Here’s Why The Indian Economy Is Fast Becoming A “One Pony Trick”, Powered Largely By The Services Sector

India Services Sector
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The Fortunes Of The Indian Economy Depend On Its Services Professionals

The Indian Economy is fast becoming a “One Pony Trick”! India’s GDP (Gross Domestic Product) growth is powered by the services sector, which accounts for more than 50% of the total GDP. It has generated a tad more than a quarter of all jobs in the formal economy, in addition to indirectly creating another 10% of employment or the so-called “multiplier” effect. While India’s services sector has suffered a significant setback due to the pandemic, what with its’ GVA (Gross Value Added) sinking to 30% in 2020-’21, the rebound in the last year or so has been spectacular. Indeed, it can be said that the Indian Economy’s fortunes rest on the shoulders of its Software, Call Center, Banking, and Financial Services professionals.

Why India Cannot Become Another China Without A Manufacturing Revolution

While the much celebrated “Indian Rennaisance” owes a lot to the Indian Services Sector, a situation where it has had a disproportionate weight in the overall growth indices is undesirable for many reasons. First, the Indian Services Sector employs only a quarter of all Indians of eligible working age, which, when contrasted with its share in the overall GDP, does little to solve India’s chronic “unemployment crisis”. Indeed, India cannot become an economic powerhouse without a parallel manufacturing revolution. Job creation needs labour-intensive firms, especially those in the formal and informal sectors of MSME (Micro, Small, and Medium Enterprises).

How India’s Much Vaunted Demographic Dividend Is Becoming A Disaster

This is when the nation is at risk of failing its youth, as the much vaunted Demographic Dividend threatens to become a nightmare, fueling social unrest. Moreover, the services sector employs skilled professionals, thereby “excluding” those with little formal education or specialized skills. Indeed, it is not as though India does not have a large talent pool of graduates with Engineering and Management Degrees. Just that the “employability” of the Crores of them is a problem, with only a few (about 20%) being “fit” for services jobs.

A Tale Of India And Bharat! Urban Consumption And Diminishing Rural Demand

Next, there is an increasing “divergence” between India and Bharat (to use a cliche) as those with “cushy” jobs in the IT and BFSI sectors are driving consumption, when rural demand is falling and worse, when our cities absorb migrants, with little hope of gainfully employing them. Not only this, but the divergence is also seen in what the former RBI (Reserve Bank of India) governor called the “K” Shaped Recovery, where the much-hyped Unicorns (startups with Billion Dollar valuations) and the rest of the services firms occupy the higher echelons and the “dark stains” of rural distress and the manufacturing firms “haemorrhaging” jobs leads to societal disruptions, with skyrocketing suicide rates, and crime infested cities, being the outcome.

How India’s Services Sector Alone Cannot Carry The Economy Forever

Third, the services sector has its problems to contend with. For one, the IT sector has to “move up the value chain” and retain its buoyancy instead of depending on low value yet high volume work, which is lucrative as long as the Dollar strengthens against the Rupee. In addition, the BPO sector is fast losing out to the Philippines as it has the same advantages that India had (English speaking workforce) with the added benefit of being an Americanized (being a former colony of the US) populace, at ease with its culture and manners of life, which no amount of training can bring to India. While the BFSI sector continues to thrive, its ability to create jobs by the Millions is simply non-existent, thanks to the specialized work and cost pressures which are the hallmark of this vertical.

The Indian services sector, with healthcare, hospitality, travel, leisure, and the F&B (Food and Beverages), as well as other allied verticals, can grow in the medium term, lifted as they are by the growing economy. Moreover, the Indian Economy, with its large “unfulfilled aspirational demand,” can drive growth in these firms. Indeed, suppose the services sector has to continue powering the overall increase in the Indian Economy. In that case, more of these and other service sector units need to thrive and prosper and not get bogged down by GST (Goods and Services Tax) and additional “imposed baggage”. However, the Indian Economy has not yet fully recovered from the pandemic, so the “drag” continues to linger.

Despite The Spin, India Is Shining For A Few And Dark Clouds Hovering Over Others

The Indian Services sector cannot be the “engine” that drives the Indian Economy. The GDP growth figures, estimates, and projections routinely thrown around in the media result from the growth of the services sector. So, the next time you see “rosy” forecasts, remember that there are also “dark clouds” hovering around the Indian Economy, which threaten the Indian “story” and lead to more significant “divergence” in the nation’s growth trajectory. The Indian Economy cannot continue to be a “One Pony Trick”.



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