In Section II and III it was discussed that services, since the 1990s have become fundamentally more important in the manufacturing production structure, as observed by cross country analysis, more importantly in the developed economies. This is now an important element of productivity regime of the manufacturing sector.
Particularly, modern services like finance, communication and business services are important in contributing to the competitiveness of manufacturing production and exports (Felipe et. al, 2013). Felipe et. al. (2013) show that the role of services as an intermediate input in production is positively associated with the per capita income.
Given the nature of service revolution India has witnessed in terms of output growth, it becomes imperative to
analyse its role in the manufacturing production structure. Following Park (1989) manufacturing intensity of service use has been calculated as share of service inputs in total input cost of manufacturing sectors.
Table 8 below depicts the dependence structure of the manufacturing sector technology groups on modern producer services and traditional services15 for the benchmark IOTT years.
Table 8
Manufacturing dependence on services based on technology groups (service input cost as a percentage of total input cost)
S No. 1993-94
Services/Manufacturing technology groups*
LOW (1)
MLT (2)
MT (3)
HT (4)
Manufacturing (5)
1 Trade, Storage and Transport 22.5 18.0 16.0 20.0 19
2 Finance and Communication services 3.4 4.0 6.1 8.6 5
3 Services 28.6 24.4 25.5 29.5 27
1998-99 LOW
(1)
MLT (2)
MT (3)
HT (4)
Manufacturing (5)
1 Trade, Storage and Transport 17.3 16.8 13.4 16.7 16
2 Finance and Communication services 5.9 6.1 7.2 8.4 6
3 Services 25.8 25.6 24.3 25.9 25
2003-04 LOW
(1)
MLT (2)
MT (3)
HT (4)
Manufacturing (5)
1 Trade, Storage and Transport 21.3 14.1 12.8 11.2 16
2
Finance, Communication and Business
services 6.6 4.5 8.9 12.0 7
3 Services 28.9 18.9 23.8 24.7 24
2007-08 LOW
(1)
MLT (2)
MT (3)
HT (4)
Manufacturing (5)
1 Trade, Transport and Storage 22.6 14.3 13.1 13.9 17
2
Finance, Communication and Business
services 5.9 3.2 7.6 11.1 6
3 Services 30.4 18.1 21.5 27.7 23
2013-14 LOW
(1)
MLT (2)
MT (3)
HT (4)
Manufacturing (5)
1 Trade, Storage and Transport 14.3 7.6 9.3 8.6 10
2
Finance, Communication and Business
services 3.4 3.6 1.5 1.2 3
15 Modern Services: Services like banking and insurance, business and legal, computer-related and real estate services; Traditional Services:
Services like wholesale and retail trade, storage & warehousing and transport services (Eichengreen and Gupta; 2011)
3 Services 17.7 11.4 10.9 9.8 13 Source: Author‟s calculation based on IOTT 1993-94, 1998-99, 2003-04 and 2007-08, CSO, MOSPI, GOI and IOTT 2013-14 Kanhaiya and Saluja (2016)
Note: Data on “business services” is separately available only since 2003-04 IOTT. For the years 1993-94 and 1998- 99 “business services” category was not separately provided and was a part of a broader category of “other services”.
In Table 8 above, the columns (1)-(4) depict the dependence of all the four manufacturing technology groups on traditional services in row 1, modern services in row 2 and aggregate services in row 3 for each benchmark IOTT years. Column (5) for each year depicts the dependence of aggregate manufacturing on the services. This dependence is characterised by the share of input cost of these services in total input cost of the manufacturing sectors concerned. A systematic pattern that is clearly visible from Table 8 is that traditional services have been structurally most important services for the manufacturing sector as a whole and all the technology groups during the post reforms period. On the other hand, the reliance of manufacturing sector on modern services was virtually unaltered as opposed to the evidence that these services tend to become structurally important in manufacturing production with increasing per capita income shown in various cross country analyses like Park (1989), Park (1994), Francois & Reinert (1996), Guerrieri & Meliciani (2005), and Driemeier & Nayyar (2018). This observation is notably perverse in the light of rapid service sector growth in India during this period16. Another clear pattern that emerges from Table 8 is that medium technology and high technology manufacturing groups have been systematically more intensive users of modern services as compared low technology and medium low technology groups. This finding is intuitive in terms of the knowledge and skill intensive nature of medium technology and high technology manufacturing, but also depicts a structural duality between technology groups within the manufacturing sector. This indicates towards a relatively higher
integration between relatively more productive and skill intensive sectors of the Indian economy17. Studies like
16 This finding has also been discussed in detail in Talreja (2018) which shows that in its rapid growth phase during the post-reform era, the service sector and modern services did not witness an increased integration with the manufacturing sector as a whole. Final demand played an important role as a source of growth and demand for services in India during this period.
17In the year 2013-14, it can be noticed that there is a steep fall in dependence of manufacturing on services which is also reflected by the technology groups. The clear patterns of comparably greater integration higher technology groups (MT and HT) with modern services observed consistently from 1993-94 and 2007-08 is not seen in 2013-14. As a possible explanation, Talreja (2018) shows that the share of mining &
quarrying saw a steep rise in manufacturing input cost from 16 percent to 24 percent between 2007-08 to 2013-14 as the share of services declined from 23 percent to 13 percent during the same period. A closer analysis of the 2007-08 and 2013-14 IOTTs shows that the dependence of medium technology and high technology groups on natural resource based medium low technology manufacturing group (which is highly integrated with the mining & quarrying sector) increased from 26 percent and 9 percent to 36 percent and 20 percent, respectively. The period 2010-11 to 2014-15 also saw a steep slowdown in manufacturing sector value added growth and the medium & high technology group witnessed the slowest growth during the post-reforms period, during this period (See Table 4). This slowdown was accompanied by a negative growth of labour productivity and capital productivity (See Table 2 and Table 6, respectively) of the manufacturing sector which was much more
pronounced for the medium & high technology group. These findings suggest that a negative productivity growth of capital and labour and higher input costs from material based sectors could have contributed to such a dependence pattern of manufacturing groups on services as observed in 2013-14. But a definitive explanation requires a deeper inquiry of this issue.
Banga and Goldar (2005) and Mukherjee (2018) in their analysis of organised manufacturing sector show that in their estimated production function, services contributed positively to manufacturing sector productivity for the years 1980-81 to 1999-00 and 2000 to 2014, respectively. Mukherjee (2018) shows this evidence to be mixed at the disaggregate level. The former is a plant level analysis while the latter is a firm level analysis. Clearly, at a broad structural level in terms of industry/sectors this did not alter the pattern of reliance of the manufacturing sector on services during this period. While there is evidence of services impacting productivity in certain organised segments of manufacturing during this period, this did not alter the structural reliance of the manufacturing productivity regime on services during this period. On one hand this could be due to
heterogeneity in productivity regimes of manufacturing sector in terms of organised and unorganised sectors and in terms of technological groups and on the other hand on the nature of service sector growth in India itself.
Service sector growth has been shown to be more driven by final consumption demand and exports as compared to intermediate demand during its rapid growth phase (Talreja; 2018).