Chapter-3. Sectoral Composition of Economic Growth and its Major Trends in India

Transcription

1 Chapter-3 Sectoral Composition of Economic Growth and its Major Trends in India This chapter deals with the first objective of the study, that is to evaluate the sectoral composition of economic growth in the pre and post reform periods. Indian economy was left in a dormant state at the time of independence and the beginning of systematic planning helped in identifying the priorities. During the period of five year plans, the process of economic growth was slow and gradual with enough fluctuations attributed to global and domestic factors. The economy had been in the grip of a low growth rate for a long period of time, before picking up the growth momentum in the post-reform period, in which the average annual growth rate was hovering at less than 3 per cent. The proportion of agriculture and allied activities had been the highest in comparison with the other sectors. Nevertheless, the economic reforms and the opening up of the economy for the outside world brought in tremendous change in the behaviour of the macroeconomic variables with reference to the increase in real output. It clearly earmarked the faster growth of services sector in comparison with other sectors. It has been 70

2 reflected in the structural changes in terms of the relative contribution of various sectors to GDP. It is necessary to look into the changes in the sectoral composition corresponding to the long-run growth trends of the economy. Also it is very important to analyse the extent up to which different macroeconomic determinants influence the economic growth process. This study holds special importance because the research attempts by focusing on macro level determinants of economic growth in India have been very limited and less concentrated. The year 1991, in which the new economic policy was introduced in India, is taken as the year of separation of pre and post reform periods. This objective has been treated in a two-fold manner. The first one looks into the trends associated with the sectoral growth from 1971 onwards. Second aspect is related to check the significance of different sectors in the growth process from the beginning of planning process in India. It is done in the context of pre and post reform periods, which helps in making a realistic comparison of the relative importance of different sectors in Indian economy and changes over time. 3.1 RESEARCH METHODS The secondary data related to real GDP and the percentage contribution of different sectors to GDP during the study period is collected from the official databases of Reserve Bank of India. Various statistical techniques have been employed to evaluate the changes in the sectoral composition of economic growth. The time period is taken as 1971 to 2014 which covers the entire planning period. The trend lines have been used to capture the pattern and direction of change in the sectoral composition of growth. The regression analysis shows the extent of influence of changes in the sectoral composition on the growth of real GDP overtime. It is done by 71

3 dividing the study period into pre and post reform periods. Along with that the overall effect is also taken for comparative purpose. 3.2 OPERATIONALISATION OF CONSTRUCTS Some of the important concepts used in connection with sectoral composition have been operationalised in the context of the present study. In this connection, the most important concept related to this study is economic growth. Also the terminology pre-reform period and post-reform period, need to be clarified since they have been used in the premise of the reform measures introduced in India in Pre and Post Reform Periods India adopted economic reforms in 1991 under the umbrella of New Economic Policy. These reforms were mainly introduced through liberalisation, privatisation and globalisation measures. These measures aimed at bringing revolutionary changes in the business environment in the country. It has marked a new era of economic transition in India. The empirical test shows that this year also marks a very important structural break in the economic history of India. Therefore, the year is taken as the demarcation to split the pre and post reform periods. Therefore, the period under study encompasses the data up to Economic Growth Economic growth refers to the increase in the market value of the goods and services produced by an economy over a period of time. It signifies a consistent increase in the real output of an economy in the long 72

4 run. The increase in real output raises the income level of people and in turn raises the standard of living of people. It can be measured in nominal terms or in real terms. Nominal income includes inflation whereas real income is adjusted for inflation. The growth rate is conventionally measured as the percentage rate of change- increase or decrease- in real gross domestic product or real GDP Sectoral Composition of Economic Growth The study is carried out in the backdrop of economic growth encompassing the study period. The economic growth process necessitates structural changes in an economy. It takes place in the form of changes in the relative contribution of various sectors to GDP. Therefore, sectoral composition of economic growth refers to the changes in the output shares by various sectors over the study period. The structural changes can also be reflected in the sector wise changes in the employment pattern over a period. In the study the sectoral composition of economic growth refers to the changes in the contribution of various sectors to GDP in the pre and post reform periods. 3.3 RESULTS AND DISCUSSION This chapter provides a detailed presentation of the results related to the changes in the sectoral composition over time. It is based on the first objective and the research questions put forward in relation to it. The results are discussed in three parts. The first part deals with the division of time period into pre and post reform periods in the light of the economic reforms introduced in 1991 and the structural break associated with it. The second segment throws light on the changes in the sectoral composition of 73

