3 - Services-led Growth and Employment in India

Summary

The Indian economy's transition to a high growth path in the 1990s is widely believed to have been triggered by accelerated growth of the service sector. And the acceleration in the growth of services has seemingly been fostered by globalization. These developments, when viewed in a perspective of international experience, appear quite extraordinary. In today's developed economies, manufacturing led the growth process in early stages of development and services took over the lead role only after a fairly high level of development had been reached. The same pattern has also been observed in the East Asian ‘tiger’ economies and in China in more recent periods. In these Asian economies, moreover, openness to trade stimulated growth by stimulating growth of manufacturing and not growth of services. India's recent experience appears to defy these patterns. Here services-led growth has come at an early stage of development and increased openness appears to have stimulated growth of services rather than growth of manufacturing.

Arguably, the ‘stylized fact’ about the role of services in economic growth is actually less than well established. Several studies claimed that, across countries, no significant relationship between the share of services in GDP and per capita GDP could be found. Several others, however, did find a significant positive relationship between those variables. A recent study seeks to reconcile these contradictory findings by proposing the idea of ‘two waves of service-sector growth’, a first wave coming at an early stage of development and a second wave at a relatively advanced stage of development.

The steady growth of the share of manufacturing in output with per capita income, on the other hand, is a very well-established stylized fact. Against this backdrop, it has been argued that services have now acquired many of the characteristics of manufacturing (‘learning by doing’ effects at enterprise level, spill over effects at macroeconomic level and international tradability) so that it can serve as a lead sector in economic growth just as well as manufacturing.