Chapter for Montek festschrift by Sunil Jain and TN Ninan
1. Introduction
The standard development model, from the time of Simon Kuznets (1901-85), has involved seeing the share of agriculture going down and that of industry going up in terms of both GDP and employment; and, after a fairly long period in which per capita incomes climb to upper-middle income levels, the share of the services sector rises while that of industry falls – agriculture, by now, has a share of between 5 and 10 per cent. The Indian growth model, it is often argued, appears to have skipped the intermediate stage, giving rise to debate about whether a growth model based heavily on services sector growth is sustainable. Will India be able to ‘service’ its GDP growth, as it were?
A related question pertains to manpower. Services growth, as seen from the experience of the developed world, has typically gone hand in hand with a better educated work force, the kind that is not to be seen in India as yet (secondary school enrolment still totals only a third of the eligible population). The result is a lack of depth in the job market, and a scarcity of people to do even basic jobs. The annual pay hikes recorded in Asia-wide salary surveys routinely show the highest increases in India (usually about 15 per cent), and not just in the cutting-edge information technology (or IT) sector. As manpower costs have climbed, one result is that labour has ceased to be a competitive advantage for many Indian companies. Does India have what it takes to keep up the momentum of services-led growth, when it does not have the required educated manpower?
After examining the nature of India’s GDP growth, this chapter outlines the contribution of the services sector to that growth; it examines whether India is indeed an outlier when it comes to the sectoral break-up of growth; and then attempts to explain what is behind the growth, in order to answer the question as to whether the growth is sustainable.
Traditional explanations for the boom in the services sector include theories which say that the splintering of industrial capacities (in part, because of industrial and tax policies) resulted in services’ units coming up; others suggest that since the industrial sector was tied up in the red tape of the ‘licence-permit raj’, relatively unregulated service sector activities became a natural outlet for Indian entrepreneurs. We look at these arguments, including the thesis that the services sector is simply playing catch-up – decades of repressed demand have created a huge market for services, ranging from telecoms to financial services, from education to health services, and even transport. While doing so, the chapter looks at the major services sectors and examines their growth prospects, including the problems arising from an opaque regulatory system. Finally, we look at some of the issues raised vis-à-vis the quality of the data on the sector.
2. Growth structure
One of the noteworthy features of India’s economic growth over the past few decades has been the faster growth of the services sector, in comparison with industry. But, on further study, it would appear that this is an overblown issue. First, it was not always the case that services were growing faster than industry. Between 1950-51 and 1980-81, while industry grew by an annual average of 5.3 per cent, services grew by a slower 4.4 per cent. This began to change some time in the 1970s. In the decade from 1980-81, for instance, services sector growth (at 6.5 per cent) outpaced industry (6.0 per cent). The maximum divergence, which is when the subject became a matter of analytical debate, was between 1991 and 2000, when services rapidly outgrew industry, with the latter’s share of GDP declining marginally as a consequence. But that aberrant pattern has not been sustained. In the current decade, industrial growth has revived as industrial companies have become more competitive, and the gap between the growth rates of the two sectors has shrunk. Indeed, the share of industry in GDP stagnated or fell in only one decade out of the past six, ie 1991-2001 (see Table 1).
Table 1. Sectoral share of GDP, in per cent
At constant 1999-00 prices
1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
Agriculture 55.11 50.62 44.26 37.92 31.37 23.89 18.51
Industry 15.03 18.68 22.07 24.04 25.92 25.8 26.75
Services 29.55 30.32 33.55 38.04 42.71 50.31 54.74
Note: Construction has been included under ‘industry’ and not under ‘services’
Source: CSO, Crisil
Still, many observers have argued that India’s faster growth in services, and its 55 per cent share of GDP, is unnatural in a low-income economy. It is in this sense that India is perceived to be an outlier; therefore, it has been argued, the skewed structure should be expected eventually to swing toward the mean.
But this thesis too seems not to be grounded in fact. Jim Gordon and Poonam Gupta argue that India may not be such an outlier when it comes to the sectoral composition of its economy. Using cross-country data, they plot the rise in the share of services as per capita income rises; in 1990, India was very much on the trend line. It moved above the trend by 2001, following the decade in which services significantly outpaced industry; but even that, the variation was less than in many other economies, so that the outlier thesis does not hold.
Perceptions of the ‘distorted’ nature of Indian growth could be a result in part of China’s well-known success in manufacturing. The industry-services mismatch seems particularly sharp when India-China comparisons are made. But the outlier, as Gordon and Gupta show, is not India but China, whose preponderance of manufacturing is what is truly unusual.
Source: Understanding India’s Services Revolution – Jim Gordon and Poonam Gupta, IMF, November 2003
India’s industrial sector suffers in comparison with China because of the latter’s obvious successes in low-cost manufacture of items like shoes and toys for export—areas in which it has established its mastery of volume play—and then in a broader range of industrial products as its domestic market grew. India, with its policy emphasis for many decades on controlling size and encouraging small-scale industry, simply missed this particular bus. But then, India was not doing particularly well in the services sector either during this period—telecom services were scarce; the transport network was rudimentary; and financial services for the most part were confined to a narrow urban elite. Hence the faster growth of industry over services in the initial decades after Independence.
The shift in growth patterns became obvious with the birth of a sizeable middle class in the 1980s, and the growing demand for a whole range of services. The somewhat belated provision of these saw rapid growth in the decade of the 1990s, especially in telecom, the sustained growth of IT services (mostly for export markets), the recent spurt in aviation, and the like. The rapid growth in sectors like telecom and IT meant that around a fifth of the growth impulse in the economy in 2006-07 came from these two sectors alone. But manufacturing did not slow down; it accelerated, while services accelerated even more.
It has taken time for the manufacturing sector to adjust to the new policy environment that was ushered in, in 1991, marked by the removal of curbs on investment, open imports, the encouragement of scale economics, the consolidation of capacities as sector leaders established themselves, and improved efficiencies that made export markets accessible. The result is that in a couple of years of the current decade, industry has in fact outpaced services, though in general services have continued to grow faster.
It should be mentioned, though, that some of the services sectors that have got enthusiastic endorsement in the business press remain relatively insignificant in a macro-economic context. Whether it is the now noticeable presence of organized retailing in the cities and large towns, or the sharp spurt in civil aviation until 2007-08, the wider user of credit cards or the broader interest in the stock market and mutual funds, all or most of these remain very much upper crust activities. It is the sectors that have become relevant closer to the base of the income pyramid (and telecommunications provide the best example, with a tele-density of 25 per cent) that are significant when assessing GDP trends. In the case of IT, the sustained conquest of external markets has added significantly to the country’s trade in goods and services, with IT exports now accounting for up to 20 per cent of the total.
