Euromonitor, 2013) Fig.3 (Market share in Indian Liquor industry and their forecasted growth) Inter-linkages With the growth of alcohol industry in India, other sectors are also affected positively. The manufacturing units are producing more and more liquor which require more means of transportation which in turn increases the demand in service sector, further as the direct advertising of liquor has been banned in India since 2000, so they use the method of surrogate advertising which increases the demand in service sector even more.The main ingredient in liquor manufacturing in India is Molasses which is an agricultural product. Hence, the primary industry is also positively affected by the growth. The main feature that supports this industry is the minimum volatility, which causes almost equal growth annually.
  6. 6. The inter relationship between agriculture, manufacturing and services sector in the economy. The inter relationship between agriculture and industry moved up into the hot topics list during the industrial impasse in the 1960s. The economy of India underwent a radical change from being agriculture based in 1970s to being service based in 1990s. With the growth of economy of a country, the GDP basket increases and the majority of financial activities shift from agriculture to service sector because of the lower elasticity in agriculture sector than the other two. (Fisher, 1939 and Clark, 1940) Theoretically, the service sector grows substantially only after a threshold amount of growth in the agricultural and manufacturing sector. Usually the developed countries followed the traditional trend of development i.e. growth in agricultural, manufacturing and service sector respectively, but certain developing countries like India are demonstrating an alternative route of development. In India, the growth of service sector attained the status of a rapidly growing one even without the manufacturing sector establishing a stronghold in the country. From a primarily agro based country in 1970s, India has revolutionized its economic structure in 1990s as a major service sector country. The rise of a new sector has radically changed inter- sectoral productivity and demand linkages. This rise has in turn effected communications, distribution and financial services positively. A study of the relationships between these three sectors doesn’t only shows us the cumulative evolution of the economy as a whole as well as individual progression of sectors but also how the three sectors have adjusted over time to facilitate a holistic growth of the economy. The inter-sectoral linkages in an economy can be analyzed and determined by the following three methods: 1. I/O table which helps in determining the patterns in structural shifts. It also helps to provide an in depth view of the interdependency among sectors. 2. Statistical technique which involves causality analysis among sectors and inferences are drawn as per the numbers. 3. Econometric modeling exercises through all sectors of the economy. (Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009) So before delving into the inter-sectoral linkages in Indian economy, it would be highly useful to first look into the chronological growth patterns among sectors and their contribution into the GDP.
  7. 7. Fig.4 (Sector-wise average growth trends in Indian economy) Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009 A decade wise study shows that GDP growth rocketed to 5.6% in the 1980s in contrast to 2.9% in the 1970s.All the sectors were equally responsible for this acceleration, but mid way between the 80s the growth in the primary sector went south unlike the rise in growth in the other two sectors. Further the growth in the service sector had been quite substantial i.e. 8.8% in 2000 in comparison to 4% in 1950s.The growth in the primary sector, however, showed no particular trend but that of the secondary manufacturing sector has shown a rate of 6.1% and 6.2% in 1980s and 1990s respectively, which is even lower rate than that of 1960s (6.5%).
  8. 8. Fig.5 (Volatility in growth across different sectors as measured by Coefficient of Variation) (Percent) Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009 The growth rate of the service sector has shown much more consistency than that of other two sectors (determined by the coefficient of variation) and hence has contributed in the rise of Indian GDP majorly owing the continuous reduction in volatility of the output in it. The contribution of the tertiary sector had risen and overtook that of the secondary sector since 1950s but remained smaller as compared to the primary sector till the 1970s.
