Service Sector: Indias Engine of Growth

Topics: Economy, Tertiary sector of the economy, Economics Pages: 10 (3066 words) Published: June 23, 2010
* Dr.Pranav Saraswat Abstract

This paper analyzes the factors behind the recent growth of India’s services sector. The high growth of services output in the 1990s was mostly due to the rapid expansion of Communication, banking, business services (including the IT sector) and community Services. While factors such as a high income elasticity of demand for services, increasing input usage of services by other sectors, and rising exports, were important in boosting services growth in the 1990s, supply side factors including reforms and technological advances also played significant roles. Going forward, the growth potential of Indian services exports is well known, but the paper also finds considerable scope for growth in the Indian service economy provided that deregulation continues. In addition, the paper shows that employment growth in the Indian services sector has been quite modest, thus underscoring the need for industry and agriculture to also grow rapidly.

A striking feature of India’s growth performance over the past decade has been the strength Of its services sector. It found that the average services grew more slowly than industry Between 1951 and 1990. Growth of services picked up in the 1980s, and further accelerated in the 1990s, when it averaged 7.5 percent a year, thus providing a valuable prop to industry And agriculture, which grew on average by 5.8 percent and 3.1 percent respectively. two Most Forecasters expect that services will grow at similar if not higher rates over the next few years. Growth in the services sector has also been less cyclical and more stable than growth in industry and agriculture.

The emergence of services as the most dynamic sector of the Indian economy has in many ways been a revolution. The most visible and well-known dimension of the take-off in services has been in software and information technology (IT)-enabled services (including call centers, software design, and business process outsourcing). However, growth in services in India has been much more broad-based than IT. In fact, although IT exports have had a profound impact on the balance of payments, the sector remains a small component of GDP.

*Assiatant Professor, Shrinathji Institute of Management, Nathdwara

As of 2003, business services (which includes IT) were only about 1¾ percent of GDP,

accounting for just 3 percent of total services output.
The paper shows that almost all service sub sectors in India have grown faster than GDP over time, but the pick-up in growth in the 1990s was the strongest in business services, communication, and banking services,3 followed by hotels and restaurants and community services. These activities together account for the entire acceleration in services growth in the 1990s. The growth in public administration and defense, real estate, storage, transport, and personal services in the 1990s was broadly similar to that in the previous decades. Rapid growth of the services sector is not unique to India. The existing literature shows that as an economy matures the share of services in output increases consistently. To begin with, the increase occurs along with an increase in the share of industry. Thereafter, the services share grows more rapidly, accompanied by a stagnant or declining share of the industrial sector.

In this paper, banking services includes activities of commercial, post office, and savings banks, as well as nonbank financial institutions, cooperative credit societies, and employee provident funds. It excludes the insurance sector. This paper explores the factors behind the dynamism of the services sector in India. One explanation suggested in the literature for fast growth in services is that the income elasticity of demand for services is greater than one. Hence, the final demand for services grows faster than the demand...

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