PRACHI TAMTA

1239
THIRD YEAR

Q) Services sector has played an important role in India’s economic growth, particularly after the
economic reforms of 1991.Keeping this statement in mind, what are the changes that have happened
in the services sector during this period of high growth?

The Indian economy has undergone major macroeconomic and structural reforms since the BOP crisis of
1991. The service sector has played an important role in enabling this improved economic performance
during post reform period. Service sector has been the fastest growing sector in Indian economy in
recent years. Services have also helped improve productivity in other sectors of the economy.
The average annual growth rate rose from 7 percent to 9.2 percent from 1988 to 2002. The sector has
superior performance compared to industry and agriculture, and exceeded the overall growth of the
economy service sector, its contribution to overall GDP has increased sharply, from 41% in 1990–91 to
63% in 2009–10. Growth performance within service sector has been uneven. The sectors which lead
increase in service sectors are communication, banking, insurance, construction and trade which have
grown 7% during 2000-9 period. Communication services registered the highest growth rates during
this period, with an average growth rate of 26.7%. The primary sector was the dominant employer, the
share of employment in the tertiary sector increased over the years. The share of the primary sector in
employment fell sharply between 1993–94 and 2004–05. The consequent rise in the share of
employment in the secondary (predominantly industry) and tertiary sectors was fairly balanced between
the two. It consistently exceeded India’s share in world merchandise exports, which also increased from
0.6% in 1998 to 1.3% in 2009. The contribution of transport sector declined in phases 50 percent in 1995
to 30 percent in 2000 and 12 percent further. Software sector contribution increased from zero percent
to 51.5 percent in 2010. The contribution of the service sector to India’s trade and foreign direct
investment (FDI) flows has also grown significantly over the past decade, facilitating India’s integration
with the world economy. India’s services export has grown 2.9 billion to $19.2 billion from 1980 to 2010.
India’s share in the world exports of services more than tripled from 1998 to 2009. There has been a
shift in the structure of India’s services exports away from traditional services such as transport and
travel toward emerging sectors such as business services, with computer and information services
constituting the predominant segment. Average share of services in FDI rose from 10.5 percent to 28.3
percent. Cumulative FDI inflows was $76.9 during January 2000-May 2010. IT –BPO sectors are growth
driver in India’s service sector rise from $754 million to $9.6 billion.
However, there is concern about sustainability of a service sector growth process and current pattern of
services growth, which largely stems from exports of skill-based services. The prevailing view is that to
make service sector sustained, the sector cannot remain dependent on external demand. More broad
based growth is required to ensure balanced, equitable, and employment oriented growth with
backward and forward linkages to the rest of the economy. Further infrastructural and regulatory
reforms and FDI liberalization in services can help diversify the sources of growth within India’s service
sector and provide the required momentum.

Q) “despite the slowdown in the agricultural sector and higher increases in the cost of food
production during the post-economic reforms period (1992–2013), food prices were relatively low
compared to the initial (1967–80) and the maturing (1980–92) stages of the Green Revolution.” What
explains relatively stable agriculture prices in the post economic-reform period?

A) Following are the explanations for the relatively low food price inflation during the post–ers period
notwithstanding the slowdown in agricultural growth

1) STABLE FOOD PRICES

At a lower level, the growth of agricultural output and GDP was more stable during post-ERs
period. this is evident from low standard deviation of the year-on-year growth rate of output.
The implication is even if the rate of agricultural growth is slow, low fluctuations in growth cause
few disruptions in food supply thereby contributing to low food price inflation. On the other
hand, high agricultural growth may not guarantee low food prices if accompanied by frequent
fluctuations in growth. This is evident from the experience of maturing stage of Green
revolution. High growth performance of Indian agriculture during this period was made possible
due to extraordinary growth achieved in just three years: 80-81- 14.44%, 83-84 -10.75% and 88-
89 -16.85%. In all other years’ growth rates of agricultural GDP and food grain output was either
negative or quite low.

2) CHANGE IN FOOD CONSUMPTION PATTERN

There is “secular shift” in food consumption pattern in favor of high value food items has
occurred in India during the maturing stage of Green revolution (1983 to 1994), which is evident
from following trends 1)Drop experienced in expenditure share of cereals both in rural and
urban India during 1983-1988 was historical highs & significantly higher than other periods 2)
Except sugar, all high-value food commodities registered highest expenditure shares both in
rural and urban areas during time interval 1983-1994 3) Highest percentage points increase
recorded in expenditure shares of pulses, milk, sugar, edible oil, vegetables and fruits in rural
India falls during 1983-1994.
These trends suggest that the high demand of high value agriculture products was one of the
key factors contributing to the historically high average food price inflation rate recorded during
maturing stage of green revolution.
Two possible factors can be held responsible for the shift in food consumption demand

i)low and stagnant economic growth during first three decades after Independence

ii) the significant increase in real agricultural wages during 1980s might have pushed up rural
demand for high-value food.

3) ROLE OF MSP
The spike in the food prices witnessed during the post ERs are the hefty increase in MSP of food
grains. High MSP can cause increase in prices due to 3 reasons
i) it set a higher benchmark for market prices of food grains thereby feeding into
food price inflation expectations.
ii) ,it necessitates a hike in prices of food grains supplied by the government
through the PDS .
 iii) it edges out private trade thereby reducing the quantum of food grains available
for consumption by ordinary consumers.

4) IMPORT LIBERALISATION
It seems that liberalization of agricultural imports and less stringent foreign exchange
constraints-both an outcome of opening up of the Indian economy since 1991-have enabled
India to import more quantities of various food items to meet food requirements, thereby
helping to reduce food inflation during the post-ERs period.
Liberalization of agricultural imports as part of economic liberalization policies, has enabled
India to import more quantities of various food items to meet her food requirement at times of
domestic shortage and escalating food prices.
5) COST OF PRODUCTION
In absolute term, the rends in nominal COP in agriculture represented by two major food crops,
namely, rice and wheat reveals that post-ERs period saw faster increase in COP than the
maturing stage in Green Revolution. A similar trend was noted during the maturing stage of
Green Revolution. The real agriculture wages increased at a much slower rate during the post-
ERs period compared to maturing stage of Green revolution.