The growth in the last two sectors mentioned is driven by factors that make them sustainable in the medium term. Telecom density has grown by leaps and bounds because prices have been cut to the bone, with local and long distance calls costing a tiny fraction of what they used to; the result is that the industry is able to make a profit even when the average revenue per user has dropped to a couple of hundred rupees per month. A supporting role has been played by the steady drop in handset prices. As for IT and IT-enabled services, the labour cost arbitrage and satellite connectivity that drove the initial business successes have been supplemented by movement up the value chain for the delivery of more sophisticated services, including business consulting that then ties in with re-engineering of business processes and their eventual outsourcing/offshoring. These have proved to be sustainable business models, driven by focused companies that have demonstrated entrepreneurial drive and ingenuity.
In an India-China comparison, it is worth noting that China has been an even bigger market for telephony, while India is now playing catch-up in the domestic manufacture of mobile handsets. In IT, the poor command of English on the part of the average Chinese citizen has meant that it is that country that is now playing catch-up with India.
There are other service sectors that will see accelerated growth in the coming years. The rapidly expanding road network, with a proper system of national highways, has speeded up truck movement by 50 per cent and more. Simultaneously, the improved traffic and operating ratios achieved by the railways, and the large investments planned in expanding the system (like the dedicated freight corridors from the north to ports in the west and east) mean that there will be active competition between road and rail. Civil aviation, meanwhile, could get back on to the growth track if oil prices drop to reasonable levels. It is interesting that some of the largest investments in physical infrastructure are now being made in the transport sector—new airport terminals in all the major cities, the investment in highways and railway lines, a new port at Krishnapatnam (Andhra Pradesh) that is touted as potentially India’s largest port, and a large container handling facility at Vizinjam (Kerala), taken together promise a greater role for transport in over-all GDP. Given the heavy commodity-orientation that is likely to mark India’s rapid economic growth, the related emphasis on transport promises to further raise the share of services in GDP.
Finally, the banking system still serves only the top 40 per cent of the population. Life insurance penetration is low, and capital market risks are taken only by a small minority. All this will change, aided by the advent of aggressive players in the private sector, like ICICI Bank, which are grabbing market share from the legacy public sector giants. Greater domestic inclusion at one end (one of the key issues addressed in the report of the Raghuram Rajan committee) and operating at the other in the international world of finance (an area of opportunity, as spelt out by the Percy Mistry committee on making Mumbai an international financial centre), are the two broad thrusts required to raise the share of financial services’ contribution to GDP.
The media and entertainment industry has also emerged as a rapid growth sector – the growing corporatisation of the Mumbai film industry, the financial muscle of the entertainment TV business (born in 1992 with the advent of satellite TV) and ambitious plans like the Anil Dhirubhai Ambani Group’s proposed investment of $1bn to make movies with Steven Spielberg, are all symptomatic of this changing reality. Modern retail is in its early stages, but is set to capture 16 per cent of the total retail market by 2013, and 25 per cent by 2018, compared to just 3 per cent today (in the urban areas, it already accounts for 8 per cent of retail spending). By way of interest, the consulting firm McKinsey found that improvements in retail trade contributed nearly a fourth of the US productivity jump between 1987-95 and 1995-99; in general merchandise, it found that Wal-Mart directly and indirectly caused much of the productivity growth .
A comparison between the sectoral share of GDP (Table 1) and the sectoral contribution to growth (Table 2) makes it clear that the value addition in the services sector has increased significantly since the reforms that began in 1990-91; most of this is probably due to the rise of the modern services sector, including sub-sectors like IT and communications. Also, it is only after 1990-91 that the contribution to GDP growth by the services sector begins to outpace its sectoral share.
Table 2. Contribution to GDP growth
In per cent 1951-52 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
Services 29.61 22.62 32.68 14.63 40.96 63.49 62.09
Industry 35.48 29.23 4.71 17.21 35.21 37.88 30.68
Agriculture 34.91 48.15 62.61 68.16 23.83 -1.37 7.24
Note: Construction has been included under ‘industry’ and not under ‘services’
Source: CSO, Crisil
The share of services in overall employment, however, continues to be very low, less than a fourth of the total, while its share in GDP is well over a half. This is an area of concern from the point of view of equity and employment creation, and could be a source of political tension . Some argue that as the share of organized retail increases, this imbalance between employment share and GDP share will change significantly , for the better. That is counter-intuitive since, if organized retail’s share has to increase, the share of kirana stores (significantly more labour-intensive) has to fall. To provide perspective, the world’s largest retailer Wal-Mart, now in India in partnership with the Bharti Group, has a global turnover which is about the same as that of the entire retail sector in India, but has far fewer employees than the numbers involved in India. As organized retail’s share in the overall pie increases, however, the value addition in the sector will rise further. That is, the impetus to services and GDP growth coming from the retail sector will rise, though the share in overall employment will not, and may even fall.
To come back to the outlier thesis, India’s share of GDP accounted for by services is not unusual. But at 27 per cent, the share of industry in GDP is typically that in a high-income country with a per capita income that’s 5 to 10 times that of India. However, the operative question is not with regard to the outlier thesis, but whether the present pattern is sustainable. As we shall argue in a later section, this is indeed the case. Indeed, as new service sectors get onto the growth turnpike, more services will be added to the list of rapidly growing sectors in the economy.
3. What explains rapid services growth?
Among the early explanations offered for services growth was ‘splintering’--that, in order to keep costs down, manufacturers outsourced non-core functions (security guards, drivers, canteen staff) to other firms and, voila, the services industry got a fresh impetus. Others include the great opportunity afforded by global trade (IT/ITeS), and change in government policy combined with severe demand-repression (telecom). Also, for many entrepreneurs, services were an easier segment to enter because they usually required less physical infrastructure than industry, and were subject to fewer controls. Which of these theories hold the key to understanding why India’s service sector has done well?
3.1 Splintering
Jagdish Bhagwati, now of Columbia University, argued that ‘splintering’ (in their drive to becoming more competitive, manufacturing units increasingly outsource some of their functions like, say, accounting and payroll management, which gives rise to a flourishing services industry) was a possible explanation for why the services sector grew the way it did.
