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1 Rural Structural Transformation: Case of the Services Sector in India 1 Jeemol Unni Ravikiran Naik The most dynamic sector in the last decade globally has been the services sector. India is said to have out-paced a number of countries with her growth in the services sector powered by software and BPO services. A large share of the export growth in the country is also fuelled by the growth of the services sector. Even in the 1990s it was seen that the share of the services sector was rising. There was, however, a debate as to whether this was growth led or low productivity residual employment crowding into the sector due to poor agricultural growth and slowing down of the manufacturing sector. However, in the decade beginning 2000 India has seen a boom of economic growth and the service sector is clearly surging ahead. What concerns us in this paper is whether much or any of this high productivity, high income growth of the service sector is occurring in rural India. This paper addresses three questions in the following sections: While India had high economic growth led by the services sector in the recent decade, to what extent has rural structural transformation taken place? India has seen a spurt in export in services. How does the Indian services sector perform in the context of GATS and how could this be reflected in the rural scenario? The IT and BPO revolution is considered the engine of the recent growth of the services sector. To what extent has the rural workforce gained from this revolution? STRUCTURAL TRANSFORMATION Manufacturing versus services Manufactured goods are an entity that allows for ownership rights, is tradable and owner derives benefit from trade, ownership can be exchanged several times to benefit ‘distributors’ who operate between producers and users of goods. Services, however, are relationship between producer and customer that cause change in conditions of one economic unit produced by activity of another. Due to service rendered there is material change to person (hair-cut), or property of consumer, but since they are not entity, cannot be stored and therefore ownership cannot be established (output of scientist/teacher). Services are intangibles that have no physical dimension or spatial coordinates. Thus, services were considered the opposite of manufacturing in that the goods could not be stored and service transactions involving intangible, non-storable goods, and it required that the client and vendor be face to face while the service was being delivered. However, the 1 Authors are RBI Chair Professor and Research Associate at Institute of Rural Management, Anand (IRMA). Paper presented at the International Conference on Rural Transformation in Emerging Economies organized by Institute of Human Development, New Delhi, April 14-16, 2010

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Rural Structural Transformation: Case of the Services Sector in India1

Jeemol Unni Ravikiran Naik

The most dynamic sector in the last decade globally has been the services sector. India is

said to have out-paced a number of countries with her growth in the services sector

powered by software and BPO services. A large share of the export growth in the country is

also fuelled by the growth of the services sector.

Even in the 1990s it was seen that the share of the services sector was rising. There was,

however, a debate as to whether this was growth led or low productivity residual

employment crowding into the sector due to poor agricultural growth and slowing down of

the manufacturing sector. However, in the decade beginning 2000 India has seen a boom of

economic growth and the service sector is clearly surging ahead. What concerns us in this

paper is whether much or any of this high productivity, high income growth of the service

sector is occurring in rural India.

This paper addresses three questions in the following sections:

While India had high economic growth led by the services sector in the recent

decade, to what extent has rural structural transformation taken place?

India has seen a spurt in export in services. How does the Indian services sector

perform in the context of GATS and how could this be reflected in the rural

scenario?

The IT and BPO revolution is considered the engine of the recent growth of the

services sector. To what extent has the rural workforce gained from this revolution?

STRUCTURAL TRANSFORMATION

Manufacturing versus services

Manufactured goods are an entity that allows for ownership rights, is tradable and owner

derives benefit from trade, ownership can be exchanged several times to benefit

‘distributors’ who operate between producers and users of goods. Services, however, are

relationship between producer and customer that cause change in conditions of one

economic unit produced by activity of another. Due to service rendered there is material

change to person (hair-cut), or property of consumer, but since they are not entity, cannot

be stored and therefore ownership cannot be established (output of scientist/teacher).

Services are intangibles that have no physical dimension or spatial coordinates. Thus,

services were considered the opposite of manufacturing in that the goods could not be

stored and service transactions involving intangible, non-storable goods, and it required that

the client and vendor be face to face while the service was being delivered. However, the

1 Authors are RBI Chair Professor and Research Associate at Institute of Rural Management, Anand

(IRMA). Paper presented at the International Conference on Rural Transformation in Emerging Economies organized by Institute of Human Development, New Delhi, April 14-16, 2010

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new technology has changed this understanding of the services sector. The new services

allow storing, retrieving and communication of information, such as legal opinion, health

counseling. Economic characteristics of goods apply to them, are knowledge that can be

stored on paper, films, disks, and be electronically transmitted and traded and re-traded e.g.

financial services, purchase of tickets and various bank operations, many of which are off-

shored to developing countries. Thus most of services are now storable, tradable and similar

to manufactured goods.

