INDIA AND THE SERVICE SECTOR

CAN SERVICES-LED GROWTH CONTINUE?

The Economic Times, July 6, 2011

The services sector is largely responsible for the Indian growth miracle. Few had anticipated this when economic reforms were rolled out two decades ago. It is one of many aspects in which the Indian growth story has not conformed to the text.
Can growth in services continue at the same pace? And can a services-dominated economy generate enough jobs? These are among the important policy questions today . There is reason for optimism on both counts. Industry was the focus of the reforms unleashed in 1991.

And yet, in the last two decades, the services sector has grown faster than industry . There is a mystery within a mystery: a big chunk of services growth has come from traditional services not targeted by reforms. These account for about 60% of the services sector. Some modern services, such as IT, communications and insurance, benefited greatly from reforms. Reforms in banking have happened in a very guarded way. Education and healthcare have both grown more in response to demand than as a result of sector-specific reforms .

Ditto for trade, hotels and railways. How do we explain the services sector becoming an engine of growth in India, unlike in China where growth is manufacturing-led ? Barry Eichengreen and Poonam Gupta attempt an explanation in a recent paper (The service sector as India's road to economic growth, NBER working paper 16757). They contend that much of services growth since 1990 represents a catching up with international norms for the share of services in GDP after a long period of repression.

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