On the basis of admittedly limited data, Gordon and Gupta argue that the impact of splintering is probably overstated. They use input-output coefficients to measure the increase in the use of outsourced services. Such data, available only till 1993-94, suggest that the use of service inputs into industry rose rapidly, by around 40 per cent, in the decade to 1989-90, but did not rise as rapidly in the 1990s. Thus, while splintering added around a half percentage point to growth in the 1980s, it was not significant in the 1990s and probably added an additional 0.25 percentage points to services growth. In the absence of data, it is not known whether this trend changed after the mid-1990s.
Table 3. Input Output Coefficients in India
Agriculture Industry Services
1979-80
Agriculture 0.06 0.13 0.04
Industry 0.07 0.35 0.11
Services 0.02 0.15 0.1
1989-90
Agriculture 0.17 0.04 0.04
Industry 0.14 0.37 0.17
0.05 0.19 0.19
1993-94
Agriculture 0.15 0.04 0.03
Industry 0.14 0.37 0.15
Services 0.05 0.21 0.2
Source: Understanding India’s Services Revolution – Jim Gordon and Poonam Gupta, IMF, November 2003
In any case, the biggest rise in services after 2000 was in sectors like communications and IT (for exports), neither of which is related to industries in India outsourcing their work to independent service units (splintering). Even so, more detailed analysis using up-to-date data is called for.
3.2 Regulation
In a nutshell, the argument here is that the IT/ITeS sector grew rapidly because it was not constrained by the shackles imposed on manufacturing activity—like licensed capacity limits, technology denial in the name of self-reliance, location policy directives, and foreign exchange constraints (since the sector was earning its own dollars). At a time of rapid growth for companies in the field, the government’s restrictive labour policies (relevant in the context of plant closure, forced termination and the like) were also not a constraint. However, even here, the IT sector would not have realized its potential if the government had not changed rules that made computer imports expensive and time-consuming, or not facilitated direct satellite links from Bangalore to Houston (for a start).
In some cases, it was a case of subversive entrepreneurship—as with the cable TV industry, which mushroomed in a grey legal area and was considered too small and fragmented to merit government attention until the point was reached when as much as 60 per cent of all TV households were hooked on to cable. At that stage, even the industry wanted some clear rules—among other things, to facilitate access to capital.
The argument has been extended to include other constraints to the manufacturing sector that, in a sense, also emanate from government regulations. The World Bank’s Doing Business index seeks to show how countries fare on various parameters relating to the ease of doing business, from the time taken to start a business to that taken to wind it down and pay creditors and equity holders. Others have looked at the cost of credit and the difficulty in obtaining it, to explain why some firms grow and others don’t – service sector firms, with their lower capital requirements, are at a relative advantage to manufacturing industry (though manufacturing companies find it easier to offer collateral). Besley and Burgess classify states as pro- and anti- labour and examine the impact of this on growth – states that have laws considered friendly to industry (or ‘anti-labour’) have seen faster industrial and employment growth and greater investment.
Poonam Gupta, Rana Hasan and Utsav Kumar use data from the Annual Survey of Industries (ASI) to compare the growth of industries that are more dependent upon infrastructure, have greater financial needs and are more labour-intensive – all three characteristics are dependent upon government policy.
They find that, in the post-delicensing period, companies that were above the median in terms of infrastructure intensiveness grew 10 per cent less than those which were below the median; those which were above the median in terms of labour intensiveness grew 19 per cent less than those which were below the median; those more dependent on markets for finance grew 18 per cent less. That is, the costs of poor infrastructure, poorly developed financial markets and rigid labour laws were significant differentiators. To the extent that services firms have lower infrastructure dependence, and restrictive labour laws don’t apply to them , they have been in a better position to grow than their counterparts in the industrial sector.
It also helped, of course, that the profitability of sunrise sectors like IT/ITeS and telecommunications was vastly greater than older manufacturing industries like textiles or steel. The cost arbitrage between India and the markets that offered offshoring contracts was massive, and it was routine for IT firms to enjoy a 30 per cent profit margin on sales—a level unthinkable for manufacturing companies. In telecommunications, too, even though the policy challenges were substantive and repetitive, the arrival of mobile telephony, vast untapped demand and a sharp reduction in costs as economies of scale kicked in, allowed a profitability that made access to capital easy, especially after policy changes in 1999 and 2003. It is worth noting that a standard call charge of Rs 16 per minute in the mid-1990s had dropped to less than a rupee by 2007.
3.3 Role of liberalization
A corollary to the role of restrictive government policy is the role of liberalization, or market-oriented reforms and opening up more areas of activity to the private sector. A look at the fast-growth sub-sectors of the services industry makes this clear – the fast-growth areas are those where there has been significant liberalization. Even in technology-driven sectors like IT and communications, the removal of government-imposed constraints was important, if not vital, for growth.
‘Transport, storage and communications’ has seen the highest rise in GDP share, from less than 4 per cent in 1960-61 to over 6 per cent in 1990-91 and then a sharp rise to nearly 11.5 per cent in 2006-07. While there has been a hike in ‘transport by other means’, the real jump has been in communication services whose share of GDP rose from 0.7 per cent in 1991 (telecoms liberalization began in 1994, when the private sector was allowed entry) to 4.9 per cent in 2006-07. The communications sector’s growth rate quadrupled, from 7.3 per cent in 1990-91 to 28 per cent in 2006-07, and its contribution to GDP growth rose from just under 1 per cent in 1990-91 to over 14 per cent in 2006-07.
Not surprisingly, the real growth in telecom took place after the mid-1990s, when the private sector was first allowed to offer telecom services. From a total of around 10 million subscribers (of fixed, landline phones) in 1991, this has risen to 300 million today – and just a little over a fourth of these are phones provided by the public sector today. In terms of the industry’s 2007-08 revenue of Rs 1,29,083 crore, however, the public sector share is higher, at 34 per cent, owing to the higher share commanded by the state-owned Bharat Sanchar Nigam Ltd in the long-distance traffic. The increased share of GDP is despite a drop in tariff levels by over 90 per cent over the past decade, for both local mobile and long-distance calls. The revenue growth, therefore, has been primarily from growth in subscribers and increased usage.