5 economic growth from 1971 and the peculiar features and trends associated with it. The third part is related to the changes in the sectoral growth rates and their impact on overall economic growth Division of Time Period and Structural Break in India s Growth Path Economic reforms introduced in India in early 1990s provide a valid case for analysing the growth pattern of Indian economy, dividing into different time zone. These reforms have brought about structural changes in Indian economy. This is the rationale for dividing the time period into pre and post reform periods based on the economic reforms introduced in India in This is supported with many studies identifying a structural break during the post-reform period (Balakrishnan & Parameswaran, 2007), (Agarwal & Ghosh, 2015). The results of Chow test, given below, also confirm the structural break in 1992 in India s GDP growth path during the study period. Table 3.1: Structural Break in India s Growth Statistic Coefficient Degrees of freedom p-value F-statistic Prob. F(4,27) Log likelihood ratio Prob. Chi-Square(4) Wald Statistic Prob. Chi-Square(4) Source: By calculation Table 3.1 shows the details of Chow Breakpoint Test for the year The null hypothesis states that there are no breaks at specified breakpoints. The equation sample covers the period from 1971 to The parameter is structurally stable when probability is below 5 per cent level. 74

6 The result confirms that the p value of F statistic is zero. Therefore, we reject the null hypothesis which proves that there is a structural break in the data in the year Evaluating the Sectoral Composition of Growth in India The changes in sectoral composition along with economic growth offer ample scope of analysing the economic growth process of any country. It becomes all the more important when the economy starts to grow at faster rates at some point of time. Also it is very useful when there are fluctuations in the growth margins achieved. This segment deals with the first objective of the study, that is to evaluate the changes in the sectoral composition of economic growth in the pre and post reform periods in India. It is arranged in two parts as per the research questions raised in this connection. The first part deals with the changes in the sectoral composition of growth during the study period, throwing light on the trends and features. The second part is associated with the extent of influence of different sectors on the growth levels of GDP. The data analysis is based on the secondary data obtained from the Planning Commission from to The changes in the sectoral composition of economic growth: Trends and Peculiar Features This segment focuses on the pattern of change in terms of the relative importance of various sectors of the economy. It is captured through the graphical method taking into account the composition of sectoral shares to output, GDP growth rate and the rate of growth of 75

7 sectoral contributions. The graphs clearly demarcate the trend in pre and post reform periods. Figure 3.1: Composition of Sectoral Growth in India in the pre and post reform periods Source: Planning Commission, (CSO), Figure 3.1 depicts the changes in the sectoral composition of GDP during the pre and post reform periods in India. During the period between 1971 and 1991, the contribution from services and industrial sectors showed consistent progress. However, the agricultural sector showed dismal picture with a steep fall in its relative contribution to total GDP. Also it is noticed that some of the years had witnessed steep fall in the contribution of agricultural sector. The momentum of growth in services sector had picked up in early 1980s itself, almost a decade before economic reforms. 76

8 The time period after the reforms witnessed a steep rise in the contribution of services sector to GDP, following the footsteps of most of the advanced economies. The industrial sector also showed a stable performance until the time of global downturn, starting in It clearly signals the adverse impact of global recession on India s manufacturing sector, affecting the productivity and growth rate. Also it has affected the growth of exports adversely. It is important to note that the agricultural sector continued to perform very bad with a consistent fall in its relative contribution to total GDP during this time Percentage Figure 3.2: Economic growth rate in India in the pre and post reform periods Source: Planning Commission, (CSO), Figure 3.2 depicts the overall rate of economic growth in India in the pre and post reform periods. The fluctuation in the growth rate of GDP signifies the unstable growth pattern of the country s GDP for a long period. The fluctuations were much higher in the pre-reform period. In some of the years the growth rate has fallen to negative zones. However, the post-reform period witnessed a more stable growth rate although there are some years of fluctuations. 77

