Indian Economy: Overserviced?

The latest Economic Survey of India indicates that India has the 2^nd fastest growing service sector in the world, second only to China. Over many past years the service sector has been championed as the cause of India’s fast economic growth.

The share of the tertiary sector has grown very rapidly, making India a ‘tertiarized’ economy- an economy in which the tertiary or the service sector dominates the primary and the secondary sector. Despite having an income level of a low middle income country, the share of the service sector in GDP in India is close to that of a high income country. Second, the service sector grew rapidly as compared with other countries.

India underwent a major economic policy overhaul in 1991- including policy reforms in external sector as well as domestic economy sector. As far as the reforms in the service sector are concerned, there was no separate policy package for the service sector per se. Unlike the secondary sector, the service sector did not get any comprehensive set of policy changes. However, the overall changes in policy regarding deregulation, opening up of FDI and privatization of services previously owned by government were important to the growth of service sector.

The employment in the service sector is very low. Thus some scholars have dubbed Indian economic growth as ‘jobless growth’ (Bhattacharya and Sakhtivel 2002). The service sector, which is recently the fastest growing sector, makes up the biggest part of the GDP, but employs only 28 percent of the population. Thus, the service sector is a “major economic sector” but a “minor contributor to employment” (Papopla 2005).This feature distinguishes India from other developing countries in Asia, where the share of services in total output and in employment match more closely (Papola 2005; Banga 2005).

            In addition to the differential patterns in the sectoral output, the patterns in employment across sectors in India are different as well. The service sector in India employs a lot less people than the service sector in other developing countries. Thus it has been less ‘employment intensive’ as compared to other countries like China and Indonesia. In China and Indonesia, the share of service sector in output was similar to the service sector’s share in employment. For example, according to Table 2.4, in 2002, China’s service sector contributed 34 percent to GDP, and employed 31 percent of the labor force. Indonesia’s tertiary sector contributed 38 percent to GDP and employed 39 percent of the labor force. In contrast to this, India had only 22 percent of its people employed in the service sector, which produced 51 percent of the output (Papola 2005). This is different from the historically observed patterns in structural changes employment that accompany sectoral changes in output. Some possible reasons responsible for slow growth of employment in the service sector. The author mentions that some services such as community, social and personal services that have grown faster and have relatively higher contribution to the GDP have experienced a fall in employment elasticity. Also, sectors like the telecommunications and software services which are growing fast have higher labor productivity and therefore less employment growth.

Various scholars have analyzed the reasons for such rapid growth in the Indian service sector argues that demand side factors like high-income elasticity of demand for final product services, and structural changes in the manufacturing sector, have led to such a fast growth of services. Also, supply side factors like economic liberalization, improvements in technology and higher foreign investment in the service sector might have boosted the growth of the tertiary sector. claim that splintering and high foreign demand may be possible contributors of rapid service sector growth.