‘Financing, insurance, real estate and business services’ is the other area where there has been a sharp hike in growth rates and hence GDP share. While real estate’s share in GDP has grown marginally, the real growth here has been in banking and insurance, whose GDP share rose from 1.3 per cent in 1960-61 to 6.7 per cent in 2006-07, and contribution to growth from 0.18 per cent to 13.7 per cent over the same period. Within this, the share of banks nearly doubled from 2.2 per cent of GDP in 1999-2000 to 4.1 in 2006-07, and the share of insurance from 0.65 per cent to 1.1 per cent. In terms of contribution to GDP growth in this period, the share of the entire banking sector (including post office savings, non-banking financial companies and cooperative credit societies) rose from -2.4 per cent in 2000-01 to 10 per cent in 2006-07, and in the case of the insurance sector from -0.12 per cent in 2000-01 to 3.9 per cent in 2006-07.
Within this, the growth of private sector players has been noteworthy. While private banks accounted for just over 5 per cent of all bank incomes in 1995, their share rose to nearly 25 per cent in 2007; in terms of share of the net profits of the banking sector, the number rose from 20 per cent to 25 per cent .
In insurance, within just seven years of the sector opening up, there were 24 private sector firms in 2006-07 who brought in Rs 9,625 crore as capital. The share of these firms in the total life insurance market rose from 14 per cent in 2005-06 to 18 per cent in 2006-07; in the non-life segment, the share of the private sector rose from 26 per cent in 2005-06 to 35 per cent just a year later .
‘Computer related services’, broadly the IT/ITeS sector, saw its share in GDP rise from 0.96 per cent in 1999-2000 to 3.04 per cent in 2006-07, while its contribution to growth was around 7 per cent. By way of comparison, the contribution of the real estate/housing sector to GDP growth was a mere 1 per cent.
Table 4. Services sub-sectoral performance (at 1999-2000 prices)
1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
Trade, hotels & restaurants
GDP share 9.23 10.24 11.44 12.06 14.34 15.39
Growth p.a. 9.15 5.37 5.21 5.24 5.19 8.49
Contributn to GDP growth 11.92 10.98 8.31 11.95 17.09 13.57
Transport, storage & communication
GDP share 3.77 4.48 6 6.28 7.96 11.42
Growth p.a. 6.88 3.54 6.71 4.97 11.21 16.64
Contribtn to GDP growth 3.67 3.17 5.62 5.91 20.49 19.75
Financing, insurance, real estate & business services
GDP share 7 6.82 7.49 10.58 13.04 14.32
Growth p.a. 2.07 4.18 1.92 6.21 4.07 13.92
Contributn to GDP growth 2.04 5.68 2 12.44 12.18 20.7
Community, social & personal services
GDP share 10.31 12.01 13.1 13.78 14.98 13.62
Growth p.a. 4.91 5.51 4.09 4.36 4.7 6.89
Contributn to GDP growth 7.15 13.2 7.47 11.37 16.17 9.75
Source: CSO, Crisil
4 Limitations of liberalization
Although it is established that the spurt in the services sector is in part a function of liberalization, that should not lead anyone to the conclusion that everything is hunky dory with the sector. Foreign banks complain about the Reserve Bank of India’s restrictive policy on opening new branches as fast as they would like, an issue which the RBI sees through the prism of reciprocity—how many branches do other countries permit Indian banks? After sustained campaigning and many protests, the US has recently allowed a new branch to ICICI Bank, now India’s second-largest bank.
In insurance, the 26 per cent cap on foreign investment has likewise been a complaint voiced by global financial firms, with constant pressure to raise the limit to 51 per cent. The government has indeed been wanting to allow more foreign shareholding, but was held back till mid-2008 by opposition from the Left parties. With the UPA government no longer dependent for its survival on the Left parties, it remains to be seen whether the government will open the investment window a little more.
But when it comes to regulatory uncertainty and indeed waywardness, there is nothing to match what has been going on in telecommunications. More than once, it would seem that the government/regulator has played favourites on everything from allocation of scarce spectrum, (which carries the signals from mobile phones) to allowing market entry, to determining the fees to be paid. In the early 2000s, for instance, the government asked the regulator if firms (like Reliance Infocomm) that had fixed line licences should be allowed to offer mobile phones as well, since the technology they used [Wireless in Local Loop, or Code Division Multiple Access, (CDMA)] allowed this. The regulator agreed and Reliance Infocomm, which till then had been a marginal player in the booming mobile market, got back-door entry under the garb of “limited mobility” and lower-cost services, both of which from the beginning were bogus arguments.
More recently, when CDMA-mobile players like the now re-christened Reliance Communications wanted to get into the faster-growing GSM end of the mobile business, the government changed the rules again. The regulator has allowed a host of new firms to offer 2G-GSM mobile phone services, though there is a shortage of spectrum.
Now the government is playing favourites on who should have access to the next generation (3G, or third generation) mobile telephony, where data upload/download speeds on mobile can be as fast at the current broadband available on fixed line phones. First, there was a recommendation, by the telecom regulator--which the government accepted--to reserve one 3G slot for Reliance Communication in the CDMA-space. After a public furore, the government appears to have decided this will also be auctioned like the 3G GSM slots. Meanwhile, to ensure that the market remains virtually closed to other newcomers, the government has announced its policy for 3G auctions with enough riders to make it difficult for new players to bid in the auctions.
5 Is the growth in services sustainable?
5.1 Changing consumption patterns
Till the liberalization of the early 1990s, the trend in private final consumption expenditure was a straightforward one – the share of services in the total consumption basket (at 1999-00 prices) rose by around 3 percentage points each decade, from around 8 per cent in 1950-51 to 11 per cent in 1960-61, 14 per cent in 1970-71, 17 per cent in 1980-81 and 21 per cent in 1990-91. However, this trend changed dramatically and, by 2000-01, the share of services in private consumption was up by 10 percentage points, to 31 per cent. By 2006-07, it was up another 8 percentage points, indicating that the pace quickened further in the 2000s. A shift in the consumption pattern of this nature indicates that the demand-side impetus to services growth will continue, indeed will get stronger.
Private expenditure on education, for instance, rose from Rs 1,558 crore in 1980-81 to Rs 6,313 crore in 1990-91, and to Rs 26,883 crore in 2000-01, before climbing to Rs 55,145 crore in 2006-07 (all at current prices). In terms of constant 1999-00 prices, such expenditure rose from Rs 8,196 crore to Rs 13,976 crore and then to Rs 48,052 crore from 1990-91 to 2006-07. The rising demand for education, including among the poor, will ensure that this remains a driver of GDP growth in the future.
