Nos. 36 & 37, March 2004

Nos. 36 & 37
(March 2004):
THE REAL STATE OF INDIA'S ECONOMY

Introduction: Growth Suppressed, Parasitism to the Fore

I.`GDP Growth'

II. Six Years of Depressed Industrial Investment

III. Where Are Corporate Profits Coming from?

IV. Finance Divorced from Production

V. Deepening Regional Inequality

VI. Who Benefits from Suppression of Public Sector Investment

VII. Sea of Unemployment

VIII. Hunger

IX. Parasitism

X. Deteriorating Base

Appendix I: The Real Scale of Unemployment

Appendix II: Starving and Stunting the People

The Real State of India's Economy
IX. Parasitism

How does one reconcile the claims of GDP growth with the reality portrayed in the above statistics? In fact the Indian economy has become further and further distorted in such a fashion that the conventional measures of its 'growth' do not necessarily represent growth in any meaningful sense.

Of the economy's three sectors, agriculture and allied activities, industry, and services, the third is quite different from the other two. Basic material well-being depends on the goods produced in the first two sectors. A portion of the goods produced in agriculture and industry meets the consumption needs of the workers of those sectors; the workers in the service sector are sustained on a portion of what remains. As production in agriculture and industry becomes more advanced, this surplus increases, and a more and more developed service sector can be sustained. Obviously, in the case of a backward economy like India's, where the mass of people are starved of material needs, it is the growth of the production of material goods that should be taken as an indicator of the economy's health:

"It is not contended that all service sector outputs are devoid of social usefulness. Some activities like education, health services, and so on are undoubtedly very useful. A good many others like administration and defence establishment do not make the society richer in any material or qualitative sense, however necessary such expenses might be from a social, political or military point of view. In any case the main objection to reckoning with the service sector in the present context lies not in its social usefulness or otherwise, but elsewhere.

"If the per capita NMP (net material product -- value added in agriculture, industry and construction) is stable over time, but per capita tertiary (service sector) income rises, it implies that the same per capita volume of agricultural and industrial goods is redistributed among workers in different sectors. In the old days most of the regions were relatively self-sufficient in foodgrains whereas now vast quantities are shipped from the northwest corner to the rest of the country adding in the process to tertiary incomes by way of transport and distribution costs. The latter costs are by no means avoidable in the present context. But has the society become richer in any meaningful sense? Going by the conventional methodology of national income statistics a kilogram of rice imported from Haryana and consumed by a Keralite today is valued higher than the same quantity of rice consumed by his grandfather from local production; for, the transport and distribution costs are now much higher. Obviously, the Keralite today is no better off than his grandfather. Many such examples could be given of an artificial increase in national income owing to the inclusion of the service sector."²¹

In recent times, such examples abound. Since Government services are valued in GDP terms by how much is spent on them, the mere increase in the salary bill as a result of the Fifth Pay Commission resulted in GDP growing sharply; whereas that increase in itself does not represent any difference in the total amount of either goods or services in the economy. Similarly, in the 1990s, there has been a great proliferation of financial sector firms, whose profits and wages are accounted as an addition to GDP — even if these firms merely trade shares and bonds, an activity which does nothing to improve material well-being.²²

It is usual for the respective shares of the three sectors — agriculture, industry, and services — to change in the course of economic development. For millennia, of course, human society was based mainly on agriculture, and the ruling classes and their State machinery lived on the surplus from agriculture. However, as a society develops, industry, with more advanced productive forces, accounts for a larger and larger share of value added. (This shift takes place despite the fact that in with the application of modern methods yields grow rapidly in agriculture.) At a more advanced stage of development, when the basic material needs of society are no longer in short supply, there is increasing demand for various types of services — leisure, entertainment, travel, improved services in medicine and education, better communications, a greater variety of retail stores and restaurants, and financial services to cater to all these needs.

However, in India, a peculiar phenomenon is taking place. The share of agriculture in GDP has no doubt declined, but so has that of industry, before it ever gained dominance in the economy. It is the services sector that has grown rapidly, and now constitutes 56 per cent of GDP. It is this sector that accounts for the smart rise in what is called per capita income in recent years.

If we exclude the services sector, and take only the agricultural and industrial sectors (commodity sector GDP), we find that value added there is now growing at a crawl — between 1996-97 and 2002-03, at the annual rate of just 0.7 per cent per capita. (Without the benefit of the new series of GDP, which systematically overestimates agricultural GDP, we would probably find the per capita commodity sector GDP actually falling in that period.)

Table 15: Share of Different Sectors in GDP
(GDP at factor cost, 1993-94 Prices)

India's bloated growth of the services sector and the shrinking share of the industrial sector is in contrast to certain other Asian countries. The share of industry in GDP in 2001 was 51.1 per cent in China, 49.6 per cent in Malaysia, 46.5 per cent in Indonesia, 41.4 per cent in Korea, and 42.4 per cent in Thailand. However, in the case of India it was just 26.4 per cent in 2001, down from 29.3 per cent in 1990. (See Table 16)

Table 16: Shifting Shares of Different Sectors in GDP
in China, Malaysia, and India
(GDP at current market prices)

Nor does industry account for a growing share of employment. The share of industry (including construction) in employment in 1999-2000 was just 17.5 per cent, the same as in 1987-88. Most of the labour which cannot find a livelihood in agriculture is unable to find jobs in industry either, and has become part of the lower end of the 'services' sector, working as petty vendors and such types of disguised unemployment.²³ Between 1987-88 and 1999-2000, the share of agriculture in employment fell from 60.1 to 56.7 per cent. The difference — 3.4 per cent — landed up in the services sector.

Table 17: Shares of Agriculture, Industry and Services in Employment
(Casual Daily Status basis)

The Government has been trying hard to convey the impression that the growth of the service sector is accounted for by the information technology sector (that is, both software services and the IT-enabled sector — call centres and the like). No doubt the IT sector is growing rapidly, but from a very low base, so that it actually accounted for only 3.2 per cent of GDP in 2002-03, and less than 0.2 per cent of employment.

To repeat: the rapid growth of the services sector does not signify increased material well-being in the context of a backward economy like India's, where people lack sufficient material goods for a decent existence and are even forced by their poverty to eat less cereals, buy less cloth and use less soap. Rather, the bloating of the services sector signifies consumption of increasing extractions from the productive sector. This is all the more glaring when the productive sector is stunted, even retrogressing.

Notes:
21. N.K. Chandra, "Long-Term Stagnation in the Indian Economy", The Retarded Economies, Foreign Domination and Class Relations in India and Other Emerging Nations, 1988, p. 178. (back)

22. The following are the different heads under which service sector income is grouped: 'community, social and personal services', which is in the main Government; 'finance, insurance, real estate and business services'; 'trade, hotels, restaurants, transport, storage and communications'; and 'construction', which is also sometimes treated as part of the industrial sector. (back)

23. These types of service sector 'employment' did not account for the large growth in the income of the service sector, which went to the cream of the sector. (back)

NEXT: Deteriorating Base

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