India's Sectoral GDP Trends

In this post, I’m going to talk about India’s GDP from a sectoral perspective. While I touched upon this in my previous post, I will highlight different trends here.

To begin with, lets take a quick look at the sectoral composition of India’s GDP vs. key developed and emerging nations.

Table 1: Sectoral Composition of India’s GDP vs. Other Nations
* See the note on data sources for this table at the end of the post.

To be able to draw any valid conclusions from this table, its important to understand the history of sectoral GDP transitions in the developed and developing world first.

1. Historically, for the leading developed nations (US, UK), there was an extended period of strong industrial sector growth (in terms of GDP share), its reaching of a peak (40%+ of GDP for the US), and then a fall off in its GDP share over the decades, all while services continued to gain share and finally came to dominate the GDP. (See chart below)

    Chart 1: US Sectoral GDP (as a % of total GDP)
    * See note for this chart at the end of the post.

I’ve picked up the chart provided above from the article “History lessons: Understanding the decline in manufacturing”, authored by Louis Johnson and published in the MinnPost in Feb 2012. Here’s the link to the full article: https://www.minnpost.com/macro-micro-minnesota/2012/02/history-lessons-understanding-decline-manufacturing. The trend that I have mentioned above is clearly visible in this chart. 

The share of agriculture in US GDP has been falling since the 1840s. The industry sector showed an extended period of growth (in GDP share) from 1840 till about 1910 when industry share peaked at ~43%, following which its share in GDP has shown a declining trend except for the short period during/after WWII. 

The US services sector has continued to gain share (as % of GDP) since 1850. It has always had a higher share in GDP vs. the industry sector (since 1850) except for the period between 1895-1905. Since then, while the share of services in GDP has continued to rise, that of the industry sector has been falling.

With this background in mind, lets look at Table 1 again. The share of industry in India’s GDP is 17%, same as that in the US. The share of the services sector in India is 65% vs. 82% in the US. The share of agriculture of course is much higher at 18% vs. 1% in the US.

2. Even though industry has the same share of GDP (17%) in both countries (India and the US), and services has high majority share in both nations as well, it is would be erroneous to assume that India’s path to industrialization has been the same as that of the US. 

The US and UK are now amongst a small set of nations that have built a strong industrial base before moving towards services’ dominance of the GDP. In most developing/emerging nations including India, there has been a movement from agriculture to service oriented economies without a substantive industrial build-up in between. As a result, even though GDP composition in these countries may be similar to that of developed economies, a strong industrial sector and its associated benefits are missing.

The chart below shows India’s sectoral transition post independence. From 10% in 1950, the industrial sector expanded to form ~20% of GDP by 1980. Since then it has hovered around this level, with its share now declining since 2010 (industrial share of 17% in 2013). Bottom-line: No sustained industrial build-up.

Chart 2: India's Sectoral GDP transition post independence - no sustained industry build-up

Source: RBI database on Indian economy. Sectoral GDP shares based on GDP at Factor Cost, at current prices (series with 2004-05 base year). 

3. Why has the industrialization phase been “skipped” as it were in developing nations like India, with services dominating the GDP somewhat prematurely?

There are few reasons for this:

•  First and foremost, many developing nations have not been able to successfully create the conditions required for a sustained industrial build-up. These include attracting the necessary investments in industrial capital and infrastructure, keeping up with technological advances, providing effective governance, ushering in sustainable economic reforms, educating the largely unskilled workforce etc. Not surprisingly, the build-up of a strong industrial base has eluded them. 

• Since the industrial sector (government + private) has been unable to absorb the rapidly growing domestic workforce, the informal services sector is where most non-agricultural workers have been absorbed and create value. Hence, the services sector has ended up dominating developing world GDP in terms of employment generation as well as value added (much like in the developed world), not so much because of its own substantive organic growth over the decades (like in the developed world), but because of industry’s relative lack of robust growth.

• With advances in technology and rising productivity, the share of the manufacturing sector in GDP and employment has been falling worldwide. It’s happening in China too now (I’ll talk about this in the next point). Having benefited from the productivity gains/advances in technology that came before and as they were industrializing, it was never realistic to assume that industrial sectors in developing nations would achieve the kind of GDP share peaks achieved by industry in the US and UK during their path to industrialization decades ago.

• China has been an exception to this developing world phenomenon. Given its communist form of government, unrelenting focus on low-cost manufacturing and infrastructure growth, availability of a large, young, low-cost labour-force as well as a large domestic market, China has become the factory of the world (produces around a quarter of global manufacturing output). While China is losing some of its business to other lower-wage countries mostly in East Asia, it will be hard to replicate China’s model. There cannot be many Chinas on the planet. There simply isn’t that kind of worldwide demand for manufactured goods. Also, China itself is facing the challenge of lower global demand now. Given the industrial scale it has achieved already, growth will have to moderate.

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Note on data sources for Table 1: For USA, UK and Germany, I have sourced the data from the stats.oecd.org website. The industry sector includes energy, while construction is included in the services sector, just as is the case for the Indian data (source: RBI’s database on the Indian economy). For China, I’ve pulled the above data from the Chinese National Bureau of Statistics, while for Brazil I’ve used the figures provided in the CIA world factbook. 

For USA, UK and Germany, the figures are on based on current price estimates of GVA at Basic Prices for 2013 or 2014; for India, they are based on 2013-14 current price estimates of GDP at Factor Cost. For China and Brazil, the figures are based on current price 2013 or 2014 GDP estimates (don’t have more details).

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Note on Chart 1: In chart 1 construction is included in the industry sector, while in table 1, I’ve included construction in the services sector (as is the practice in India). If I adjust for this inconsistency in the table (i.e. add construction which has ~4% share in US GDP to the industry sector after removing it from the services sector), I get US industry share of 21% and services share of 78% of GDP for 2013. This is much closer to 2010 sector shares in chart 1.

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