Private expenditure on communications, in current prices, similarly, rose from a mere Rs 522 crore in 1980-81 to Rs 3,402 crore in 1990-91, Rs 17,162 crore in 2000-01 and finally to Rs 61,655 crore in 2006-07 (expenditure on communications understates the spread of the sector due to the sharp reduction in prices in the segment during this period – the share of expenditure on communication in private final consumption expenditure was 14 per cent higher than that on medicine in 2006-07 if you use constant prices; but at current prices, expenditure on medicine was much higher than that on communication).
Expenditure on medical care and health services rose from Rs 3,434 crore in 1980-81 to Rs 9,552 crore in 1990-91, jumped to Rs 64,777 crore in 2000-01 and then to Rs 102,422 crore in 2006-07.
Not surprisingly, there is close correlation between the demand and the supply sides. Communications, as already seen, has been one of the growth industries of the decade – its share in GDP growth shot up to nearly 5 per cent in 2006-07 and contribution to GDP growth around 14 per cent. Between 1950-51 and 1990-91, there was nothing dramatic in the share of expenditure on communications, though it grew steadily. Between 1990-91 and 2000-01, however, the share nearly trebled; in the next six years, it rose still further.
Table 5. Total expenditure as % of PFCE
1999-2000 prices 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
1 Food, beverages and tobacco 68.83 68.12 65.29 61.4 56.67 48.06 42.13
2 Clothing & footwear 2.64 3.36 4.12 5.42 6.03 5.95 5.09
3 Rent, fuel & power 18.29 14.81 13.56 13.82 12.78 11.35 10.02
3.1 Gross rent & water charges 13.01 11.14 9.92 10.28 9.49 7.84 6.87
3.2 Fuel & power 5.09 3.69 3.6 3.54 3.3 3.52 3.15
3.2.1 Electricity 0.32 0.23 0.23 0.22 0.51 0.79 0.8
3.2.2 Liquefied petrol'm gas 0.1 0.07 0.07 0.07 0.27 0.5 0.55
3.2.3 Kerosene 0.41 0.3 0.29 0.28 0.38 0.29 0.18
3.2.4 Other fuel 4.26 3.09 3.01 2.96 2.14 1.93 1.62
4 Furniture, furnishing, appliances & services 2.06 2.68 2.98 2.58 3.07 3.38 3.96
Sub-total 91.82 88.97 85.94 83.22 78.55 68.74 61.19
5 Medical care & health services 1.67 2.02 3.13 3.94 3.24 4.71 4.4
6 Transport & communication 2.84 3.06 4.07 5.7 9.83 14.46 18.37
6.1 Personal tpt. Equipment 0.11 0.14 0.24 0.23 0.46 0.7 0.9
6.2 Operation of tpt. eqpts. 0.11 0.15 0.47 0.95 2.75 4.21 4.18
6.3 Purchase of tpt. Serv. 2.69 2.77 3.09 4.1 6.13 8.06 8.27
6.4 Communication 0.09 0.12 0.32 0.41 0.49 1.48 5.02
7 Recreation, education & cultural services 1.43 1.33 2.34 2.18 2.75 3.68 4.86
7.1 Eqpt., paper & stationery 0.52 0.37 0.68 0.53 0.92 1.48 2.13
7.2 Recreation & cul.services 0.19 0.14 0.25 0.2 0.17 0.18 0.11
7.3 Education 0.6 0.82 1.41 1.46 1.66 2.01 2.62
8 Misc. good & services 5.43 5.08 4.61 4.96 5.63 8.42 11.18
8.1 Personal care & effect 3.38 3.17 2.87 3.09 2.79 2.95 2.72
8.2 Personal goods n.e.c. 0.89 0.83 0.75 0.81 1.25 2.22 2.55
8.3 Other misc. services 1.16 1.09 0.98 1.06 1.59 3.25 5.9
Services sub-total 8.18 11.03 14.06 16.78 21.45 31.26 38.81
9 PFCE in domestic market 100 100 100 100 100 100 100
5.2 Exports
Since liberalization began, India’s services exports have increased 15-fold, from $5bn in 1990 to $74 bn in 2006. Exports of business services, mostly IT/ITeS, have increased at over 25 per cent per year in the past decade, an unmatched record anywhere in the world. As a result, while India’s share in global trade is approaching 1 per cent (up from 0.4 per cent in 1990-91), its share in the global services trade is double that.
Much of this is related to the increased share of global services that have now become tradeable and, on India’s part, to liberalization which has made many sectors more efficient. Between 1965 and 2000, India’s exports of business services rose by 43 per cent a year, this was followed by Israel’s 28 per cent. Even the US grew by just 11 per cent, though from a much higher base . As a result, by 2005, services exports accounted for 35 per cent of India’s total exports of goods and services, compared to a mere 9 per cent for China. The figure was 28 per cent for the US and 35 per cent for the UK.
For developing countries as a whole, the share in global services trade rose from 14 per cent in 1986 to nearly 20 per cent by 2002, while for goods, it rose from 18 per cent to 28 per cent in the same period. According to Mattoo and Stern, India would gain as much as 1.6 per cent of GDP if the tariff equivalents of protection were cut by a third in all countries, again a pointer to the growth possibilities in the services sector.
Source: India, trade in services and the Doha agenda, Aditya Mattoo, January 2007
According to the National Association of Software Services Companies (or Nasscom), the total software and services business has gone up from $17bn in 2003-04 to $52bn in 2007-08, and of this, exports grew from $13bn to $40 bn. It is expected that by 2009-10, exports will rise to $60bn and the total market to $75bn.
Since the global BPO market alone stands at around $150bn, Nasscom estimates that the addressable market is large enough to leave enough headroom for growth for several years. According to a study done by McKinsey & Company for Nasscom, the total market for what is called Remote Infrastructure Management is around $100 bn currently, and around three-fourths of this can be offshored. According to McKinsey, India is well positioned to capture around $15bn of this business in the next five years, ie by 2013.
Over time, a host of new service areas are also likely to grow. The US, for instance, stands to save over $1.5 bn annually if just 10 per cent of US patients choose to undergo medical treatment overseas for just 15 low-risk procedures – for this, insurance would have to be portable . Harpal Singh, till recently chairman of Fortis (the health care group) has calculated that the scope for providing medical services in India for nationals of other can be compared to what has been achieved in software services.