Structural Change: Clark, 1957; Fisher, 1936 and 1946; Kuznets, 1968 and 1972 using cross

country comparisons propounded theories of structural change. The countries would at first

be dominated by the agricultural sector, in income and employment. The industrial sector

(manufacturing/ construction) would develop next. The services sector would only grow to

prominence at the last stage when per capita incomes had risen sufficiently.

Fisher emphasized the demand side while Clark emphasized the supply side. According to

fisher, the income elasticity of demand for services was high. Based on a hierarchy of needs,

agricultural products were necessities, followed by manufactured goods, while services were

often luxuries. On the supply side, Clark argued that services had a high employment

generation potential because the producer and consumer had to meet at the transaction

point (old definition of service). Therefore, the employment elasticity was one (highest). But

the productivity in the sector was low and surplus labour from rural would migrate to urban

areas. So while the sectoral share of employment would rise over time, the income share

would not rise commensurately.

In the context of globalization, however, the structural change in the economy was no

longer an endogenous process as propounded by the early theorists. A host of exogenous

factors, including inflow of new technologies, gave rise to new patterns of structural change.

In developing countries, where per capita income continued to be low, the services sector

growth outstripped the growth of the secondary sector. Also in India the primary sector did

not reduce to the extent predicted by the structural transformation theorists.

In the modern structural change, new reasons were found for the growth of the services

sector. On the demand side there was high income elasticity of demand. Enhanced

tradability of services as new technologies allowed splintering-off of services from its

providers. Further, for efficiency and other considerations the large manufacturing

enterprises began downsizing. It retained only its core competencies within the enterprise

and increasingly contracted out services to more specialized service sector enterprises, such

as cleaning, security, catering etc. On the supply side trade liberalisation, including WTO and

GATS agreements, rising exports, technological advances and inflow of FDI in services led to

the growth of new services sector industries. Advent of information technology and

knowledge economy led to outsourcing of Back-office operations.

Growth and Share of GDP and Employment in India

According to the Planning Commission (2008) “Report of the High Level Group on Services

Sector” the services sector has been the key driver of the fast growth of the Indian economy

in the last decade. Since 2001 while the Indian economy grew at a rapidly increasing rate

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from nearly 6 to 9.7 percent per annum in 2006-07, the service sector outstripped this

growth in most years. Since 2005 service sector growth has been closer to 11 percent per

annum (Table 1). The service sector is now seen as the new engine of growth replacing

manufacturing (Dasgupta and Singh, 2005). It is also contrasted with China where the

Industry, with emphasis on mass production, led the rapid growth of the recent decades

(Shantong LI, et al, 2003).

Table 1: Growth of GDP by Broad Sectors, Since 2000.

Growth of GDP (%)

2000-01

2001-02

2000-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Total GDP 4.4 5.8 3.8 8.5 7.5 9.5 9.7 9.0 6.7

Agriculture -0.2 6.3 -7.2 10.0 0.0 5.8 4.0 4.9 1.6

Industry 6.4 2.7 7.1 7.4 10.3 10.2 11.0 8.1 3.9

Services 5.7 7.2 7.5 8.5 9.1 10.6 11.2 10.9 9.7 Note: Computed at 1999-2000 prices. Source: National Accounts Statistics various years.

The traditional version of structural change was also not visible in India. Even in 2000, nearly

half of the GDP of the country was contributed by the services sector. The share of services

has grown to nearly 60 percent of the economy’s incomes. The share of the agricultural

primary sector declined rapidly from a quarter of GDP in 1999-2000 to 17 percent in 2008 -

09, while industry maintained its position with about a quarter of share of GDP (Table 2).

Table 2: Share of GDP by Broad Sectors, Since 2000

Share of GDP (%)

1999-00

2000-01

2001-02

2000-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Agriculture 25.0 23.9 24.0 21.4 21.7 20.2 19.5 18.5 17.8 17.0

Industry 25.3 25.8 25.0 25.8 25.6 26.2 26.4 26.7 26.5 25.8

Services 49.7 50.3 51.0 52.7 52.7 53.6 54.1 54.8 55.7 57.3

Note: Computed at 1999-2000 prices. Source: National Accounts Statistics various years.