9 20 15 Agri-culture & Allied Services - % Growth Rate (YoY) Industry - % Growth Rate (YoY) Services - % Growth Rate (YoY) 10 Percentage Figure 3.3: Sectoral Growth Rates in India in the pre and post reform periods Source: Planning Commission, (CSO), Figure 3.3 shows the pattern of sectoral growth rate of GDP in the pre and post reform periods. It is quite evident that among all the three sectors, primary sector growth rate is the one with highest degree of fluctuation. The growth rate of industrial sector also fluctuates due to various domestic and global factors. It is evident that the global downturn has caused serious fall in the contribution and growth rate of industrial sector. The services sector growth is more consistent than the other two sectors. In addition to this, it is very clear that the post-reform period witnessed remarkable progress in the growth rate of services sector. 78

10 Agri-culture & Allied Services - % Growth Rate (YoY) -10 Industry - % Growth Rate (YoY) Services - % Growth Rate (YoY) -15 Gross Domestic Product - % Growth Rate (YoY) Figure 3.4: Sectoral Growth with overall Economic Growth Rates in India in the pre and post reform periods Source: Planning Commission, (CSO), Figure 3.4 shows the pattern of sectoral growth with overall rate of GDP growth in the pre and post reform periods. It is quite evident that the primary sector growth rate is with highest degree of fluctuation and it affects the overall growth rate of the economy. It clearly spells out that the two way linkage of agricultural sector, namely supply of raw materials to other sectors and also the markets for industrial products play a significant role in influencing the level of overall growth rate of the economy. It is interesting to see that it continues even during the post-reform era, although the share of agricultural sector to GDP is on a decline during this time. 79

11 Changes in the Sectoral Shares of Output and their Impact on Overall Economic Growth in the Pre and Post Reform Periods The shift in the relative importance of different sectors is said to be a sign of fast growing economies like India. Moreover it is inevitable in the context of the structural transformation, being occurred in India. The following analysis highlights the impact of various sectors on the overall growth of the economy. The results of multiple regression analysis is explained at three levels, taking the time period up to 2014 and then dividing them into pre and post reform periods keeping 1991 as the dividing year. The null hypothesis tested is mentioned below. H 01 : The sectoral composition of economic growth doesn t have any significant association with economic growth. Table 3.2 presents the result of multiple regression analysis pertaining to the overall economic growth and changes in the sectoral share of output in the pre and post reform periods in India. It shows that the changes in the sectoral share of output related to all three sectors are significant at 5 per cent level. The data covers the time period 1971 to The real gross domestic product (GDP) is taken as the dependent variable and the growth rates of agriculture and allied activities, industrial sector and service sector are taken as the independent variables. The Adjusted R- squared value shows that 96 per cent of change in the dependent variable can be explained by the model. The Durbin-Watson statistics show that there is no multicollinearity since the value is around 2. The coefficient values show the relative significance of various sectors in contributing to the GDP growth of the economy. It is evident that every one 80

12 per cent increase in the allocation to agriculture and allied activities will increase GDP by 0.37 per cent. Again, every one per cent increase in industrial allocation will increase GDP by 0.19 per cent. Similarly every one per cent increase in services sector allocation will increase GDP by 0.61 per cent. The services sector plays a key role in the long-run growth process in India. However, the results point out the importance of the growth of other sectors as well and depict why the growth of agricultural sector acts as the backbone of Indian economy. Table 3.2: Overall Economic Growth and the changes in the Sectoral shares of output in India in the Pre and Post Reform Periods Variable Coefficient Std. Error t-statistic Probability C D (AGRICULTURE) D (INDUSTRY) D (SERVICES) R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood Hannan-Quinn criter F-statistic Durbin-Watson stat Prob (F-statistic) Source: By Calculation Regression equation: GDP= AGR IND SER 81

13 Table 3.3: Overall Economic Growth and the changes in the Sectoral shares of output in India in the Pre-Reform Period Variable Coefficient Std. Error t-statistic Probability C D (AGRICULTURE) D (INDUSTRY) D (SERVICES) R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood Hannan-Quinn criter F-statistic Durbin-Watson stat Prob(F-statistic) Source: By Calculation Regression equation: GDP= AGR IND SER Table 3.3 shows the result of multiple regression analysis pertaining to the growth in real GDP and the changes in the sectoral shares of output in the pre-reform period. The results confirm that the changes in the sectoral shares of output for all three sectors during the pre-reform period are significant at 5 per cent level. The data covers the time period 1971 to The real gross domestic product (GDP) is taken as the dependent variable and the sectoral shares of output from agriculture and allied activities, industrial sector and service sector are taken as the independent variables. 82

