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GDP composition: Factors that led the change - Views on News from Equitymaster
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  • Sep 17, 2008

    GDP composition: Factors that led the change

    India, once considered an agrarian economy is now dominated by the service sector. It is perhaps, the only economy that has circumvented the industrial revolution stage during the growth phase. The share of agricultural sector has declined from 44% in 1991 to almost 17% in 2007. For the same period, industrial sector contribution has increased from 25% to 28%, while that of service sector has increased from 31% to 55%. The unparalleled rise in the service sector's share in GDP marks a structural shift in the Indian economy.

    Agriculture: The laggard
    The agricultural yield increased after independence on account of increased focus on the sector in the five-year plans and green revolution that took place. However, in the recent past it has declined and has been volatile. The decline in agricultural yield has impacted growth of the sector and consequently its share as a percentage of GDP. While the economy and other sectors are clocking near double-digit growth rates, the agricultural sector is merely growing at the rate of 2% to 3%. In the past eighteen years, the sector has grown at a CAGR of 1.8%. The growth in agricultural sector has slowed down on account of small and fragmented farms, which has resulted in lower productivity.

    Further, insufficient investments towards agricultural research and the development of new techniques to improve have impacted the growth of the sector. While the government allocates subsidies to the agricultural sector, the same does not help to retain or improve natural resources and their quality. On account of insufficient irrigation facilities, farmers are dependant on rainfall, which is unpredictable. Inadequate investments towards educating farmers with respect to new techniques to be used, location specific farming systems etc have affected the sector growth. The sector also lacks proper credit facilities. In this year's budget, the government has announced farm loan waiver, which may provide some relief to debt burdened small framers but the same will not improve the agricultural scenario in India. Further, such measures hardly benefit the intended ones as there is no proper follow up and lot of loopholes in the system.

  • Read- Agriculture: Grain of truth

    On the other hand, service sector growth has been boosted by increased consumption with the increase in purchasing power. India has the lowest median age of 24 as compared to developed countries like USA, UK, Japan etc. The composition of the Indian population is shifting towards the age group of 20-49 i.e. the working population with purchasing power. Approximately, 60% of the Indian population is below 30 years of age. Thus, India has the largest 'young' population in terms of sheer size and this young segment is the major driver of consumption as they have the ability (disposable income) and willingness to spend. A larger number of households are getting added to the consuming class with growth in income levels. Increasing instances of double incomes in most families coupled with the rise in spending power is further fuelling the growth. This has resulted in significant increase in the high-income group and mass affluent categories. These factors have transformed Indian economy into a vibrant, rapidly growing consumer market. Also the changing regulatory mechanism such as opening up of the economy has boosted the growth of the service sector.

    Industrial sector that had reported tepid growth in its share as a percentage of GDP finally came of age after the opening up of economy and economic liberalisation. Factors such as removal of governmental control, rationalization of regulation and increased foreign investment have led to growth of the industrial as well as service sector. After realizing the need to develop infrastructure sector, the government has gradually approved foreign direct investments, that not only extend capital but technical know how and better practices followed in other countries. 100% FDI is allowed in most sectors except telecommunications (49%), insurance (26%), banking (49%), aviation (40%), retail (100% in cash and carry and 51% in single brand) and small-scale industries (24%) etc. Government has also gradually reduced its stake and has also contracted public private partnership agreements to pump in capital and boost the overall economic growth. The developing banking sector and increased credit towards industrial sector has further enabled to expand and grow manufacturing base.

  • Read- Serious fiscal risks and more...

    To conclude…
    Though the share of the agricultural sector has declined, it continues to play an important role in the Indian economy given the fact that 60% of the population is still dependant on agriculture. While burgeoning service sector and increased focus on industrial growth have extended employment opportunities and boosted economic growth, slowdown in agricultural sector is not imperative. Moreover, the meager growth of the agricultural sector is more led by the allied activities (plantations) rather than growth in crop cultivation. If the sector growth does not keep pace supporting the needs of the growing population and the economic growth, the inflationary situation that is witnessed currently on account of supply side constraints would be difficult to ease. The same in turn will hurt the overall economic growth.



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