The Telegraph
Since 1st March, 1999
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- Growth by export of services requires widespread education

The Indian economy has exhibited a spectacular 8.1 per cent rate of growth in the first quarter of the current fiscal. The growth figure is exciting by itself, but if one considers the mammoth size of the nation, one is likely to be doubly impressed, for economic growth in a vastly heterogeneous and huge country like India is substantially harder to accomplish than in small island states like Hong Kong or Taiwan. The only comparable competitor seems to be the People's Republic of China, which is still racing ahead at a distinctly higher rate of growth than India. But if the current tempo can be maintained, there is hope that we shall catch up with the Chinese at some not-so-distant future.

Quite a few are finding a special comfort in the fact that the recent upsurge in growth is largely due to an expansion of the manufacturing sector. Indeed, the 8.1 per cent overall growth has been made possible by an 11 per cent growth in manufacturing. This is a clear departure from the recent trend of services playing the lead role in the process of economic growth. Many people, including economists, think that a growth process driven primarily by growth in the services sector is bound to prove wobbly and unsustainable.

To them, a country has to develop a solid manufacturing base before it can embark on a sustained growth path.

History lends ample support to this view. Most countries, which are now categorized as developed, had made their early breakthrough by inventing cheaper ways of producing mass consumption goods and selling them to the world market. The pattern is as much discernible in the development episode of the United Kingdom, the first industrialized nation, as in that of Japan, east Asia or the latest down the line, China. In most cases, the cheap mass consumption good which gave an early impetus to growth happened to be textiles. But then, with the passage of time, the comparative advantage had gradually shifted from textiles to light engineering, from light engineering to cheaper electronic goods and from electronic goods to automobiles or even computers.

But for the very recent upsurge in manufacturing, which may well be a temporary aberration from the general trend, India has not been following the beaten track. The rise in the rate of growth in the post-liberalization era can be attributed more to a spectacular expansion of the services sector than to anything else. How should we interpret this phenomenon' Should we get apprehensive because the economy is trying to expand itself without a firm manufacturing base' Or should we interpret it as a new model of development where it is feasible to jump directly from the primary to the tertiary sector, paying not too much attention to the secondary sector' Of course, agrarian opulence alone is generally not enough to sustain the long-term prosperity of a nation. Over the last couple of hundred years, living standards of the average man have improved beyond recognition. The real basis of this change has been technical progress which has manifested itself through a spectacular growth of the manufacturing sector. Technical progress had left its mark not only in the improvement of the known techniques of production but in the invention of newer sets of manufactured commodities. Clearly, if human societies had remained agrarian, the transformation of living standards, which we call progress, would not have been possible.

This largely explains why countries had to shift from the primary to the secondary sector at early stages of their development. Clearly some countries, particularly the ones relatively better at agricultural production, could have remained agrarian on the production side and yet consume advanced industrial goods by selling some of their agricultural production in the world market and buying manufactured items in return. With the opening up of international trade, this was evidently possible. But for a number of reasons it was not the best path to take. For one thing, there were obvious limitations to agricultural growth because of the fixed supply of land. Moreover, there was a clearly discernible fall in the relative demand for agricultural goods over time, especially that for foodgrain. It stemmed from a basic human tendency of spending relatively less on food and more on manufactures as one's income went up. Indeed, world per capita income went up all the time and this was translated into a secular fall in the relative demand and hence in the relative price of agricultural goods as compared to manufactures. Therefore, barring a few exceptions like Australia, Canada or New Zealand, where the land-man ratio was unusually favourable, countries found it impossible to maintain their upward journey on the ascending path of development by remaining agrarian.

But why did the countries move from agriculture to manufacturing, why not from agriculture to services' Services, as economic commodities, were present even in primitive societies, but they started becoming increasingly important with the expansion of the manufacturing sector. Clerks, accountants, lawyers, bankers, commercial travellers, hoteliers, wholesalers and retailers all grew in importance with the spread of industrialization and urbanization. The main purpose of the services network was to give support to the growing manufacturing sector. But more important, a service could not be separated from its provider and so it could not be exported or imported without physically shifting the person providing the service. In short, for a long time services remained a non-traded commodity and so it was not possible for a country to shift from agriculture to specialize in services and export them to buy manufactures from the world market. Over time, as manufacturing techniques got more capital intensive, services became more and more important as providers of employment, but until recently they retained their unique feature of being internationally non-tradable.

Over the past few years, however, the world has undergone a sea change in information technology which, among other things, has made trade in services possible. This has opened up the scope for a new model of development. It is now indeed feasible to sell services to the rest of the world and buy manufactures in return. Clearly, services are different from foodgrain. Their production is not dependent on any fixed factor like land. There is no evidence of any secular fall in the relative prices of services either. On the contrary, the demand for services seems to be growing faster than that for manufactures as is clear from the quick expansion of business process outsourcing activities. So for a country like India, which has a huge supply of skilled labour and technical personnel, what is the harm in shifting labour directly from agriculture to services, skipping the intermediate stage of exporting manufactures'

The development experience of Kerala suggests that a services-dependent growth strategy is indeed viable. Kerala, which tops the list of the major Indian states in terms of per capita consumption, has achieved very little growth of the industrial sector. Evidently, a large part of the state's affluence is attributable to services, to remittances made by non-resident natives of the state from all over the globe. Why cannot the country replicate on a larger scale the Keralite model' In fact, the main difficulty in replicating the Keralite experience is that the rest of the country does not have an evenly-spread-out educated and skilled population like Kerala. Now, in order to make a services-dependent growth path sustainable, the majority of the people must participate in the growth process. But to participate in a services sector-led growth process it is necessary that a person has sufficient education or skill. While this necessary condition is satisfied for a large chunk of people in Kerala, unfortunately it is not so for the rest of the country.

The conclusion, therefore, is straightforward. If India hopes to develop and follow a new model of development based on directly exportable services, it has to educate its people. If that looks like a daunting job, the only alternative left is to develop an exportable manufacturing sector which can compete in the world market.

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