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I s the ri sing share of services in the national income of I ndian economy a

discouragement to a fi rm wishing to make investment i n manufactur ing sector?

There are several points of view through which the above argument can be viewed and

perceived, but before delving into the analysis of the argument, firstly lets discuss as to what are

different types of sectors.

Primarily there are three kinds of sectors which contribute to the growth of Indian economy:

1. Primary sectorThis sector includes the activities which is largely dependent upon the exploitation of

natural resources. Agriculture and related activities are the examples.

2. Secondary sectorThe activities related to manufacturing of physical goods come under secondary sector.

3. Tertiary sectorThis sector comprises of the activities which are aimed towards providing intangible

goods such as services. Telephony, financial consultancy, management counseling are

few examples.

(www.excellup.com,2009)

The earliest time of economy were dominated by primary sector and was concerned

about the production of food, but slowly and gradually when the production of food became

surplus, people started to develop needs for different products and this need gave birth to the

secondary sector. Secondary or manufacturing sector saw a boom during the industrial revolutionof the 1800s. Later, a system was needed to support the manufacturing sector, i.e. transport and

shops, so as provide mobility and communications and hence the tertiary sector sprang into

existence. It gradually evolved from just being limited to transportation and selling of goods

manufactured by the secondary sector directly, to a more indirect form of tuition and

administrative services. (www.excellup.com,2009)

The second last decade of the 20thcentury was marked by the autonomy of state owned

enterprises in India. Service (Tertiary) sector was characterized by several entry barriers and

restrictions for both domestic private as well as international players. The market structure in the

sector of telecommunication was that of monopoly and was dominated by National TelecomCompany. Transport sector witnessed the rule of state owned firms, whether it be roadways or

airways. Further, the shipping industry was dominated by public companies and electricity was

owned by Central government.

Followed by the Balance of Payment Crisis in the 1990s, several IMF regulatory reforms were

applied in the economic structure of the country. Subsequent reforms took place by the 1950s in

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energy, transport and telecommunication sectors but owing to the huge investment required for

the expansion of capability and improvement of quality of the services sector, it was opened up

for private investments. The main objective of this reform was to maximize the potency of

service sector. (Bas, 2013)

Fig.1 (A comparison in the value of sectors in 1970s and 2000s)

Source: (www.excellup.com,2009)

Two major reforms included:

The reduction of entry barriers and restrictions for private domestic firms The ease of entry for international players. (VOX,2010)

http://www.excellup.com/http://www.excellup.com/

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Effects of the rise of services sector in India on the manufacturing sector:

The bright side:

Due to the removal of hard restrictions and heavy barriers to the entry of private domesticand international players, many new players entered the market which in turn raised thecompetition between service sector firms to a higher level. This competition compelled

the players to lower down their pricing so as to gain an edge over their competitors and

this low pricing of services ultimately lead to the reduction in the cost incurred by the

manufacturing industries, hence enabling them to produce more goods.

Low cost of manufacturing has enabled even the small firms to export their goods asthere are now able to afford it. Further the firms which were already exporting have given

the ability to expand their market abroad.

Technological advancement is another byproduct of liberalization. Owing to the toughcompetition in the market, firms adopt or even develop new technologies to make the

production more efficient and less cumbersome.

(www.business.mapsofindia.com,2010)

The downside:

Even with the above mentioned beneficial effects the rapid growth of services sector which,

in one way is supporting the manufacturing sector, is also militating against the growth factor

of the same which in turn is discouraging firms to invest in the secondary sector.

Fig.2 (Sectoral share in GDP in Indian economy)

Source:(Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009)

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Over the past many years, service sector has overtaken the manufacturing sector interms of growth and expansion as the largest sector in the present world economy.

Service sector constitutes around 50% of the GDP in developing countries and 70%

in the developed countries and is still growing at a faster pace(36%) than the

secondary sector(20%).

Adding to these data, starting and/or running a service has become far moreeconomical than manufacturing tangible goods.

Large and established firms find it quite hefty to hire employees and monitor themwhen they can hire services itself, for example outsourcing, which makes running a

firm easier.

Many firms are even into outsourcing innovations and have managed to decrease therisk and cost of it by upto 90%, subsequently decreasing cycle times. (Cycle times

means the total time utilized in the completion of one batch of a specified

manufacturing and allied operations.)