14 The Adjusted R-squared value shows that 98 per cent of change in the dependent variable can be explained by the model. The Durbin-Watson statistics show that there is no multicollinearity since the value is around 2. The coefficient values show the relative significance of changes in the output shares of various sectors in contributing to the GDP growth. It is clear that every one per cent increase in the allocation to agriculture and allied activities will increase GDP by 0.41 per cent. Again, every one per cent increase in industrial allocation will increase GDP by 0.16 per cent. Similarly every one per cent increase in services sector allocation will increase GDP by 0.47 per cent. It indicates that services sector s contribution is a key aspect in the growth process in India even in the prereform period. However, it is clear that primary sector has played a very crucial role in the growth process and it has acted as the backbone of Indian economy. Table 3.4: Overall Economic Growth and the changes in the Sectoral shares of output in India in the Post-Reform Period Variable Coefficient Std. Error t-statistic Probability C D (AGRICULTURE) D (INDUSTRY) D (SERVICES) R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood Hannan-Quinn criter F-statistic Durbin-Watson stat Prob (F-statistic)

15 Source: By Calculation Regression equation: GDP= AGR IND SER Table 3.4 presents the result of multiple regression analysis pertaining to the economic growth and the changes in the sectoral shares of output in the post-reform period. The results confirm that the changes in the output shares for all three sectors during the post-reform period are significant at 5 per cent level. The data covers the time period from 1991 to The real gross domestic product (GDP) is taken as the dependent variable and the changes in the output share of agriculture and allied activities, industrial sector and service sector are taken as the independent variables. The Adjusted R-squared value shows that 95 per cent of change in the dependent variable can be explained by the model. The coefficient values show that every one per cent increase in the allocation to agriculture and allied activities will increase GDP by 0.23 per cent. Again, every one per cent increase in industrial allocation will increase GDP by 0.27 per cent. Similarly every one per cent increase in services sector allocation will increase GDP by 0.52 per cent. It indicates that services sector s contribution is a key aspect in the post-reform period. However the primary and secondary sectors have a special role in enhancing the growth levels in Indian economy. The results clearly support the findings of various studies highlighting the increasing importance of services sector in the economic growth process in India. While comparing the trends in sectoral composition of economic growth in the pre-reform period to post-reform time, the changes in sectoral composition of output is very evident because it clearly depicts the nature of the structural transformation in the economy. It is noticeable that the pace of economic growth is much high after the 84

16 introduction of economic reforms in India in Also the increasing importance of services sector becomes more and more visible in the overall economic growth scenario. Three things are very important in the context of these findings. One, the steady growth momentum achieved by the economy after 1991 was mainly due to the spurt in the service sector growth which helped in balancing the overall growth against the considerable decline in the production of agricultural sector and fluctuations in the manufacturing sector growth. Two, the faster growth of the service sector is necessary to sustain the growth in the primary and secondary sectors. It is due to the inter-linkage between different sectors of the economy. Third, it is observed that sustaining the growth rate achieved by the service sector would be a big challenge for the economy in the coming years. 3.4 CHAPTER SUMMARY This chapter has highlighted the changes in the sectoral composition of economic growth in the pre and post reform periods. It is very important to keep a good understanding of the position of Indian economy before the introduction of economic reforms in It is true to say that the economy was left in a dormant state at the time of independence and the beginning of systematic planning helped in identifying the priorities. During the period of five year plans, the process of economic growth was very slow and gradual with enough fluctuations attributed to various global and domestic factors. However, the introduction of economic reforms in 1991 has marked a significant change in the growth history of the economy. The growth of service sector has started playing a crucial role in the overall economic growth scenario. The service-sector-led growth has given the status to Indian economy as one of the fast growing economies, but it would give rise to challenges related to retaining the growth rates attained. 85