While the share of GDP in agriculture fell rapidly from 25 percent in 1999-2000 to 20 in

2004-05 and 17 percent in 2008-09, the share of employment fell from 60 to 57 percent only

during 1999 to 2005. In rural areas nearly three-fourth of the workforce is still dependent on

the agricultural sector as the main source of livelihoods, with industry and services

constituting 13 percent each of the shares of employment (Table 3). Industry and services

have grown in the rural sectors as well. In fact, while the agricultural sector has a large share

of employment with low share of incomes, it the services sector that had more than 50

percent share of GDP employment only a quarter of the workforce in India. The services

sector has been dynamic and productive for the country and has helped the sustained high

growth rates in the last decade.

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Table 3: Share of Employment in Rural and Urban Areas, 1993-2005

Rural Urban Total

Broad Sectors

1993-94

1999-00

2004-05

1993-94

1999-00

2004-05 1993-94

1999-00

2004-05

Agriculture 78.4 76.2 72.7 12.3 8.8 8.8 64.0 60.4 56.6

Industry 10.2 11.4 13.7 32.1 32.2 34.0 15.0 16.3 18.8

Services 11.60 12.5 13.6 55.6 59.00 57.1 21.2 23.4 24.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Computed from unit level records of NSS 50

th, 55

th and 61

st Rounds, adjusted for population

INDIA’S EXPORT IN SERVICES IN THE CONTEXT OF GATS

Indian service sector has experienced rapid integration with world economy.

India’s export in services increased drastically in the past decade, from US $16 billion

in 2000 to nearly 73 billion in 2006 (Figure 1). It grew by average annual rate of 12

per cent during the same period. The growing FDI flows to service sector also

facilitated the integration to the world economy (Chanda R, 2003). India has shown

global competitiveness in the supply of services primarily in computer and

information technology related services (IT) and business process outsourcing (BPO).

However, its share in world trade in services is minuscule, rising from 1 percent in

2000 to 2.7 percent in 2006. With the rapid growth in services in the past few years

India’s export in services outdid her import in services since 2004, obtaining a trade

surplus in the sector (Figure 2)

Fig 1: Global and India’s trade in services, Fig 2: India’s Export and Import in Services

2000-2006 in US $ Million, 1990-2006

Source: RBI- Bulletin, November 2006

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Due to complex nature and diverse range of international supply of services, GATS classified

the entire range of services trade into four ‘modes’. Mode 1 refers to cross border supply;

Mode 2 refers to consumption abroad, Mode 3 refers to commercial presence abroad and

Mode 4 which is related to temporary movement of natural persons (Box 1).

Box 1: Examples of the four Modes of Supply of Services (from the perspective of an

"importing" country A)

Mode 1: Cross-border: A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.

Mode 2: Consumption abroad: Nationals of A have moved abroad as tourists, students, or patients to consume the respective services.

Mode 3: Commercial presence: The service is provided within A by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and – controlled company (bank, hotel group, Construction Company, etc.)

Mode 4: Movement of natural persons: A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, Construction Company).

Source: http://www.wto.org (Service Trade) The traditional sectors in which India has been undertaking export of services are travel

under Mode 2. This includes goods and services acquired by foreign travelers for health,

education, tourism and business. The other traditional sector where India has export in

services is transportation under Mode 1 which includes sea, air, water, land performed by

nationals for those of other countries involving passenger, freight, rentals of carriers and

crew and supporting auxiliary services. The new and dynamic sectors are those related to

the new IT revolution software and ITES related services including BPO, and non software

business and professional services. ITES-BPO include customer care, data entry, remote

maintenance, medical transcription, call centers and claims processing. Business and

professional services include legal and accountancy, communication, financial, news agency,

royalties, copyright and license fees, recreational and cultural services. These new sectors

are included under Mode 1.

Mode 1 and 2: With the advent of this new technology an interesting shift has been noted in

the composition of India’s export of services. It has shifted away from the traditional sectors

like transport and travel to new sectors like software and business services. This rise in the IT

related software and non-software services began around 1997 and picked up sharply in

2000 (Figure 3). Within these new services software accounted for the largest share, nearly

45 percent of all exports in 2008. Among the non-software miscellaneous services, the

largest share was of business services, nearly 20 percent of all exports in 2006-07, declined

slightly till 2008-09. The other components were financial services and communication

which crept up to 4.2 and 3.2 percent in 2006-07 (Figure 4).

