Service Sector in Bihar

In recent years, Bihar which is primarily an agricultural economy with 75% of

rural population has seen an increase in the contribution of service sector to the
State Domestic Product. The contribution of service sector to Bihar’s GSDP has
increased from 35% in 1980-81 to almost 51% in 2008-09 at a CAGR of 5.12%
per year. This growth is quite puzzling since rapid growth of services represents a
mature economy whereas since the last two decades, Bihar has been the worst
performing state in terms of GDP growth in India. Also its per capita income of
Rs. 7168 and a low literacy rate of 47% shows that it is a poor performer both in
terms of economic and human development. So, the question arises as to what
has driven the rapid surge in services growth rate in the state.

This paper discusses the nature of growth of Services in Bihar. Here, in section I
we would compare the growth of GDP and Services in Bihar with the overall
India level. In Section II we would look into the sectoral contribution of services
in Bihar while in Section III we would see how the GDP and Services Deflator
have grown from 1980-81 to 2007-08. We also discuss other important features
of the Services led growth in the state. In Section IV, we would conclude our
discussion about what is the true characteristic of the service sector in Bihar. For
measuring State Domestic Product, we here use the Gross measure of it, taken at
the 1999-00 price level (EPWRF). Also for convenience of analysis, Jharkhand is
not taken to be a separate State and hence constitutes a part of Bihar.

Section I

India has experienced a rapid surge in the growth of services with services sector
contributed 55% of India’s real gross domestic product (GDP) at factor cost,
having grown annually at 8% since 1990-91, to become the economy’s leading
sector [Nagraj 2009]. During the same period services in Bihar too have grown at
the rate of 5.12% where Industry and Agriculture grew at 1.31 and 4.35 percent
repectively. Table 1 shows that there has been a deceleration in agricultural
growth both in Bihar as well as India, the magnitude being greater in the former.
Over the years services and industries have grown but Bihar has had more
Industrial growth than India overall. This may seen as an aberration since high
industrial growth in Bihar is due to the base effect and not rapid industrialization.
The growth of services in Bihar is less than the overall India growth rate in
services.

The terms of trade of services with agriculture and industry both in Bihar and
India show a different trend (Fig 1). The increase in the share of services has been
accompanied by the rapid decline in agriculture. At the all India level, services
share has increased at a greater rate than industry after 2003-05 while in Bihar,
services though have easily increased at a greater rate than agriculture, it has not
outshone the industrial performance though with frequent divergence and
convergence. There is no clear trend as is the case with all-India level.

The main contributors to Services growth over the years has been the Hotel,
Trades, Transport and Communications. This phenomenon is observed both at
the Bihar and all-India level. The other major contributor the services growth has
been the growth in other services such as health, education etc. Rapid growth of
IT and IT enabled services have been the flag bearer of services led growth in
India because of FDI inflows, but this phenomenon is not to be seen in Bihar.

Section II

The rapid growth in Services in Bihar has been due to Trade, Transport, Hotels &
Restaurants and Banking & Insurance sector till 1995, but from 1996 onwards
there has been a rapid growth of Telecommunication sector thereby pulling up
the services sector growth. From the Table 2, we see that still Trade, Hotels&
Restaurants continues to be the major component of the services just because of
the high size(30% in 2006-07), but their contribution to the growth has been
low(Table) at 4% in 2006-07. Communications though a small part of the
services has been the greatest contributor to the growth in services. During the 5-
year period of 1981-86, the contribution of communications to the growth in
services in 3% and this increased to 20% during 1995-2000. The entrance of
private players and mobile phones has been the reason behind this phenomenal
growth. The number of GSM subscribers have increased from 9.20 lakhs to 1.27
crore in 2008. Banking and Insurance has been a small contributor to the services
at only around due to lack of credit advances. Bihar has less than 8% of total
Bank branches in India and a very low Credit-Deposit ratio of 32% as compared
with the all India average of 73% (2007). The expansion of banking sector has
been slow at an average growth of 0.61% during the last 4 years with Private
Banks very much reluctant to enter the state.

The growth in transport services other than Railways has been at around 3.43 %
annually while Railways have grown at an annual rate of 2.74%. It is quite
surprising to find that the growth of Railways has been slow, particularly their
low contribution to the growth of Services, with the last three Railway Ministers
being from Bihar and expansion in the number of trains crossing through Bihar.
The number of motor vehicles has increased by 239 percent as compared to a 197
percent increase at all-India level [Deptt. of Transport, GoB].

The share of public administration in services has increased from 9% in 1980-81

to 12% in 2006-07 but their contribution to the growth in services has seen a
sharp dip with it being negative for the last 15 years. There has been a change in
the composition with ratio of filled up posts has varied between 80.7 percent in
2002-03 to 76.0 percent in 2007-08[Bihar Economic Survey 2007]. Voluntary
Retirement schemes implemented rigorously by the State Government have
another major cause. Other services such as social, community and private
services have grown at an annual rate of 4.67% from 1980. Their overall
contribution to the services has declined marginally from 27% in 1980-81 to 23%
in 2006-07. With other infrastructure facilities lacking and a poor law and order
situation, the Real Estate, Ownership and Dwelling as a proportion of services
has declined from 12% in 1980-81 to 8% in 2006-07.
 Section III

During the period 1980-2007, in Bihar, the service sector price deflator and GDP
price deflator have risen by 7.55% and 7.46% respectively (Figure 2). This gets
reflected in the high Consumer Price Index of 484 for Urban Non-manual
workers (CPI-UNMW) [Bihar Economic Survey 2007].