The returns to scale in services sector is more than that of manufacturing sector. Thisoccurs because the services provided by the tertiary sector involves a labor who is

causing the return of an industrial size without many variables which could change

the output rate, but in manufacturing sector the output depends on the efficiency of

labors, business environment, business services under a decreasing returns

technology.

So it could be concluded that the exponential growth in the service sector is

generating a great number of employments across varied platforms but it is quite

strange to observe that tertiary sector is growing faster than the sector it has been

derived from (secondary sector), and to a degree it is indeed discouraging investors in

putting in money into the manufacturing sector. (Mukherjee, 2012)

I ndian Alcohol I ndustry

Introduction

The manufacturing, distribution and retail sale of alcoholic drinks and beverages is taken care by

the alcohol industry. Indian alcohol industry is among the fastest growing industries in the world.

It currently occupies the 3rdrank in the field of consumption all over the world and is also a big

contributor to Indias GDP. This industry is marked by giant players like Heineken, SAB Miller,

Pernord Ricard. The products manufactured by this industry can be classified as follows:

Foreign liquor bottled in Origin (BIO) Foreign liquor bottled in India (BII) Indian Manufactured Foreign Liquor (IMFL) Wine Beer

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Indigenous country liquorGrowth

Total size of this industry in India is $35 billion and is showing a CAGR growth rate of 8%

annually. With the rise of Indian economy and the increase in the customers disposable income,this industry is expected to rise in the future as well.Since the liberalization of Indian economy,

many international players have made tie ups with the domestic ones to maintain their stronghold

in India. These tie ups have contributed majorly in the growth of this industry. Despite of strong

government regulations and restrictions preventing new players entering the market, the alcohol

industry havent slowed down since the 1990s, on the contrary this industry has become a typical

example of oligopoly. (Euromonitor, 2013)

Fig.3 (Market share in Indian Liquor industry and their forecasted growth)

Inter-linkages

With the growth of alcohol industry in India, other sectors are also affected positively. The

manufacturing units are producing more and more liquor which require more means of

transportation which in turn increases the demand in service sector, further as the direct

advertising of liquor has been banned in India since 2000, so they use the method of surrogate

advertising which increases the demand in service sector even more.The main ingredient in

liquor manufacturing in India is Molasses which is an agricultural product. Hence, the primary

industry is also positively affected by the growth. The main feature that supports this industry is

the minimum volatility, which causes almost equal growth annually.

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The inter r elationship between agriculture, manufactur ing and services sector in

the economy.

The inter relationship between agriculture and industry moved up into the hot topics list during

the industrial impasse in the 1960s. The economy of India underwent a radical change from

being agriculture based in 1970s to being service based in 1990s.

With the growth of economy of a country, the GDP basket increases and the majority of financial

activities shift from agriculture to service sector because of the lower elasticity in agriculture

sector than the other two. (Fisher, 1939 and Clark, 1940)

Theoretically, the service sector grows substantially only after a threshold amount of

growth in the agricultural and manufacturing sector. Usually the developed countries followed

the traditional trend of development i.e. growth in agricultural, manufacturing and service sector

respectively, but certain developing countries like India are demonstrating an alternative route of

development. In India, the growth of service sector attained the status of a rapidly growing oneeven without the manufacturing sector establishing a stronghold in the country. From a primarily

agro based country in 1970s, India has revolutionized its economic structure in 1990s as a major

service sector country. The rise of a new sector has radically changed inter- sectoral productivity

and demand linkages. This rise has in turn effected communications, distribution and financial

services positively.

A study of the relationships between these three sectors doesnt only shows us the

cumulative evolution of the economy as a whole as well as individual progression of sectors but

also how the three sectors have adjusted over time to facilitate a holistic growth of the economy.

The inter-sectoral linkages in an economy can be analyzed and determined by the following threemethods:

1. I/O table which helps in determining the patterns in structural shifts. It also helps toprovide an in depth view of the interdependency among sectors.

2. Statistical technique which involves causality analysis among sectors and inferencesare drawn as per the numbers.

3. Econometric modeling exercises through all sectors of the economy.(Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009)

So before delving into the inter-sectoral linkages in Indian economy, it would be highly useful tofirst look into the chronological growth patterns among sectors and their contribution into the

GDP.

