>INDIA’S SERVICES SECTOR

WHY SERVICES?
This report focuses specifically on the services sector because of the central importance of services to India’s current economic expansion. Whereas the East Asian economies’ success has largely been built on the development of export-oriented manufacturing, India’s recent growth has been led by the dynamism of its services sector – particularly high-end, knowledge-intensive services exports. Services have consistently grown at a faster pace than the economy as a whole since 1991, when the reform effort was kicked off in earnest. They now occupy some 60 per cent of India’s GDP, based on the WTO definition of services which includes construction. Manufacturing, by contrast, has maintained a stubbornly static share in the economy at around 20 per cent, while that of agriculture – still far and away the largest employer – has dwindled. Productivity growth in India, unlike virtually all other regions of the world, has been strongest in services (IMF 2006).

This is not to say that developments in other sectors are unimportant; nor that the profile of India’s economy will remain static over time. Already, for example, there are signs of an acceleration in the growth of India’s manufacturing sector. But to date, it has been services that have led the way; and their sheer size within the economy means they will continue to have a critical role.

This is an unusual growth path. In terms of per capita income India remains a poor country. Yet the services-dependent profile of its economy is much closer to that which has typically been associated with middle-income developing countries. In general, development of the services sector occurs after developments in agriculture and manufacturing. In India’s case, the reverse has occurred.

How can the services boom lead to sustainable growth?
For the reformist approach that has led to India’s recent growth to be politically sustainable in the medium to long term, it must demonstrate benefits to all strata of society. The key imperative for Indian policy-makers is to improve the situation of a huge and growing, but relatively low skilled, rural working class. This means creating vast numbers of appropriate jobs. But the main driver of growth in the economy since 1991 has been a knowledge-intensive sector, which is never likely to become a mass employer of low-skilled labour. How to resolve the two?

Fieldwork in the course of this study suggested that, in the minds of many participants in the Indian economy, there is a plausible route by which services-led growth could lead to broader-based development, and consequently to job creation on the necessary scale. Put simply, this would involve growth of dynamic services export sectors such as Information Technology–Information Technology Enabled Services (IT–ITES), and the income that growth brings to the country, providing a major stimulus to domestic demand and hence catalysing reform and growth in other sectors – including infrastructure development, construction, manufacturing and retail. It is the consequent growth in these other sectors, particularly manufacturing, which might be expected to provide the bulk of the required jobs over time.

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