Price and Income Elasticity of Demand for Services in India: A Macro Analysis

Abstract

India has a higher share of services and rapid growth in its services sector that have contributed to the overall economic growth phenomenally. The services revolution recently experienced have caused services-led growth in India. There have been questions raised on the sustainability of services-led growth achieved by India. Besides exports of services, domestic consumers and producers also consume services. Domestic demand for services equally contributes to India’s services-led growth paradigm. The New Economic Policy, 1991 has a significant role in taking India on a services-led growth paradigm. The present study is an attempt to provide a substantial theoretical explanation through demand-side to support services-led growth. The paper estimates the demand for services overall and also for disaggregated sub-sectoral services. The present study estimates the price and income elasticity of demand for services from 1951 to 2010. The study endeavours to find structural changes in demand for services during pre and post-liberalised periods (1951–1990 and 1991–2010) through the most important determinants of demand for any product/service, that is, price and income. The study finds a structural change in demand for services corresponding to income and price. The study finds that India’s services are income elastic and are very unresponsive for the increase in price. Hence, it substantiates that domestic demand for services will help to sustain the services-led growth.