The growth of the service sector in both the developed and developing world has been phenomenal. As economies become progressively service driven, greater wealth and employment is being generated in this sector. Before we begin, what exactly are the different types of services?
Services can be classified into four categories on the basis of the service customization and customer contact, and we would look at the categories as follow.
First of all would be the Service Factory, with such examples as airlines, hotels/resorts and trucking. This is the type where there is low customer contact and low degree of customization. The services offered need to be warm and exciting, and attention must be paid to ambience and physical surroundings.
Secondly, the Service Shops, where there is high degree of customization. The management must deal with skilled labour and the key challenges would be keeping cost down and quality up. Examples are hospital and auto repair.
The third type of service would be the Mass Service, where there is high level of customer contact and low level of customization. Managing and controlling the workforce would be the key and examples are retailing, wholesale trade and school.
Lastly, the Professional Service Firms, with a high degree of customer contact and customization. The key to this type of services is the managing and controlling of people, management's ability to deal with skilled workforce as well as keeping cost down and quality up. Some examples are doctors, lawyers, consulting firms and so on. Due to the growing importance of the service sector, academics and consultants worldwide have make efforts towards improving the management of service businesses.
Similarly, in India, the service sector has been growing rapidly over the last decade or so and the trend is likely to continue. If one describes an economy based on its major economic sector, then India made the transition from an agricultural economy to a service economy in 1979. In 1985, the service sector accounted for 47 per cent of GDP, having expanded at an average annual growth rate of 7 per cent between 1980 and 1985 The share of services sector in the real GDP in India has surpassed that of agriculture and industry at a relatively faster pace as compared to other industrialized nations.
Service sector has become the main contributor to the GDP not merely in developed economies like U.S.A.(71%), Japan(60%) & U.K.(67%) but also in developing economies like China(33%), Indonesia(41%), Pakistan(50%) & Brazil(56%).
PROBLEMS FACED BY CHINA IN THE
SERVICE SECTOR:
In China, banks continue to be keen on providing support to larger players and are playing a relatively small role in financing the private firms who are rewriting its history.
While its banking system made good progress in divorcing itself from interference by government, it still has a long way to go. There is evidence that the government still encourages lending to ailing State Enterprises. Again one gets to see the same moral hazard that is omnipresent. Banks still don't consider bad loans given to State Enterprises a serious problem.
At the basic level the problems are similar to those faced by any banking system that grows under the socialist legacy. Competition is very much limited. Profit motive is largely absent. The state ownership of banks and private ownership of business is big mismatch. Unless banks are also privatized, they are unlikely to develop profit motive.
the banking sector needs to be opened up for foreign competition and foreign ownership. Deregulation of interest rates will be another area of big change. The change is already visible with many banks gearing up for listing of their shares.
The state-owned banks saddled with about $150 bn of NPAs are considered technically bankrupt. Though the bad debts have been transferred to AMCs, it merely transfers the burden from one to another. The bottom line is that the system has to bear the cost of these NPAs. With lack of alternative avenues of investment in the market place, banks are still flush with deposits and the state guarantee is also construed as risk free investment. The need of the hour is to totally liberate the banking system .
CHINA Vs. INDIA
A COMPARITIVE STUDY
China and India each have a population of over 1 billion people. Their collective population amounts to more than 33% of the world population. Their countries are geographically large and their population is composed of a wide range of ethnicity, each speaking their own language or dialect. Yet, over the last 20 years, China's GDP growth, GDP per capita growth and labour productivity have been significantly higher than that of India. Why is this? What should India do to compete with China and establish itself as the world's workshop, factory and supplier of quality goods and services? Although India has the major human resource, it has failed to utilise its potential to create a vibrant manufacturing sector like that of China There was not much difference in the economic performance roughly until 1980, when the per capita incomes were also similar. Over the last quarter century, both instituted economic reforms and economic growth accelerated.
As the history goes, in 1947 India achieved independence and it is in the year 1949 that in China communists assumed power. Both the economies made modest beginning toward industrialization. In the early 1950s, China was better placed than India to extract resources from agriculture to finance the planned industrialization program. India didn't pay attention to agriculture until the food crisis of the 1966-67.
China's current account balance stands at a huge plus, at nearly $30 billions, while for India it has been a minus throughout the last four decades.
China's FDI strength stands apart. Over 75 percent of FDI that China received, went to new enterprises. In India, about 65 percent of the little FDI went into M&A.
Another area where India failed and China achieved immensely is the area of labor reform. India succeeded in overprotecting the interests of workmen making the restructuring of the industry impossible
China embraced globalization and trade enthusiastically, welcoming foreign direct investment with no inhibitions, and gradually gaining control of world markets for low-tech labor-intensive manufactures.
China initiated reforms a decade earlier than India's reform. China's economy grew at double the rate of India's during the '80s and early '90s. While successive Indian governments restricted the import of technology from the West and Japan, the Chinese governments encouraged them.
