Open Policies and Service Sector Growth in India: Does Service Sector Growth Influence Economic Growth of India?

Abstract

Service sector in India has been growing at a rapid rate in recent years. Many view this as the service sector revolution, acting as an engine of economic growth of India. However, the sectoral transformation in the Indian economy has not been in tune with the structural transformation hypothesis propounded in development literature. It seems there are no studies, which empirically verified the structural shift in service sector growth, its impact on economic growth and the various determinants of its growth. The empirical analysis supports the modern view of structural transformation i.e. decline in the share of agriculture and industry and increase in the share of service sector in India. The structural shift analysis confirms that the sectoral growth trend has changed in favour of service sector after open policies have been initiated. Indian economic growth depends both on agriculture and industry, in spite of it being services led in 1990s. Our theoretical model suggests that apart from service sector growth, industry, agriculture and the open policies of 1990s also had positive impact on India's economic growth though, the service sector appears to contribute more. The sources of service sector growth in India appear to be income elasticity of demand, open policies and the growth in the service sectors like communications, business, banking and insurance and trade services. In view of these findings certain policy interventions are suggested.