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Figure 3: Composition of India’s Export in Services, 1990 to 2009

Source: RBI- Bulletin, November 2006 Figure 4: Detailed Composition of India’s Export in Services, 2000 to 2009

Source: RBI- Bulletin, November 2006 Mode 4: Mode4 which consists of movement of natural persons abroad has also been growing substantially from India. There are two broad streams of labour movement from India. The more skilled and professional workers moving to the developed nations, US, UK and Europe and the less skilled workers to the Gulf, African and other Asian countries. In 2001 there were 4.5 million Indian in the developed nations and nearly 12 million in the developing nations (Table 4). The remittances coming into the country has been growing rapidly during the last decade. It rose from US $ 2.1 in 1990-91 to nearly 25 billion in 2005-06. The share of remittances has grown and stabilized around 3 percent of GDP in 2005-06. This is of significance to us since a large part of this workforce hails from rural India, particularly the stream flowing to the developing countries. These remittances flow to the

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rural areas of the country. It helps significantly to raise incomes of households and as well as improves housing and puts pressure on system to improve the rural infrastructure.

Table 4: Movement of natural persons (Mode 4): People and Remittances to India

Country Number of Persons

(million) 2001

Year Flows (US $

billions)

Share in current receipts

% of GDP

Industrial 4.5 1990-91 2.1 8 0.7

US 1.7 1995-96 8.5 17.1 2.4

Euro Area 0.5 1999-00 12.3 18.1 2.7

UK 1.2 2000-01 13.1 16.8 2.8

Others 1.1 2001-02 15.8 19.4 3.3

Developing 12.1 2002-03 17.2 18 3.4

Africa 2 2003-04 22.2 18.5 3.7

Asia 5.5 2004-05 21.1 13.6 3

Middle East 3.5 2005-06 24.6 12.5 3.1

Latin America 1.1

Source: RBI- Bulletin, November 2006

COMPOSITION OF THE SERVICE SECTOR GROWTH

It was noted by the Planning Commission (2008) that while the growth of the services sector

was broad based, certain services such as communication, for which telecommunication was

the principal component, and insurance and banking grew more rapidly. We found that

while the overall growth in GDP in services was closer to 11 percent that of communication

was nearly 26 percent and banking and insurance at 15 percent (Table 3). These latter

segments are the new dynamic services. While the nature and delivery of communications

has seen major changes under new policy of delivery of internet and broadband services,

finance and insurance, as also a number of business services, have also benefitted from new

technologies.

Table 5: Growth of GDP in components of Service Sector, since 2000

Industry 2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Trade, hotels & restaurant 5.2 9.6 6.9 10.1 7.7 10.3 10.4 10.1

trade 5.0 9.8 7.0 10.2 7.3 9.8 9.9 10.0

hotels & restaurants 7.0 7.9 5.7 8.6 11.4 14.6 15.9 11.5

Transport, storage & communication 11.2 8.4 14.1 15.3 15.6 14.9 16.3 15.5

railways 4.1 7.0 5.6 5.9 7.3 8.8 10.0 9.3

transport by other 7.7 4.0 10.3 11.9 12.1 8.3 8.8 7.7

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means

storage 6.1 0.6 -6.7 5.1 13.5 1.2 3.1 -1.4

communication 26.8 20.3 27.7 26.1 24.5 26.8 27.7 25.6

Financing, insurance, real estate & business services 4.1 7.3 8.0 5.6 8.7 11.4 13.8 11.7

banking & insurance -2.0 9.1 11.3 2.2 8.8 14.2 20.3 15.4

real estate, ownership of dwellings & business services 9.1 5.9 5.4 8.3 8.6 9.2 8.6 8.5

Community, social & personal services 4.7 4.1 3.9 5.4 6.8 7.1 5.7 6.8

public administration & defense 1.9 2.9 1.6 2.6 6.5 4.9 4.0 4.2

other services 7.1 5.1 5.8 7.6 7.1 8.6 6.9 8.5

Total 4.4 5.8 3.8 8.5 7.5 9.5 9.7 9.0

Note: Computed at 1999-2000 prices. Source: National Accounts Statistics various years.

The shift of the share of within the services sector also followed a similar pattern to the

growth. While the overall share of services in GDP grew from 49 to 57 percent, that of the

traditional sectors such as trade, hotels and restaurants remained stagnant at around 15

percent. Within the transport, storage and communications, the latter’s share grew from 1.6

in 2000 to 5.7 in 2008, while transport retained its share of about 6 percent.