Table 6. India's IT industry
$bn FY2004 FY2005 FY2006 FY2007 FY2008 E
IT Services 10.4 13.5 17.8 23.5 31
-Exports 7.3 10.0 13.3 18.0 23.1
-Domestic 3.1 3.5 4.5 5.5 7.9
ITES-BPO 3.4 5.2 7.2 9.5 12.5
-Exports 3.1 4.6 6.3 8.4 10.9
-Domestic 0.3 0.6 0.9 1.1 1.6
Engineering Services etc 2.9 3.8 5.3 6.5 8.5
-Exports 2.5 3.1 4.0 4.9 6.3
-Domestic 0.4 0.7 1.3 1.6 2.2
Total Software/Services 16.7 22.5 30.3 39.5 52.0
Of which, exports are 12.9 17.7 23.6 31.3 40.3
Hardware 5.0 5.6 7.1 8.5 12.0
-Exports 0.5 0.5 0.6 0.5 0.5
-Domestic 4.4 5.1 6.5 8.0 11.5
Total IT Industry 21.6 28.2 37.4 48.0 64.0
Source: Nasscom
5.3 Retail Sector
Organised retailing has grown from tiny beginnings, as India’s middle class has grown in both size and proportion. According to a study by the Indian Council for Research in International Economic Relations (Icrier) on the retail sector, around $35bn will be invested in organized retailing over the next 5-7 years, by homegrown Indian firms as well as by joint ventures with well-known international retailers like Wal-Mart and Carrefour. Icrier estimates that while the total retail business (including mom and pop stores) in the country will grow 13 per cent annually, between 2006-07 and 2011-12, the organized retail sector will grow 45-50 per cent per annum and will increase its market share to 16 per cent by 2011-12. By 2017-18, according to the consulting firm Technopak, which did the projections for Icrier, this will rise further, to 25 per cent.
It is hard to tell whether these ambitious numbers will materialize. From a situation where retailers were willing to pay exorbitant rates for space in the shopping malls that have sprouted in every major city, the economic slowdown in 2008 has meant that mall stalls are going empty and mall owners are offering sweeteners to be able to rent out stall space.
Icrier says the organized retailing sector will employ roughly 2 million persons by 2011-12. That is small, when the unorganized retail sector employs around 35 million persons. It would seem obvious that any reduction in the latter’s share will cause changes in the job market, but in a rapidly growing economy that is under-served because of the relative shortage of shelf space, growth itself would take care of the displacement problem and therefore the changes would almost certainly be for the better. The upstream benefits in terms of volume production to meet large orders, effective supply chain management to drive efficiencies, and the possibility that between the two more exports will develop, are matched by the downstream benefits that will accrue through lower prices for consumers, and (arguably) better prices for at least some producers.
But several policy issues remain to be sorted out. Should organized retailing be thrown open to foreign investment, and if so with what ownership limits stipulated? Should the opening up be only for single-brand stores, or for multi-brand chains as well? With the Left parties having walked away, the government has been toying with proposals to take some of these steps.
7. Size of Indian Retail Industry
$bn Total Organised
2008 410 15
2009 445 22
2010 483 33
2011 524 50
2012 568 74
2013 615 110
2018 860 215
Source: Technopak
5.4 Entertainment
Over the past 3-4 years, the entertainment and media sector has grown by around 19 per cent per annum, and according to the Federation of Indian Chambers of Commerce and Industry (Ficci) and PricewaterhouseCoopers , the industry will continue to grow at around the same rate, to touch annual revenue of $28bn by 2012. Within this, animation and gaming are a new phenomenon, emerging as a serious business just a couple of years ago. The Bollywood film industry is likely to nearly double in size over the next five years including, if the ADAG group foray is anything to go by, tie-ups with Hollywood involving the co-production of films.
8. Size of Indian Media Business (Rs mn)
2004 2005 2006 2007 2012 F CAGR %
TV 128,700 158,500 191,200 225,900 600,000 21.2
Print 97,800 109,500 127,900 149,000 281,000 14.1
Films 59,900 68,100 84,500 96,000 176,000 14.4
Radio 2,400 3,200 5,000 6,200 18,000 28.6
Music 6,700 7,000 7,200 7,300 8,000 2.2
Animation, Gaming - - 10,500 13,000 40,000
Outdoor Advt 8,500 9,000 10,000 12,500 21,500 12.3
Internet Advt 600 1,000 1,600 2,700 11,000 43.8
Total 306,604 358,305 439,906 514,607 1,155,500 18
Source: FICCI Frames
5.5 International Financial Services
With India integrating with the global economy, the two-way flow of money has involved not just payment for trade but also money being invested in physical capital as well as in stocks and bonds. And with Indian firms having started to buy firms in other countries, there is also an outflow of capital as well as substantial fees paid for a variety of financial services. According to the Report of the High Powered Expert Committee on Making Mumbai an International Financial Centre, the best way to look at this transition, and its impact, is to look at the trade-to-GDP ratio to begin with. This fell from 16.6 per cent in 1952 when India was still an open economy, to 7.5 per cent in the 1970-73 period of intense socialism, and has now risen to around 36 per cent – the period of increase can almost directly be correlated to changes in policy that have created a realistic market for the rupee, dropped tariffs sharply and removed virtually all physical controls on international trade.
As a result, the gross flows have risen from around $15bn a quarter in the early 1990s to over $150 bn today. In terms of share of GDP, too, this represents a sharp increase.
Based on the projected size of exports/imports, FII and FDI inflows, the fees paid by Indian firms to investment bankers overseas, and so on, the MIFC projects the total external flows over the next decade. It then works out what this means in terms of brokerage fees, currently paid to financial firms located outside the country. Based on a weighted average paid to merchant bankers for different services, MIFC calculates the total fees that India stands to gain if Mumbai is to become an international financial centre. The estimate for 2015 is $48 bn, based on the medium-low projections of overall flows; a higher degree of integration would mean that this figure would increase substantially.
