Sunday, September 1, 2002

Bharatiya Rate OF Growth: The Role of Services

In an earlier article (August 2002,, I showed that India moved from the “Hindu Rate of Growth (HRG)” during the sixties and seventies to a “Bharatriya Rate of Growth (BRG)” of 5.8 per cent during the eighties and nineties. A number of eminent economists have asserted that the growth of the economy during the second half of the nineties was propped up by pay commission related increases in the pay of government/public servants and this artificial increase is unsustainable. Thus the real growth rate of the economy is currently not 5.8 per cent but closer to 5 per cent. Other commentators have gone even further to assert that services growth during the entire nineties, which has kept average growth during the nineties at 5.8 per cent is unsustainable and that the underlying growth rate is currently as low as 4.5 per cent. In this article I address these and other related questions by looking a little deeper into the underlying sector growth rates, particularly the role of services. Such assertions based on short-term movements, are shown to have little relevance to long-term growth trends and prospects.
Role of Administration & Pay Commission
Because of the way in which GDP from administration is measured, it is quite legitimate to question its role in long-term growth. The productive sectors of the economy meet the market test in that the consumer is willing to pay for the goods or services purchased. Thus their value is determined by market prices. As there is no market price for the administrative services supplied by the government, their contribution to GDP is measured by wages etc. incurred in the sector. Thus a rise in the real wages paid raises the value added as measured by the GDP statistics. As long as these services are not produced at rates determined through competitive bidding, there is no other way in which they can be valued. We can, however, get a better fix on the sustainable rate of growth by excluding GDP from administration from our growth estimates.
During the eighties and nineties, average rate of growth of GDP (adj.) i.e. excluding the GDP from administration, was only 0.04 per cent point lower than the growth of conventionally measured GDP. This leaves the Bharatiya rate of growth unchanged at 5.8 per cent. This is not, however, true of the Hindu rate of growth. During the sixties and seventies the average rate of growth of GDP (adj) was 0.13 per cent point lower than for GDP as a whole, so that the HRG is reduced from 3.4 per cent to 3.3 per cent. The picture is quite similar if we take the HRG as applying to three decades including the fifties. In this case the growth rate of GDP (adj.) at 3.4 per cent is lower by 0.11 per cent point than the GDP growth rate of 3.5 per cent. Therefore, if we exclude GDP from administration from our growth estimates, the rate of growth accelerated from 3.4 per cent per annum (HRG) to 5.8 per cent per annum (BRG). Thus there is little factual basis for the statement that the excessive rise in pay of government servants during the nineties distorts the observed growth performance so much that the underlying rate of growth was since 1996-97 (or currently is) between 5 per cent and 5.5 per cent per annum.
Role of Service Sector
As per broad globally accepted definition of goods and services, Agriculture & allied sectors, mining & quarrying and manufacturing sectors produce goods while the output of all other sectors constitutes services. The former are traditionally classified as tradable and the latter as non-tradable, though this is rapidly changing. We can define GDP from Services (adj) by excluding the GDP from administration. A comparison of the growth rate in this with the unadjusted GDP completely contradicts the common assertion that much of services growth was due to the government pay rise. On the contrary the rate of growth of services (adj) during the last two decades was marginally (0.05 per cent point) higher than that for Services as a whole (unadjusted).
In fact, the GDP from administration grew much faster during the sixties and seventies than it grew during the eighties and nineties. Consequently, the growth of GDP services (adj.) is lower than the growth of Services GDP by 0.2 per cent points during the former period and by 0.16 per cent points during 1950-1980. With this background we can re-evaluate the contribution of acceleration in the rate of growth of services to the acceleration in GDP growth between 1950-1980 (HRG period) and 1980-2000 (BRG period). The contribution of acceleration in growth of Services (adj) to overall GDP (adj) growth acceleration (2.4 per cent / 2.5 per cent) was even higher than apparent from the conventional (unadjusted) numbers (2.1 per cent / 2.4 per cent).
It is, however, wrong to conclude, as some have done, that the nineties is the first instance in which services have grown faster than other sectors of the economy. On the contrary in each of the five decades since independence, GDP from Services has grown faster than GDP from the tradable goods sectors of the economy. The gap averaged about 2.2 per cent points in the first four decades but has expanded to 3.1 per cent points in the nineties. If we exclude GDP from administration from our GDP calculations, the gap shows much greater fluctuations; It was 0.8 per cent point in the fifties, rose to 1.3 per cent point in sixties and seventies, fell back to 0.7 per cent point in the eighties and then rose to a peak of 1.7 per cent point in the nineties. Though in absolute terms the last is unprecedented it is worth noting that it is only 30 per cent higher than the GDP (adj) growth rate for the nineties. The 1.3 per cent point gap in the seventies & sixties was respectively 46 per cent & 34 per cent higher than GDP (adj) growth rate.
There are two broad reasons for the higher contribution of non-tradable services to GDP growth during the nineties. The decline in protection for non-tradable sectors arising from the elimination of QRs and reduction in tariffs for mining and manufacturing sectors. This has tended to raise (lower) the relative price of non-tradable services (tradable goods). This coupled with liberalisation of private entry into modern service sectors like communications and finance (banking etc.) has resulted in faster growth of these services. The reduction of public monopoly and more effective competition may also have increased overall productivity in these sectors. Other traditional services like trade, hotels & restaurants and community services have also grown at unprecedented rates, because of combination of rising incomes (restaurants), globalisation (tourism/business travel, hotels) and fall in relative prices & increased variety of consumer durables (trade) and a combination of government failure and democratic initiative (community services).
In conclusion, we find that though the pay commission related pay increases may have distorted estimates of GDP for a few years they do not affect the trend rate of growth of GDP. The “Bharatiya rate of growth” remains at 5.8% per annum even if government administration is excluded altogether. A similar adjustment of services also contradicts the assertion that this factor is responsible for higher service growth. Further, services (adjusted) have always grown faster than overall GDP growth, though their contribution has fluctuated. The contribution of services during the nineties is high only in comparison to the eighties, when their contribution was unusually low.

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