Understanding growth: Challenges and prospects
There is no need for Nepal to have one sector-led growth policy. Our economy does not have to be a one-trick pony, and we have to move away from the ‘one size fits all’ recipe so as to achieve sustainable economic growth
The growth projection of 5.89 per cent for the current fiscal year unveiled by the Central Bureau of Statistics (CBS) in April is a silver lining.
As per the CBS, the growth is largely driven by construction activities and the service sector. The service sector will continue to be a major contributor to the nation’s GDP followed by agriculture and industrial sectors. There has been no growth in the primary sector or agrarian sector, which is recorded as low as 2.7 per cent. Meanwhile, the industrial sector is expected to grow through increased post-quake reconstruction activities.
A look at the sector-wise contribution to overall GDP over the last decade (2009-10 to 2017-18) reveals that the service sector has remained a major contributor to nation’s GDP followed by agriculture (primary) and industry (secondary) over the period. Nevertheless, the growth pattern in these sectors has not been encouraging over these years.
Majority of classical literature and normal textbooks on economics have argued for several years that economic growth is associated with the manufacturing sector. But when it comes to Nepal, the case is different. Contrary to the conventional growth path, the service sector’s contribution has always remained higher. Countries that have achieved substantial income convergence towards more developed economies since the 1960s have in general experienced robust increase in manufacturing employment and exports. The East Asian Tigers have success stories of how the traditional growth path goes -- industrialisation from agriculture through manufacturing and later to services.
Surprisingly, the higher contribution from the service sector is not a peculiar trend. The World Economic Outlook 2018 by the International Monetary Fund highlighted that share of the service sector in overall contribution has risen almost everywhere, reflecting a shift from manufacturing based in advanced economies and mostly a shift from agriculture in developing economies. Also, looking at the global employment, share of services in global employment has increased by about 16 percentage points since the 1970s. Moreover, average productivity growth in services in many developing economies, including China, India and some sub-Saharan African countries, has recently exceeded that of manufacturing.
India also appears to be moving away from the traditional path by globalising through service-led activities, which is mainly aided by information technology and outsourcing. Service sector-led growth has been the striking feature of structural transformation of late.
In terms of contribution to GDP and employment, the service sector is now contributing more than manufacturing in both low and high income countries. This has stoked debates as to which sector -- service or manufacturing -- would be the main source of growth for developing countries like Nepal at present.
Despite higher contribution from the service sector (approximately more than 50 per cent in recent years), the stagnation in the sector over the last decade has failed to enable this sector to absorb the excess labour which has resulted in acute manpower drain. The service sector has been able to absorb only 20 per cent of the total population over the decade.
Despite more than 60 per cent of the population still engaged in agriculture, this sector has been in a dismal state for almost two decades. Investment in the agriculture sector will certainly boost its productivity, but with less elastic in nature as compared to other sector, the overall GDP growth may saturate at a certain point. Therefore, in addition to investment in the primary sector, the government needs to invest in other sectors -- such as service and industrial.
Nepal needs to channelise investment towards hydro-electricity, a comparative advantage sector.
The growth in the industrial sector has been less than 20 per cent over the last decade. Completion of current projects and additional investment in the sector can give a boost to the industrial sector, which will not only contribute to economy but also create more employment opportunities.
Besides, tourism has been the favourable sector which can facilitate the growth space for the service sector in coming years. Timely completion of some projects such as international airports in Pokhara and Bhairahawa and national roadways, along with other additional development activities related to the tourism sector, is likely to expand the growth in hotel, transport and communications services. Contribution from hotels and restaurants has been less than 5 per cent to overall service sector over the decade, suggesting a wide scope of growth in overall service sector in future.
Thus, it is highly likely that the service sector and industrial sector will grow at a greater pace in coming years. These likely improvements over the sector not only spur the growth in that particular sector but will also have a spill-over effect in the overall economy. Thus, prioritising the heads for capital expenditure in this line can be a decisive factor in the upcoming budget.
It is not necessary for us to have one sector-led growth policy. Our economy does not have to be a one-trick pony, and we have to move away from the “one size fits all” growth recipe.
Sharma is a consultant at National Institute of Public Finance and Policy, New Delhi