  9. 9. The Link: To start with the interdependency of the three sectors of economy, it can easily be understood that the demand in a sector is influenced greatly by the output generation in the other two sectors. For instance, the primary sector is dependent on the secondary sector for agricultural equipments and other products like pesticides and manure which increases the productivity of the former and in turn increases the demand for more products of the latter. Further this improved harvest increases demand of the services needed between the harvest and selling of it like transport, banking, trade, etc. And if we see at the supply side then agricultural products helps the manufacturing sector to produce pharmaceutical products, food products, chemicals and others. Therefore a fall in the agriculture sector seriously hampers the growth of the manufacturing sector. A similar relationship is quite apparent in the manufacturing and service sector and this relationship becomes gradually stronger with the evolution of the economy.With expansion and growth in the manufacturing sector, the demand for utility services like communication, transport, trade, hotels, et cetera and social services like hospitals, schools and better infrastructure increases. In turn, the sophistication of service sector helps in creating more demands for the manufactured goods. With the development of the country’s economy along which also causes a rise in per capita income, the secondary and tertiary industries more and more dependent on each other, hence strengthening the bond and pushing the economy higher. Abetted Liberalization Communication sector has shown a recent promising growth which has compounded the productivity in the manufacturing sector as the former causes the sharing of current information regarding the ongoing market and demand conditions. Financial service sector has shown substantial growth and so is the scenario with the transport services which has largely benefitted from the increased manufacturing ability and productivity of the secondary sector. (Dilip, 2009) An I/O table study backed by econometric exercise shows the inter and intra sectoral linkages between and within the three sectors of the Indian economy respectively. This table shows how the output of one sector serves as an input in the other sector thereby benefitting both the consumer and supplier. There are two aspects along which the I/O table is made: Production linkages Demand linkages Production linkages This table shows the relationship of units among the three sectors (year wise) and gives us a view as to how much units were utilized from all the three sectors to produce a unit of product in any one of them. For example, according to table __, to produce one unit of product of agricultural product in 1979-1980, 0.160 units of agriculture output, 0.068 units of industry
  10. 10. (manufacturing sector) output and 0.020 of service output was utilized. Similarly to produce one unit of product of service sector in 1998-99, 0.025 units of agriculture output, 0.211 units of manufacturing output and 0.132 units of service output was utilized. (Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009) Fig.6 (Sector wise utilization of units for the production of a single unit in any sector) Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009 Demand linkages This table shows the relationship as to how an increase in demand in one sector increases the demand in all the sectors. For example, according to the table __, the increase in
  11. 11. demand in the year 1979-80, an increase in demand in the industry (manufacturing) sector by one unit, the demand is increased by 0.260 units in agriculture sector and by 0.269 units in the service sector. (Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009) Fig.7 (Increase in demand across different sectors with the increase in demand in one sector) Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009 Hence it can be concluded that each and every sector in an economy affects the other sectors, both positively and negatively and further with the evolution of any economy a shift in the rate of growth from agriculture sector to service sector is observed.
  12. 12. Reference: 1. Bas,M(2013) ‘Does services liberalization affect manufacturing firms' export performance? Evidence from India’, CEPII 2013:17,pp.20-25. 2. Business Maps of India (2010)’Indian GDP and Standard of living’(online)(cited 2010).Available from URL: <http://business.mapsofindia.com/india-gdp/sectorwise/standard-living.html> 3. Excellup (2009) ‘Sectors of the Indian economy’(online)(cited 2009).Available from URL: <http://www.excellup.com/notes/10_socsc_sectorsofeconomy.pdf> 4. Euromonitor (2013) ‘Alcoholic drinks in India’(online)(cited September 2013).Available from URL:<https://euromonitor.com> 5. Kaur,G, Bordoloi,S and Rajesh,R (2009) ‘An Empirical Investigation of the Inter-Sectoral Linkages in India’, Reserve Bank of India Occasional Papers 30:1, pp.20-62. 6. S,Dilip (2009) ‘Agriculture-Industry Interlinkages: Some Theoretical and Methodological Issues in the Indian Context’, Institute for Financial Management and Research 4:1 (online)(cited 5 May 2009). Available from URL: <http://mpra.ub.uni-muenchen.de/27820> 7. VOX (2010) ‘Regulatory reform in services sectors: The missing explanation for the revival of Indian manufacturing?’(Online)(cited 12 October 2010).Available from URL: <http://www.voxeu.org/article/services-sector-reform-and-indian-manufacturing-miracle>

×