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Fig.4 (Sector-wise average growth trends in Indian economy)

Source:Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009A decade wise study shows that GDP growth rocketed to 5.6% in the 1980s in contrast to 2.9%

in the 1970s.All the sectors were equally responsible for this acceleration, but mid way between

the 80s the growth in the primary sector went south unlike the rise in growth in the other twosectors. Further the growth in the service sector had been quite substantial i.e. 8.8% in 2000 in

comparison to 4% in 1950s.The growth in the primary sector, however, showed no particular

trend but that of the secondary manufacturing sector has shown a rate of 6.1% and 6.2% in 1980s

and 1990s respectively, which is even lower rate than that of 1960s (6.5%).

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Fig.5 (Volatility in growth across different sectors as measured by Coefficient of Variation)

(Percent)

Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009

The growth rate of the service sector has shown much more consistency than that of other two

sectors (determined by the coefficient of variation) and hence has contributed in the rise ofIndian GDP majorly owing the continuous reduction in volatility of the output in it.

The contribution of the tertiary sector had risen and overtook that of the secondary sector since

1950s but remained smaller as compared to the primary sector till the 1970s.

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The Link:

To start with the interdependency of the three sectors of economy, it can easily be understood

that the demand in a sector is influenced greatly by the output generation in the other two sectors.

For instance, the primary sector is dependent on the secondary sector for agricultural equipments

and other products like pesticides and manure which increases the productivity of the former andin turn increases the demand for more products of the latter. Further this improved harvest

increases demand of the services needed between the harvest and selling of it like transport,

banking, trade, etc. And if we see at the supply side then agricultural products helps the

manufacturing sector to produce pharmaceutical products, food products, chemicals and others.

Therefore a fall in the agriculture sector seriously hampers the growth of the manufacturing

sector. A similar relationship is quite apparent in the manufacturing and service sector and this

relationship becomes gradually stronger with the evolution of the economy.With expansion and

growth in the manufacturing sector, the demand for utility services like communication,

transport, trade, hotels, et cetera and social services like hospitals, schools and better

infrastructure increases.

In turn, the sophistication of service sector helps in creating more demands for the manufactured

goods. With the development of the countrys economy along which also causes a rise in per

capita income, the secondary and tertiary industries more and more dependent on each other,

hence strengthening the bond and pushing the economy higher. Abetted Liberalization

Communication sector has shown a recent promising growth which has compounded the

productivity in the manufacturing sector as the former causes the sharing of current information

regarding the ongoing market and demand conditions. Financial service sector has shown

substantial growth and so is the scenario with the transport services which has largely benefitted

from the increased manufacturing ability and productivity of the secondary sector.

(Dilip, 2009)

An I/O table study backed by econometric exercise shows the inter and intra sectoral

linkages between and within the three sectors of the Indian economy respectively. This table

shows how the output of one sector serves as an input in the other sector thereby benefitting both

the consumer and supplier. There are two aspects along which the I/O table is made:

Production linkages Demand linkages

Production linkages

This table shows the relationship of units among the three sectors (year wise) and gives

us a view as to how much units were utilized from all the three sectors to produce a unit of

product in any one of them. For example, according to table __, to produce one unit of product of

agricultural product in 1979-1980, 0.160 units of agriculture output, 0.068 units of industry

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(manufacturing sector) output and 0.020 of service output was utilized. Similarly to produce one

unit of product of service sector in 1998-99, 0.025 units of agriculture output, 0.211 units of

manufacturing output and 0.132 units of service output was utilized.

(Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009)

Fig.6 (Sector wise utilization of units for the production of a single unit in any sector)

Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009

Demand linkages

This table shows the relationship as to how an increase in demand in one sector

increases the demand in all the sectors. For example, according to the table __, the increase in

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demand in the year 1979-80, an increase in demand in the industry (manufacturing) sector by one

unit, the demand is increased by 0.260 units in agriculture sector and by 0.269 units in the

service sector.

(Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009)

Fig.7 (Increase in demand across different sectors with the increase in demand in one sector)

Source: Gunjeet Kaur, Sanjib Bordoloi and Raj Rajesh, 2009

Hence it can be concluded that each and every sector in an economy affects the other

sectors, both positively and negatively and further with the evolution of any economy a shift in

the rate of growth from agriculture sector to service sector is observed.