As is known to any student of economics, there are three phases for a developed capitalist economy: primary, secondary and tertiary. The primary phase includes agriculture, fishing, mining etc., the secondary phase takes in mainly manufacturing and the third phase is comprised of post industrialized service phase.
All the economies of the developed countries of our time, from the United States to Western Europe, to Japan and South Korea, evolved through all three phases. Most of these developed countries are now in the post-industrial phase, with services as the prime contributor to their GDPs.
The collapse of communism in the late 1980s, and the subsequent globalization and liberalization, followed by the introduction of market economies in the former communist states and third world countries resulted in a theatrical shift in the world economy, but in fact this trend had its origin even earlier.
Without compromising on the monopoly of communist power and despite its reluctance to embrace democracy, China opened its closed economy, began to create a world class infrastructure, and turned to attracting foreign direct investment. This transformation in the Chinese economic policy was initiated by Deng Xiaoping in 1978, a decade before the collapse of communism in Eastern Europe.
India, the second largest country in the world, embraced the spirit of market economy in toto thirteen years later, in 1991, as advocated by then finance minister, Dr. Manmohan Sing, who is currently the prime minister. The beginning of the last decade of the last century witnessed an expeditious change in the business model of Western Europe and the United States with a substantial portion of the manufacturing and services being outsourced to third world countries, especially China and India.
Outsourcing has had a very significant impact on the economies of China and India; both having grown at a very fast pace and their roles in international monetary affairs becoming vital.
But from a long term perspective, how far can India continue the momentum of her economic growth? The availability of cheap labor was the primary reason why western business giants preferred outsourcing to the third world. China made use of the manufacturing outsourcing with the support of the first-rate infrastructure it created and India took advantage of the services outsourcing with the support of the technical talent and English proficiency it inherited from its colonial legacy.
But in services outsourcing, India’s case seems to be different now. Many of the world’s leading business analysts are of the opinion that the Indian outsourcing model has already reached a saturation point. The information technology (IT) sector has been the main beneficiary of the Indian outsourcing model, but the traditional business model of Indian’s IT outsourcing industry, providing low margin, commodity IT services at high volume, has “maxed out”, according to a new report from Constellation Research.
This view is echoed by eminent Indian business stewards such as S Gopalakrishnan, former CEO of Infosys. Mr. Gopalakrishnan said that if the shift to newer models of billing by outsourcing customers was dramatic, the immediate revenue earned from deploying business software products could be hit.
If we go by the opinion of the experts, India’s revenue from services exports will drastically fall. With services comprising 55 percent of the Indian economy, how long can the country sustain the economic growth that it has been enjoying for the last generation?
So where has India gone wrong? Answering this question doesn’t require the expertise of a Manmohan Singh or an Amarthya Sen. India focused more on services which did not need world class infrastructure like expressways, bullet trains and airports and ignored essentials such as energy generation, mining and rural development.
Indeed, there will come a day that China’s labor cost advantage will no longer be relevant. But by then, the Chinese economy will have entered the post-industrial service phase and will continue to the tertiary phase of economic progress.
At the same time, the negligence on the part of the Indian state in providing education to the backward sections of its society has been oxymoronic, as India has so far been modeling a service driven economy. Even in this respect China has done better, as its socialist policy was not just rhetorical like India’s, but implemented into practice.
Coherently, unlike other major developing and developed economies, even prior to industrialization, the Indian economy has entered a post-industrial service phase, and this trend is alarming. It may not be too late, but India has to be retrospective about its economic model and she has to go back to industrialization in addition to promoting the service sector.