Industrialization Trends

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Services-led industrialization in India: Assessment and lessons Nirvikar Singh* 1. Introduction
India has become one of the fastest growing economies in the world over the last two decades, arguably aided in this performance by economic reforms. One of the striking aspects of India’s recent growth has been the dynamism of the service sector, particularly information technology (IT) and IT enabled services (ITES), while, in contrast, manufacturing has been less robust. The contribution of the service sector was particularly striking in the 1990s, which not only saw rapid growth (averaging over 6 per cent since 1992), but also a high contribution – over 60 per cent (Hansda, 2001) – from services. This growth trajectory, which has been termed “services-led” industrialization, or even a “services revolution” (Gordon and Gupta, 2004), seems to stand out from the previous experience of economic development, which followed the traditional path from agriculture to manufacturing, with services becoming important at a later stage. In India, in contrast, there was a sharp increase in the share of services in GDP, from 37 per cent in 1980 to 49 per cent in 2002,1 while the share of manufacturing remained about the same, at 16 per cent (Kochhar et al., 2006). Thus questions arise about India’s development pattern, including its nature, sustainability and replicability. This paper reviews the recent growth experience of India, identifies the major contributing factors to its pattern of development, and examines the prospects for further “services-led” industrialization in India. The analysis will draw on theoretical models as well as case studies of the Indian experience. The structure of the paper is as follows. The next section provides a conceptual framework for the examination of the Indian experience. In particular, we discuss the nature of services, their distinction from products, and their categorization. We argue that the precise nature of the services being considered is important for any analysis of growth impacts, and that one therefore has to go beyond broad national income accounts categories to understand the role of services in industrialization. Section 3 provides a brief overview of India’s overall growth experience, followed by a more detailed examination of the contribution of the service sector to growth, and the relative performance of manufacturing and agriculture in Section 4. Section 5 * Department of Economics and Santa Cruz Centre for International Economics, University of California, Santa Cruz.


Industrial Development for the 21st Century

examines the potential for spillovers from IT, ITES and other service sectors such as financial services, to the rest of the economy. We draw on econometric work on productivity growth, as well as input-output analysis of linkages to understand these possible spillovers. It is possible, based on this evidence, to hypothesize that India’s manufacturing sector development may have been constrained, at least in part, by weaknesses in key service sectors such as transportation and electricity. In fact, other evidence suggests that telecommunications reforms were also critical for the rapid growth in IT and ITES.2 In Section 6, we consider the particular role of international trade in services. This deserves special treatment because of its growing importance, and because balance of payments constraints have often been major barriers to stable growth for developing countries. In Section 7 we discuss the consequences for employment of different growth paths, and the challenges of education and manpower training to support and sustain India’s development path. Section 8 briefly considers the social and environmental issues associated with “services-led” or alternative development paths. The focus in this section is on regional inequality issues, as well as impacts that do not necessarily manifest themselves in the national income accounts and growth statistics....
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