Multiple Structural Breaks and Unit Root Hypothesis: Evidence from India's Service Sector

Abstract

This paper takes a comprehensive investigation into India’s service sector, the main growth engine for Indian economy over past two decades. First, the paper deals with the endogenous multiple structural break developed by Bai Perron (1998, 2003). Here both the models of pure and partial structural breaks propounded by Bai and Perron are considered. Second, using the Boyce method (1986) of estimating kinked exponential models for growth rate, the growth rates in different regimes are calculated. Third, the sequential t ratio estimation method due to Banerjee, Lumsdaine and Stock (1992), Zivot Andrews (1992) and extended by Lumsdaine and Pappel (1997) is used. This paper extends the Lumsdaine and Pappel (1997) methodology further to the consideration of three possible breaks in the series. In this paper, the data used is the components of subsector of services GDP and GDP at constant prices (at 2004-05 prices) at factor cost, for the entire period from 1950-51 to 2009-2010. Using the Bai Perron methodology, there is very little difference in the estimation of the break dates in the pure and the partial break tests. The period of growth therefore can be broadly categorized into four regimes, with the first break in India’s GDP is found at 1978-79. Using the Boyce method, the growth rates are highest mainly the third and fourth regime at the sectoral level and at the aggregate level. Using the methodology used by Banerjee Lumsdaine and Stock (1992) and the extended Lumsdaine Papell test (1997), the presence of unit root in the data, irrespective of the presence of structural break, cannot be negated. The paper concludes with broad four regimes of growth of India’s GDP and the corresponding growth of subsectors of services in its process.