Service Sector Growth in China and India: A Comparison

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Service Sector Growth in China and India: A Comparison Yanrui Wu Since the early 1990s, the world has witnessed the spectacular growth of the economies of China and India (averaging 10.2 and 6.2 per cent annually from 1992 to 2005, respectively).1 Associated with this growth has been the dramatic development of the service sectors in the two Asian giants.2 However, a comparison of China's and India's economic structures demonstrates that the role of the service sector (or, the tertiary sector as it is known in China) is very different (see Figure 1). In India, the service sector has become the dominant contributor to the Indian economy, accounting for 54.2 per cent of GDP in 2004.3 The success in this sector is regarded as "India's services revolution".4 In China, however, the service sector has lagged well behind the manufacturing sector (or the secondary sector, according to Chinese terminology), though its role in the economy improved slightly in the last 15 years. From 1990 to 2004, the service sector as a proportion of China's GDP increased modestly from 34.3 per cent in 1990 to 40.7 per cent in 2004. Why have the two countries taken very different trajectories in developing their service economies? What are the implications for future development in the two Asian giants? Which factors affect demand for services in China and India? These are some of the questions which are investigated in this paper. To date there have hardly been any comparative studies of services in China and India. However, several studies have focused on the service sector in the individual countries. For example, Gupta and Mohan both examine productivity in the Indian service sector in comparison with other [End Page 137] Click for larger view Figure 1 GDP Shares by Sector in China and India, 1978–2004 [End Page 138] Asian economies. Chanda discusses service trade in the world, particularly in India, and its implications for the World Trade Organisation (WTO) negotiations in services, while Gordon and Gupta present a detailed study explaining India's service growth in the past decade.5 Examples of studies on China include Li and Hou who produced an edited volume on China's WTO entry and the implications for the service sector, Jiang who edited a book focusing on growth and structural changes in services with some marginal coverage of international comparison, and Li who conducted a comprehensive investigation of China's service sector.6 Thus, it is the goal of this study to extend the existing literature by comparing the growth in and demand for services in China and India. First there is a brief review of developments in the service sector in China and India. This is followed by a discussion of the determinants of the demand for services. Three empirical models are employed to examine the factors affecting demand for services internationally, as well as in China and India. Subsequently, the article discusses the growth outlook for services in the two countries. The final section summarises the findings. Service Sector Development Following the conventional classification, an economy is divided into three sectors, that is, agricultural (or primary), manufacturing (or secondary) and service (or tertiary). The agricultural sector consists of farming, forestry, animal husbandry and fisheries. The manufacturing sector is composed of mining, [End Page 139] construction and manufacturing.7 All other economic activities which are not covered by the agricultural or manufacturing sectors are broadly defined as services and hence belong to the service sector. They include services provided for the agricultural sector, activities associated with the supply of water, electricity and gas, transport and communications, wholesale and retail trade, finance and insurance, business and personal services, and community and social services. Services can be broadly distinguished between two types, that is, old and new. The old or traditional services include petty trading, domestic services, catering and hotel services. The new services are generally associated with communications, business and legal...