9. Demand for International Financial Services in India
$bn
1992-93 2001-02 2003-04 2004-05 2005-06
External Flow 101.3 237.5 360.5 480 657
(% of GDP) 47.1 53.9 65.1 74 90.6
External Flows 2006 2010 2015
Low 657 962 1549
Medium 657 1362 3390
High 657 2524 13575
Projected Fees 2006 2010 2015
At 1 per cent 6.57 11.81 23.9
At 2 per cent 13.14 23.62 47.8
At 3 per cent 19.71 35.43 71.7
Fee projections based on less than medium flows
5.6 Inclusive banking
The impact of the spread of banking on GDP growth is well established – the banking sector’s contribution to GDP rose from 7.5 per cent in 2001-02 to 10 per cent in 2006-07. This contribution, it should be kept in mind, took place when the vast majority of Indians remained unbanked; National Sample Survey data reveal, for instance, that over half the 45 million farmers in the country have no access to credit, either informal or formal. And of these, just around half have access to formal credit – all told, around three-quarters of farmers have no access to formal credit. The exclusion is worst in the central, eastern and north-eastern parts of the country – less than a fifth of the indebtedness in this region is to formal sources of credit .
The Invest India Savings Survey of 2007 revealed similar trends, with just 14 per cent of agricultural farm labour having bank accounts. The figure was better, but not much, for non-agricultural wage labour, at 25 per cent .
These numbers indicate that the problem is not just with the geographical spread of the banking sector which, it is well known, is still poor in the rural areas. As much is also borne out by the fact that, even in the case of the top-most income quartile, less than half of those who take loans take them from the banking sector. This suggests that bank formalities may be too cumbersome, or credit risk assessments too stringent. Given that around half the loans taken by those in the lowest income quartile are at interest rates of over 36 per cent per year, the scope for growth in the banking sector is clearly large.
10. Sources of loans by income group
% of persons who've taken loans in last two years
Loan Sources Quartile 1 Quartile2 Quartile 3 Quartile 4
Relatives/Friends 39.2 34.4 33.2 32
Moneylenders 39.8 33.2 25.8 14.8
Banks 9.6 20.7 33.3 45.8
SHGs 9.7 8.4 3.3 3.4
Coop Societies 5.4 4.9 6.5 7.4
Chit Funds/NBFC 1.6 1.9 1.5 1.2
MFIs 1.1 1.4 1.2 0.9
Others 1 0.9 0.8 1.4
Though the banking sector has grown rapidly over the past decade (the ratio of bank loans to GDP rose from 22.7 per cent in 2000 to 46 per cent in 2007), this share is small relative to many countries. Not surprisingly, then, even the largest Indian banks are quite small when compared on a global scale – just one bank, the State Bank of India, figures in the top 100 global banks in terms of assets. It is ranked 80th.
In recent times, the government has got C Rangarajan, till recently the chairman of the Prime Minister’s Economic Advisory Council, to write a report on financial inclusion. The Planning Commission also got a panel headed by Raghuram Rajan to write a report on financial sector reforms. Both have suggested a variety of ways to improve financial inclusion and reform the financial sector. Without going into the merits and demerits of these reports, it can be asserted quite safely that if greater financial inclusion is to be achieved, the growth of the banking sector, and its contribution to GDP, will have to increase manifold.
6. Manning the jobs
No economy, and more so one looking at rapid growth in its services sector, can grow beyond a point if its population is largely illiterate, or semi-literate. Yet, this seems precisely what India is managing to do. Despite very high primary school enrolment ratios, the level of functional literacy achieved is quite low because of very high drop-out rates, and the poor standards achieved in most primary schools. According to one study, as much as 80 per cent of the population in the 18-22 age group is illiterate . While that figure may seem high to many, India’s track record when it comes to higher education, especially in science and technology, is even worse. The way out so far has been to privatize even the largely-privatised education system. So, India’s largest IT/ITeS firms virtually run their own universities, places where graduates of Indian schools and universities are once again trained to meet the requirements of their current jobs. Such firm-level and even industry-level solutions, however, are at best stop-gap measures. If a more permanent solution is not found, it could well slow India’s progress on the services front. As the skills shortage grows, salaries will keep rising to the point where business becomes globally uncompetitive.
Figures cited in the India Labour Report 2007, prepared by India’s largest temping company TeamLease Services, show that under a third of India’s IT graduates are employable in the IT sector and, as a result of this, there will be a shortage of 500,000 IT professionals in the sector by next year. Another set of figures, this time relating to employability in multinational companies that have slightly higher standards, say that just a fourth of India’s engineering graduates are employable – the figure for finance and accounting professionals is even lower, at 15 per cent.
Annual surveys by the NGO, Pratham, show the quality of learning in schools in rural India is abysmal. As many as a fifth of those in Class V cannot read a single paragraph and as many as half cannot read a simple story. A fifth cannot perform simple operations in maths like division and subtraction.
If it isn’t bad enough that nearly 80 per cent of the 18-22 year old work force is illiterate, of all 15-60 year olds, just 0.3 per cent have had a technical education of any kind, and just 7 per cent of those in the 15-29 age group receive even vocational training. Within this last group, less than a third receives it through formal training. According to TeamLease, more than half of India’s youth suffers from some degree of unemployability. Nearly two thirds of them, to use TeamLease’s term, need ‘structural repair’ (one to two years’ training) at a whopping cost of Rs 490,000 crore over the next two years. Certainly, India’s education budgets are nowhere near what is needed, but the problem goes beyond money. At the end of the day, 90 per cent of employment opportunities require vocational skills, but 90 per cent of India’s college/school output is bookish knowledge.
Apart from the levels of education, what also matters for the economy that is trying to develop on the basis of the services sector, is the extent of use of information technology and R&D spending. The World Bank captures most of these parameters in its Knowledge Economy Index (KEI) – this takes into account levels of education, information technology and the economic incentives regime in a country and then normalizes them keeping in mind the country’s population. To no one’s surprise, India’s absolute scores lag behind those of peer group countries.
Country KEI Economic Incentive and Institutional Regime Innovation Education ICT
recent 1995 recent 1995 recent 1995 recent 1995 recent 1995
United States 9.1 9.51 9.16 9.2 9.45 9.58 8.79 9.42 9.02 9.83
Korea, Rep. 7.67 7.85 5.57 6.75 8.47 8.16 7.89 8.3 8.74 8.2
Malaysia 6.16 6.04 6.18 7.21 6.82 6.2 4.35 4.17 7.3 6.57
Russian Federation 5.58 5.53 1.55 2.43 6.88 5.61 7.62 8.04 6.26 6.05
Brazil 5.5 5.03 4.3 4.81 6.06 5.88 5.78 3.95 5.87 5.5
China 4.36 3.48 4.01 3.31 5.1 4.26 4.06 3.63 4.28 2.74
Indonesia 3.27 3.46 3.36 4.02 3.31 2.4 3.45 3.92 2.94 3.5
India 3.04 3.13 3.67 3.48 3.95 3.61 2.11 2.56 2.45 2.87
Source: World Bank
The government has now set its mind on increasing public spending on education. There is also a greater willingness to allow the private sector an expanded role, especially when it comes to technical education, and for public private partnerships. All of this will improve supply, as also (one hopes) quality. The demand for education, in turn, will be driven by the higher salaries that an educated person gets – the median multiple being 7 when you look at salary levels for illiterate and those with post-graduate degrees.