Table 6: Share of GDP in components of Service Sector, since 2000

Industry 1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Agriculture & allied 25.0 23.9 24.0 21.4 21.7 20.2 19.5 18.5 17.8

mining & quarrying 2.3 2.3 2.2 2.3 2.2 2.2 2.1 2.1 2.0

manufacturing 14.8 15.3 14.8 15.2 15.0 15.1 15.1 15.3 15.2

registered 9.7 10.0 9.9 10.2 10.1 10.3 10.2 10.4 10.3

unregistered 5.1 5.3 4.9 5.0 4.8 4.8 4.8 4.9 4.9

Elect. gas & water supply 2.5 2.4 2.3 2.4 2.3 2.3 2.2 2.1 2.0

construction 5.7 5.8 5.7 5.9 6.1 6.6 7.0 7.2 7.2

trade, hotels & restaurant 14.2 14.3 14.9 15.3 15.5 15.5 15.6 15.7 15.9

trade 13.0 13.1 13.6 14.0 14.2 14.2 14.2 14.2 14.3

hotels & restaurants 1.2 1.3 1.3 1.3 1.3 1.4 1.4 1.5 1.6

transport, storage & communication 7.5 8.0 8.2 9.0 9.5 10.2 10.7 11.4 12.1

railways 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2

transport by other means 4.6 4.8 4.7 5.0 5.1 5.3 5.3 5.2 5.2

storage 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

communication 1.6 1.9 2.2 2.7 3.1 3.6 4.2 4.9 5.7

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financing, insurance, real estate & business services 13.1 13.0 13.2 13.7 13.4 13.5 13.8 14.3 14.6

banking & insurance 5.9 5.6 5.7 6.1 5.8 5.9 6.1 6.7 7.1

real estate, ownership of dwellings & business services 7.2 7.5 7.5 7.6 7.6 7.7 7.6 7.6 7.5

community, social & personal services 14.9 15.0 14.7 14.8 14.3 14.2 13.9 13.4 13.1

public administration & defense 6.9 6.7 6.5 6.4 6.0 6.0 5.7 5.4 5.2

other services 8.1 8.3 8.2 8.4 8.3 8.3 8.2 8.0 8.0

Total 100.0

100.0

100.0 100.0 100.0 100.0

100.0 100.0 100.0

Note: Computed at 1999-2000 prices. Source: National Accounts Statistics various years.

RURAL TRANSFORMATION IN SECTORAL INCOMES AND EMPLOYMENT

Economic diversification has occurring in the composition of the sectors in India

which clearly can be considered as dynamic structural change. To what extent is this

reflected in the rural areas or is the dynamism, particularly in the modern services sector

restricted to the urban areas? The rise in the share of service sector is often followed by

subsequent rise in total employment. But in Indian case, the service led growth has failed to

create significant number of jobs in economy (Banga R, 2006). While we had noted a faster

rate of growth of services than industry in GDP in India, we find that the growth of

employment was higher in industry than in services (Table 6). This could imply that on the

whole the services sector is more productive than the industry sector. Overall employment

growth was much higher in urban areas (3.2 percent) compared to rural (1.6 percent) in the

period 1993-94 to 2004-05. A rural urban comparison showed that the growth of

employment was higher in industry in rural areas while employment grew faster in the

urban areas in services sector.

Table 7: Growth of Employment in Rural and Urban Areas, 1993-2005

Rural Urban Total

Broad Sectors

1993-94 to

1999-00

1999-00 to

2004-05

1993-94 to

2004-05

1993-94 to

1999-00

1999-00 to

2004-05

1993-94 to

2004-05 1993-94 to

2004-05

Agriculture 0.18 1.70 0.87 -3.36 4.43 0.18 0.84

Industry 2.48 6.35 4.24 2.28 5.57 3.77 4.01

Services 2.03 4.52 3.16 3.30 3.74 3.50 3.35

Total 0.65 2.65 1.56 2.27 4.41 3.24 1.95

Within the industry sector, it was employment in the construction industry that grew the

fastest particularly in rural areas. Among the services sector, employment growth was

highest in rural and urban areas in the dynamic new sectors of communications, finance and

business services. Within this also the rural urban differential was striking, with

10

communication and banking and insurance showing much faster growth of employment in

the urban areas. It was appear that the new and modern industry with rapid export growth

was growing faster, not just in terms of GDP but also employment in the urban areas.