As a result, the gap widened considerably. While reforms in India are supposed to have been initiated in 1991, the doctrinaire socialist policy had begun to be diluted in the second innings of Indira Gandhi.
The process of liberalization continued under Rajiv Gandhi, and more dramatically after 1991. The growth rate doubled from the previous rate, but still lagged that of China.
The result has been that starting with more or less the same per capita incomes 25 years back, Chinese incomes today are double that of India's -- a result not only of faster GDP growth, but also of a lower population increase.
Today, apart from higher incomes and lower poverty, the areas in which China is far ahead of us are literacy, FDI, labor rationalization in the public sector and infrastructure investments.
Thus, the post-reform China has successfully created manufacturing conditions that have redefined the concept of productivity. With interest rates being relatively low at around 4-6 percent, high productivity of labor, enabling infrastructure, lower input costs, Chinese private firms have evolved themselves into mighty price warriors.
THE TVE PHENOMENON:
The real force behind China's economic achievement appears to be the country's ability to take the industry to rural China as against the common model of industry concentration in urban cities.
Harbingers of this revolution is something called 'Town and Village Enterprises (TVEs). The TVE phenomenon that led to worldwide spread of China's standard and cheap products . By the 1980s the State Enterprises (the public sector companies) were losing steam. This led to displacement of many skilled workers. They had the choice of returning to their native places.
About the same time the Non-Resident Chinese became wealthy and were willing to play venture capitalists. They provided funds to the homeland's businesses, which promised a good return. They found that the rural entrepreneurship coupled with the skilled worker from the big industry was an ideal combination to unleash a revolution. They not only funded these businesses but also acted as buyback agents of the production.
Special thrust was given to light and medium enterprises where investments required are limited. This strategy delivered results. Smaller private enterprises emerged as a force to reckon with. It led to rapid economic growth. Production of consumer goods increased. A consequent rise in exports and foreign currency earnings led to a general rise in personal incomes.
LIBERALISATION OF INDIAN ECONOMY
Since the start of liberalization of its economy in 1991, India has been going through an epochal transformation into one of the world's fastest growing economies. Its gross domestic product rate was picked up from 1.3 % in 1191 to 1992 to 7.8 % in 119-1997 and despite a global slowdown, moved up from 4.4% in 2000-01 to 5.6% in 2001-2002. Its GDP for 2002-2007 is currently targeted at 8%. New investment opportunities for 2002-2007 total sum of $1.5 trillion spread over the various sectors such as agriculture, bio-technology, communications, electricity, financial services, manufacturing, mining, trade and transport.
Financial liberalization consists of 3 sets of measures:
The pre- liberalisation period visualized a subordination of the financial system to the perceived needs of economic development. To this end, the interest rates were kept low. Banks and financial institutions were required to hold government securities upto a certain percent of their total liabilities, permitting the easy sale and cheap servicing of public debt, credit was directed to priority sectors , especially agriculture, the RBI was retained as a part of the government and hence accountable to the parliament for its actions. There were problems with this regime arising from the fact that the economy was experiencing capitalist development and hence the credit needs of vast masses of small producers and even small capitalist could not be met cheaply from institutional sources. But within this overall constrain the logic of the regime was to make the financial sector serve the needs of development, which, it was believed, necessitated its four features, namely:
The purpose of financial liberalization is to reverse all these features
In short, the purpose of financial sector reforms is to make the financial sector an aliquot part of globalised finance.
An economy that has undertaken financial liberalization also becomes vulnerable to crisis. When short term funds flow in they tend to cause an appreciation of the exchange rate, the consequence of which is to make imports cheaper relative to home production and hence need to deindustrialization. But if this is avoided through the central bank intervention that supports the exchange rate by holding foreign exchange reserves, then that in turn enlarges liquidity in the economy which is typically used either for an expansion of luxury consumption or for an expansion of investment in the domestic non-tradable sector such as real estate, or for financing speculative booms in asset markets especially the stock market. When short funds begin to flow out, there is both a downward pressure on the exchange rate and a collapse of asset prices, which reinforce one another and cause an avalance of outflow. Efforts by the central bank to manage the forex market by raising the interest rate to induce short term funds to say or to come back, have very little effect or even have the opposite effect of further enhancing outflows by aggravating the asset market to collapse.
On the other hand, interest rate increases which leads to a contraction of the real economy. Thus, while the inflow of short term funds, generally, has little impact by way of increasing the growth rate of the real economy, the withdrawal of short term funds does affect the real economy adversely.
Effect of liberalization on the various cross-sections of the Indian society:
Liberalization has greatly benifitted the external sector. The balance of payments, positions is quite comfortable. The current account deficit is far from significant, and foreign exchange reserves are growing steadily. The current level is well above what we need for our developmental purposes. The exchange rate has remained steady equally encouraging is a decline in the size of external debt and the debt servicing burden. All these should boost confidence of the foreign investors in the long term prospect of the economy and one can expect them to continue investing in India.