7. Is the data dodgy?
As with most other statistics in India, there is no shortage of people who question the veracity of the data on services too. This goes beyond the larger issue of whether India has a robust statistical system to capture reality – price datafor some sectors, for instance, are not updated for months, and consumption data as reported by the National Sample Survey Organisation capture less and less of the consumption revealed by the National Accounts. Bosworth, Collins and Virmani (BCV) argue that the kind of productivity growth that the Indian services data have been reflecting since the early 1980s is something never seen in any other country at a similar stage of development. While that, in itself, is not sufficient to damn the data, what BCV point out as worrying are the productivity surges in sectors which typically don’t see such sharp hikes – such as in trade, transportation and education. The crux of the problem, BCV argue, lies in the unorganized sector where data capture is simply not a robust exercise – and, nearly half the services sector happens to be ‘unorganized’. As a result, the revisions in GDP data that take place are often quite sharp. As BCV put it, ‘The extent that this is concentrated in TFP (total factor productivity) and not employment does give us pause…Though difficult to verify, we are concerned that output growth in services has been over-stated, perhaps due to an under-estimate of services price inflation, particularly in the more traditional sectors.’
As a result of the underlying annual survey data for the unorganized portion of the economy, according to BCV, the data get revised quite sharply. The 1993-94 GDP data, for instance, was revised upwards by nearly a tenth, but while the revisions for industry were under 1 percentage point, those for services were over 15 percentage points; within this, the revision for ‘real estate and business services’ was over 100 percentage points. While the overall revision came down to just 1.7 percentage points for the 1999-00 GDP data, that in ‘real estate and business services’ was still as high as a fourth. For the services sector as a whole, the revision was around 4.5 percentage points, a figure that added dramatically to the GDP growth number.
According to BCV, while nearly all the output growth in the 1960-80 period took place due to increased factor inputs, the post-1980 growth is very largely influenced by an increase in factor productivity – output per worker surged from an annual rate of 1.8 per cent in 1973-83 to 2.4 per cent in 1983-87 and further to 5.8 per cent in 1993-99.
So, is the data dodgy enough to call off all analysis on the services sector, (which would then mean the entire economy, since services account for more than a half of GDP), or should economists be like the drunk who looks for a lost key under the lamp-post because that is the only place where there is light? Given the need for analysis, there can be only one answer. But equally, there can be little doubt that the data isn’t as robust as researchers and analysts would like. Indeed, while BCV point to the sharp surge in TFP to 5.8 per cent per annum in 1993-99 as evidence of the data being dodgy, the sharp fall in TFP growth in the 1999-2004 period to 3.2 per cent per cent seems to confirm this, but also indicates that the bias is not in just one direction. Indeed, Goldar also shows, with respect to manufacturing, that total TFP growth has actually fallen in the post-reforms period (ie since 1991). Perhaps the explanation lies in the fact that, as a concept, factor productivity is tricky to measure since it is almost always simply a residual factor. India’s investment-to-GDP numbers, for instance, have gone up sharply in recent years. And any small increase in capital levels or even in the labour force can affect factor productivity calculations. It is also inconceivable that changes, like those in telecommunications, where the number of those with phones has risen almost eight-fold in the first seven years of this decade, have not led to a sharp surge in productivity.
The view that productivity numbers are dodgy is supported by the data on investment. BCV appear to have few doubts on the authenticity of India’s data on savings and investment. But then, as Surjit Bhalla argues, the increase in capital and labour in the post-2002 period is in itself sufficient to explain the stepped-up GDP growth that India has witnessed. If the growth did therefore take place and had to be divided between the three sectors, are BCV saying agricultural and industrial growth are understated? Or is it that the productivity numbers may not be robust?
8. Conclusion
Given the nature of the global financial crisis and the likelihood that this will result in near-zero growth in the US and much of the Euro Area for the next 12-15 months, it is very likely India’s services exports will take a hit, indeed most other macro numbers will also take a hit. So, while Nasscom has put on a brave face saying the current crisis offers greater potential, IT/ITeS leaders like Infosys have already lowered their earnings guidance.
What’s important is how long this slowing of growth will last and whether it will be restricted to just the exports sector. To take the second question first, it is unlikely any further liberalization of trade in goods, and especially services, can take place in an environment of near-recession in advanced economies. In which case, the chances of the services sector increasing exports through greater liberalization of world trade (like, say, relaxing of rules allowing insurance firms to pay for medical treatment in India) look bleak over the next few years.
To the extent financial services growth is predicated on global markets, they too will take a beating. For the next year or so, as financial markets in the OECD struggle to get back on their feet, it is unlikely the GDR/ADR market will have much action; to the extent Indian companies slow their acquisitions in the face of a slow real world economy, all the fee-based income of the type envisaged in the MIFC report (assuming India does the necessary reforms) will also take a backseat.
As for IT/ITeS, it must be said the sector has consistently reinvented itself, moving from pure voice work to more sophisticated value addition – indeed, the last time there was a slowdown in the US, the sector increased its revenues as it offered US firms a more cost-effective substitute. So, over the medium term of 2-3 years, it seems likely the sector will increase its penetration in the US markets.
The overall impact of course will depend on how the Indian economy is impacted. As this paper has argued, it is changes in GDP growth that have driven changes in demand patterns and it is that demand that has driven service sector growth (health, communication and education expenditures are three very clear areas where there have been significant increases in consumption share). As economic growth slows, as it will for the next couple of years, this too will slow, but the secular trend is an upward one. Indeed, since it is well-established that every 1 per cent change in GDP results in a higher in growth in the number of upper-income households, it is likely that a slight slowing in GDP growth rates may not significantly lower demand for areas like telecom, education or health. Sharp shortages in infrastructure will also ensure the demand for transportation will not slow either.
As with the overall economy, there will be a dip in growth in the immediate term, but the overall direction of growth is clear.
ends