Table 8: Growth of Employment in Rural and Urban Areas, 1993-2005

Rural Urban

Industry-wise

1993-94 to

1999-00

1999-00 to

2004-05

1993-94 to

2004-05

1993-94 to

1999-00

1999-00 to

2004-05

1993-94 to

2004-05

agriculture, etc 0.18 1.70 0.87 -3.36 4.43 0.18

mining & quarrying -2.41 2.67 -0.10 -4.53 4.43 -0.46

manufacturing 1.56 4.48 2.88 1.58 6.03 3.60

elect. gas & water supply 0.63 2.67 1.56 -3.72 4.43 -0.02

construction 5.94 10.58 8.05 6.21 4.43 5.40

trade, hotels & restaurant 3.47 6.25 4.74 7.67 2.64 5.38

Trade 3.45 6.32 4.75 7.97 2.13 5.32

Hotels and restaurants 3.67 5.75 4.62 4.70 6.40 5.47

transport, storage, communications 7.39 6.16 6.83 3.83 4.20 4.00

railways 0.63 2.67 1.56 -4.53 -0.04 -2.49

transport by other means 7.39 6.68 7.07 4.19 4.43 4.30

storage - - - 7.02 4.43 5.84

communication 12.18 2.67 7.86 15.37 4.43 10.39

fin. Inter, business act etc. 5.42 7.13 6.20 5.34 9.56 7.26

banking and insurance 0.63 2.67 1.56 4.08 5.45 4.70

real estate, ownership of dwelling, business services 12.18 10.78 11.54 6.52 12.54 9.26

Community, social & personal services -1.33 1.38 -0.10 -2.04 3.90 0.66

public admn. & defence 0.63 -5.44 -2.13 -0.38 -1.80 -1.03

other services -1.94 3.22 0.41 -2.95 6.62 1.40

TOTAL 0.65 2.65 1.56 2.27 4.41 3.24

The National Accounts Statistics (NAS) does not report the rural urban composition of Net

Domestic Product (NDP) on a yearly basis. It generally reports the rural composition only

when the there is a series change in the GDP estimation. We therefore were able to find

estimations of the share of rural in total NDP for the years 1970-71, 1980-81, 1993-94 and

1999-2000. The rural urban estimation of GDP for the year 2004-05 when there is a series

change in GDP is still being estimate and we were not able to get the information. However,

since it was crucial to the argument in this paper, we have tried to estimate the rural share

in2004-05 ourselves using the method provided in the NAS Sources and Methods volume.

Obviously, these estimations are not accurate and only provide tentative shares till we are

able to get the final estimates from the NAS. In fact for a few sectors, such as transport by

other means and real estate, dwellings and business services we were not able to estimate

11

since the procedure was very complicated. The rural share of total NDP at factor costs is

presented in Table 5.

Agriculture, forestry and fishing is almost fully confined to the rural areas and it has declined

only marginally as can be expected over the period 1970-71 to 2004-05. Within industry the

share of GDP in manufacturing in rural areas rose from 25 to 42 percent and that of utilities

from 39 to 46 percent. Within manufacturing the share of rural incomes in both the

organized and unorganized sector appears to have risen. The share of income from

construction in rural areas maintained itself at around 43 percent.

It is in the services sector that the sectoral transformation in incomes is more prominent.

The traditional sectors of trade and hotels and restaurants and railways and other transport

retained an almost constant share of income around 28-30 percent from 1980-81 to 2004-

05.

The dynamic and new service sectors that we identified above showed a marked decline in

its share in incomes in the rural areas. The share of communications sector in GDP in rural

areas declined from 35 to 25 percent, banking and insurance from 19 to 14 percent during

1970-71 to 2004-05 and real estate and business services from 48 to 32 percent during

1970-71 to 1999-00 (Table 5). Other personal services, such as education and health,

showed a slight decline in share of incomes in rural areas from 42 percent in 1980-81 to 39

percent in 2004-05.

This raises questions with regarding to the nature of structural transformation that is

occurring in India. Is this new IT led, communication and services industry mainly

concentrated in the urban areas? Does this imply that rural India is not sharing the fruits of

the new service sector led growth of the economy?