The economic reform continues to remain focused on facilitating foreign investment and liberalization of trade. Policy liberalization has been significant in this respect. The domestic market is exposed to external competition. However, the economic reform still lacks its focus on the imperative of restructuring and competitiveness building of the indegenious industry that continues to suffer from inherent disadvantages of high capital costs, poor insfrastructure, irrational duty structure, strangulating labour laws, cumbersome procedures and numerous systematic inefficiencies.
The basic objectives behind liberalization of the FDI policy namely:
Have not been achieved so far. But in many sectors it has destabilized the indigenous enterprises and in certain hi-tech sectors, the foreign companies have secured total control of the markets, even as they have brought little by way of investment. In other words, foreign companies are gaining control of the domestic market at a relatively lower cost and without developing significant stake in the economy.
CAUSES OF LIBERALISATION IN CHINA
In the early 1990s was that after Tiananmen Square in 1989, the conservative economic planners took control of the country. At that time the State Owned Enterprises (SOEs) ie. China's PSUs were virtually bankrupt because of the tight economic controls that the central planners imposed on the country.
In the 1980s, there was some private sector activity, but when these activities became politically and ideologically problematic for the leadership after Tiananmen, they cracked down on private firms. So in 1991 there was a substantial reduction of economic growth and the Chinese external sector ran into difficulty. It was this difficulty that prompted the leadership to open up the Chinese economy to FDIs.
MANUFACTURING SECTORS OF CHINA AND
INDIA
China's emphasis on manufacturing is confirmed by the fact that among the three sectors in China, manufacturing takes the largest slice of the pie, while in India, it is third behind services and agriculture. Apart from this, the Chinese are so competitive on a global basis that most nations, including India, find them as a force to reckon with in textiles, consumer durables, and so on. An essential offshoot of this is the huge trade surplus China enjoys. Its exports race ahead despite global slow down and its foreign investment figures are much higher than India
Most people associate China's economy with over investment in singular and unprofitable pursuit of export products, low quality goods and marginal pricing. The truth is that China's growth is the result of not only significant investment, foreign and domestic, but by a sharp increase in labour productivity, a growing export based on foreign investment, strong domestic demand fed by low prices and improved quality of products. The price competitiveness of China's products is unmatched. China's businesses seem to operate on the principle of sales maximization. The strategy of sales maximization calls for setting of prices at very low levels so as to create markets. The focus being maximization of sales the resultant business model necessitated concentration on such products that are amenable to mass production and mass consumption. With pricing set at rates unimaginable to competitors abroad, the product offers tremendous value for money.
That must explain why Nike produces 40% of its footwear in China while Galanz has 30% of the global market for microwave ovens because of quality enhancements in Chinese factories.
China's lower prices are not just due to cheaper wages - Indian wages are comparable - but to lower taxes, lower cost of capital, higher productivity of workers and shorter delivery time.
Lower taxes, import duties and raw material costs are important factors but a competitive environment and a higher level of component manufacturers also help.
PRODUCT SPECIFIC EXAMPLES
China produces eight times more ceiling fans than India and half the price advantage is because of India's high indirect taxes that affect domestic and export sales
CAUSES OF STAGNATION OF
INDIA'S MANUFACTURING SECTOR
LACK OF INFRASTRUCTURAL DEVELOPMENT:
1. The sheer speed with which infrastructure projects get implemented in China is commendable. Financial Times rightly commented (January 21, 2004) "if thousands of villagers have to be moved to make way for roads or power stations, so be it: investment in infrastructure underpins China's success."
Eg. The way the giant Three Gorges Dam has come up in China,in contrast to the Narmada Dam project is an example of how the infrastructure projects in India are frustrated by misguided individuals going to court. This is how democracy has been used in India to hinder growth.
Agitation, endless court cases, environmentalists, and other manifestations of a democratic, rule-of-law society have not only delayed implementation perhaps by a decade, but also added enormously to the costs while direct cost escalation is perhaps only a small part of the total cost to the economy. One can only imagine the output lost because of the delays in the starting of the project.
India consumes almost thrice as much energy as any average rich developed country produces. Generally, the rich countries use less oil per unit of output than the developing countries. This is because of variety of reasons like better capital stock and modern infrastructure.
For Example, the fact that the rich countries are less dependent on manufacturing also ahelps them to conserve energy. This is where india's energy-inefficient ways stand out. China, whose economy is powered by manufacturing, is less energy-intensive than India. India's energy intensity is almost 24% higher than china's despite the fact that both the countries are at around the same level of development.
REMEDIAL STEPS
India needs to immediately set right this situation and give primacy to manufacturing as China has done.In the process, the following steps may have to be taken:
Corporatise Indian railways into indian railways corporation and focus on the core business and spin off the rest. Railways must get separate instituions for policy regulation and management.
CONCLUSION