Figure 3 shows that the deflators for GDP and services though have declined in
values since 1980’s, but after 1991-95 the latter has declined at a greater rate
suggesting a lowering of CPI-UNMW after the 1991-95. The growth of services
in Bihar has been marked by an increase in the unregistered (unorganized) sector
implying that most of the growth has been where the employed labour are outside
the social safety net. Total percentage of workforce employed by services in
Bihar is only 2.6%, half of the 5% at the national level.

Section IV

The services sector growth in Bihar could be best explained as the failure of
Industries and Agriculture sector. The failure of agriculture and industry to
provide gainful employment has led to the population shifting to the services as
an alternative. This growth of services in Bihar is not much in terms of absolute
value. While the share of Bihar GDP out of India’s GDP is 4.23%, the share of
services is only 3.23%. While the rest of India has seen as Banking and other
financial services growth and rapid growth in business due to high investment,
both domestic and foreign, nothing of this is evident in Bihar. Ideally the growth
in Services should have brought about with it an increase in per-capita income,
even which is absent.

The sustainability of services sector growth in Bihar is doubtful since it is mostly

in urban areas which constitute only 10.5% of the population. This service led
growth has also not led to any decline in poverty which stands at 42.6% whereas
the all-India figure stands at 27%. For Bihar to sustain its growth rate of the last 5
years at 5.6%, the agriculture and industries also grow at a healthy rate in unison
with the services. Industry in Bihar, though has grown at a faster during the last
decade than earlier, even though the volume is low. This growth phenomenon has
started after services growth has stabilized at around 6-7% of the domestic
product.
 Appendix
Table 1: Sectoral Growth
1980- 1986- 1991- 1996- 2001-
Sectors 1985 1990 1996 2000 2008
Bihar
Agriculture 5.11 -2.56 -2.24 3.07 1.35
Industry 7.93 7.19 -0.97 10.41 14.32
Services 5.43 5.43 2.96 7.82 6.66
India
Agriculture 4.36 4.24 3.50 3.68 2.88
Industry 6.73 7.65 5.18 3.95 7.15
Services 5.35 7.02 5.58 8.38 9.29

Figure 1: Terms of Trade of Services

Ratio of s e rvice s w ith agriculture and indus try
4

3.5

2.5
ratio

1.5

0.5

0 7
5
3
7

1
1
9

5
7
3

5
1

-0
-0
-0
-9

-9

-0
-9

-9

-9
-8
-8
-8

-8
-8

06
04
02
96

00
90

92

94

98
88
86
82
80

84

Bihar(s ervice/indus try) Ye ar Bihar(s ervice/agriculture)

20
20
20

20
19

19

19

19

19
19
19
19

19
19

India(s ervice/agriculture) India(s ervice/indus ty)

Table 3: Sectoral Growth of Services in Bihar

1980- 1986- 1991- 1996- 2001-
Components 1985 1990 1995 2000 2007
Railways 2.85 4.00 2.49 0.25 1.27
Transport by other means 2.03 2.66 2.03 6.23 3.83
Communication 3.34 7.23 10.67 19.51 17.12
Trade, Hotels& Restaurants 7.12 4.76 2.01 10.02 11.37
Banking & Insurance 8.98 17.97 -2.28 17.09 5.41
Real Estate & Business 2.02 2.09 2.57 6.58 5.93
Public Administration 6.20 7.61 6.33 8.47 4.26
Others 5.38 7.16 5.42 2.03 3.28
Services(Total) 5.43 5.43 2.96 7.82 6.66
GSDP 5.62 3.29 0.90 6.19 5.26

Table 4: GDP and Services growth in Bihar

1980- 1986- 1991- 1996- 2001-
Years 1985 1990 1995 2000 2007
GSDP 5.62 3.29 0.90 6.19 5.26
 Services 5.43 5.43 2.96 7.82 6.66

Table 5: Sectoral Contribution to the Growth in Services in Bihar

1980- 1986- 1991- 1996- 2001-
Components 1985 1990 1996 2000 2007
Communications -1.99 1.71 7.49 10.85 9.80
Railways -2.44 -1.35 -0.46 -7.02 -5.06
Tranport_other than railways 0.20 -2.62 -0.91 -1.48 -2.66
Trade,Hotels&Restaurants 1.60 -0.64 -0.93 2.05 4.41
Banking&Insurance 3.37 11.89 -5.09 8.60 -1.18
Real Estate&Business -3.24 -3.17 -0.38 -1.15 -0.68
Public administration 0.73 -3.17 -0.38 -1.15 -0.68
Other services -0.05 2.07 3.27 0.61 -2.26

Figure 2: GSDP and Services Deflator for Bihar

Bihar GSDP and Services Deflator

250

200

150
Index

100

50

0
19 - 81

19 - 82

19 - 83

19 - 84

20 - 04

20 - 05
19 - 85

19 - 86

20 - 06
87 7

7
19 - 88

19 - 89

19 - 90

19 - 91

19 - 92

19 - 93

94 4
19 - 95

19 - 96

19 - 97

19 - 98

19 - 99

00 0
20 - 01

20 - 02

20 - 03
19 - 8

-0
19 - 9

20 - 0
80

81

82

04
83

84

85

03
86

05

06
88

89

90

91

92

93

95

96

97

98

99

01

02
19

year

GDP Deflator Services Deflator

Figure 3: Growth in the GDP and Services Deflator

CAGR of Deflators
12

10
Rate of growth(in%)

0
1980-1985 1986-1990 1991-1995 1996-2000 2000-2007

GDP Deflator Services Deflator