Table 9: Share of Rural in Total NDP at Factor Cost in 1970 to 2005 (Percentage)

Rural as % of Total

1970-71

1980-81

1993-94

1999-00

2004-05

1 agriculture, forestry & fishing 96.23 94.89 93.94 93.25 ***

2 mining & quarrying 61.01 54.75 65.88 42.39 ***

3 manufacturing 25.79 31.84 29.77 41.56 42.42

4 elect. gas & water supply 39.81 40.02 37.88 45.44 46.04

5 construction 43.22 45.62 45.11 43.32 6 trade, hotels & restaurant 18.18 30.34 30.45 27.06 28.71

6.1 trade * * 30.75 26.26 27.72

6.2 hotels & restaurants * * 25.36 35.9 39.65

7 transport, storage &

communication 22.81 22.99 34.29 29.3 ***

7.1 railways 26.36 29.52 33.83 30.98 27.18

7.2 transport by other means 16.13 17.84 32.33 28.43 ***

7.3 storage ** 16.67 30.99 31.18 11.30

7.4 communication 35.82 38.66 40.97 30.76 25.30

12

8 financing, insurance, real 43.18 37.61 28.18 23.62 ***

estate & business services

8.1 banking & insurance 19.31 15.7 16.37 14.52 14.70

8.2

real estate, ownership of

dwellings & business services

48.41

49.98

39.9

32.07

***

9

community, social & personal

services 39.8 39.08 41.71 29.16 33.37

9.1 public admin & defence 42.2 34.28 40.34 19.91 31.48

9.2 other services 37.86 42.85 42.8 36.25 38.73

net domestic product (1-9) 62.35 58.91 54.27 48.09 - Note: * included in item 6; ** included in item 7.2; *** could not be computed for transport by other means and for real estate, business service. Data of different years pertains to different NAS Series. Source: NAS for various years for 1970-71 to 1999-2000. Own estimates for 2004-05 approximating the methodology presented in the sources and methods, NAS.

A similar composition of shift in services sector in employment is also noted. The share of employment in manufacturing and traditional services such as trade, hotels and restaurants remained more or less the same during the decade 1993-93 to 2004-05. The share of employment in rural areas in the dynamic sector of communications fell from 42 to 35 percent and of banking and insurance from 30 to 23 percent in the decade. Therefore it would appear that the share of both incomes and employment in new sectors with the dynamic export growth was restricted to the urban areas. Hence we would argue that the benefits of this rapid growth in the perhaps more productive and high income earning sector were not obtained in the rural areas.

Table 10: Share of Rural in Total Employment in 1993 to 2005 (Percentage)

Industry 1993-94 1999-00 2004-05

Agriculture & Allied 95.8 96.6 96.1

Mining and quarrying 64.2 67.1 65.1

Manufacturing 51.6 51.5 49.6

Electricity 41.8 48.2 46.0

Construction 57.7 57.4 64.9

INDUSTRY 53.3 53.6 54.6

Trade, hotels & restaurants 44.2 38.2 42.5

Trade 44.5 37.9 43.0

Hotels and restaurants 41.8 40.3 39.5

Transport, storage & communication 38.9 43.8 46.5

railways 19.3 24.6 27.2

transport by other means 43.5 48.2 51.0

storage 0.0 0.0 0.0

communication 41.8 37.2 35.2 financing, insurance, real estate and business services 24.0 24.1 22.0

banking and insurance 29.7 25.5 23.0

real estate, ownership of dwelling and 17.4 22.9 21.4

13

IT

REVOLUTION IN RURAL INDIA

The analysis of growth in exports, incomes and employment in the Indian economy has led

us to believe that the most dynamic segments of the economy are the IT led sectors of

communications, banking and insurance and business and professional services. The latter

include both ITES and BPOs. We also found that these industries were growing faster in the

urban compared to the rural areas.

A recent paper argued that the IT labour market has been deepening and thickening (Basant

and Rani, 2004). Labour market deepening occurs through extending to new areas, when the

diversity in the demand and supply of skills gets enhanced. With specialization and increase

in scale, the demand for skills in specific segments grows, which is referred to as thickening.

To what extent have these processes in IT related skilled labour market growth occurred in

the rural areas?

The number of IT workers has been growing in the economy (Table 11). The IT workers can

be classified according to occupation and by industry. The overall share of IT workers in the

rural areas was very low, 11 percent in 2004-05 and declining since 1993-94. Further, the

distribution of IT occupations into computing machine operators, data processing and

system analysts/programmers showed a striking difference in the nature of work of the IT

workers in urban and rural areas. In urban areas nearly a third of the IT workers were

professionals even in 1993-94, while they rose to nearly 9 percent in rural areas only in

2004-05. The IT workers in rural areas were the less qualified data processing or machine

operators (Table 12).

Table 11: Distribution of IT Workers by Occupation in Rural (% Rural Of Total)

Occupation 1993-94 1999-00 2004-05

System Analysts and Programmers 0.0 1.1 3.2

Data Processing 56.4 1.0 16.5

Computing Machine Operators 7.9 9.6 14.7

Total 26.6 5.5 11.4

Total workers (Rural +Urban) 105311 320464 613787

Source: Computed from unit level records of NSS 50th

, 55th

and 61st

Rounds

Table 12: Distribution of IT Workers by Occupation in Rural and Urban Areas

Rural

Occupation 1993-94 1999-00 2004-05

System Analysts and Programmers 0.0 4.6 8.9

business services

Community, social & personal services 43.9 44.9 41.8

public admn. & defence 34.2 35.5 31.5 other services 47.7 49.2 45.0

SERVICES 42.4 40.7 41.5

Total ( All) 78.2 76.5 74.9

14

Data Processing 91.0 4.6 28.6

Computing Machine Operators 9.0 90.8 62.5

Total 100.0 100.0 100.0

Urban

System Analysts and Programmers 36.3 24.5 34.5

Data Processing 25.5 26.1 18.7

Computing Machine Operators 38.2 49.4 46.8

Total 100.0 100.0 100.0

The lack of diversity of IT related occupations in rural areas as compared to the urban is also

noted in the classification by industry groups. The variety of industries in which IT workers

were engaged in rural areas were restricted to manufacturing, business services and public

administration, and more recently into trade and communications (Table 13). Further, while

there was an increase in the proportion of worker in IT in manufacturing in rural areas, those

in business services showed a decline. Of course some new areas of penetration of IT was

noted in 2004-05 in rural areas.

Table 13: Distribution of IT Workers by Industry and Area

Industry Urban Rural Rural as % of Total

1993-94

1999-00

2004-05

1993-94

1999-00

2004-05

1993-94

1999-00

2004-05

Mining 0.2 0.4 100.0

Manufacturing 26.5 20.6 11.3 12.6 42.1 29.2 14.8 10.5 25.1

Electircity, gas, Water supply 1.8 0.3 0.3 2.9 33.5

Construction 0.0 1.7 0.0

Trade 3.7 8.3 2.7 6.4 23.3

Hotels And Restaurants 0.1 0.0 0.8

Transport 2.0 2.8 1.8 6.4 11.6

Post and Telecommunication 3.4 0.3 1.0 1.8 19.0

Banking 17.7 9.8 6.1

Insurance, Pension Funding 1.8 0.9 2.0

Computer & Computer related 38.8 62.7 37.0 7.1

Business Services 26.4 3.1 3.1 80.2 25.5 14.8 52.6 32.0 37.8

Public Ad, Defence 3.2 2.6 6.8 0.8 2.6 100.0 1.5 11.6

Education 7.1 4.1 8.5 8.2 6.4 20.6

Health & Social Work 1.0 0.4 13.8 44.0

Recreational Activities 1.4

15

Other Community, Social, Personal service activities 16.5 0.7 0.9

100.0

0 100 100 100 100 100 26.73 5.45 11.44

No of Total Workers

77160

303012

543546

28151 17452 70241

105311

320464

613787

Source: Computed from unit level records of NSS 50th

, 55th

and 61st

Rounds

Overall it appears that the process of labour market deepening and thickening was mainly

occurring in the urban areas. The transformation of the IT sector or It workers into varied

industries in the rural areas continued to be limited in rural areas.

Conclusion

The most dynamic sector in the last decade globally has been the service sector. India is said to have out-paced a number of countries with her growth in the services sector powered by software and BPO services. A large share of the export growth in the country is also fuelled by the growth of the services sector. We identified communications, banking and insurance and business services as the most dynamic segments of the service sector. It appear that the share of both incomes and employment in these new sectors was restricted to the urban areas. Thus much of this high productivity, high income growth of the service sector has not created structural transformation in rural India. The IT and BPO revolution is considered the engine of the recent growth of the services sector. However, we noted that the rural workforce has not gained from the labour market deepening in the IT sector. We therefore argue that the benefits of the rapid economic growth in the more productive and high income earning services sectors were not obtained in the rural areas.

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