Services Growth in India: A Look Inside the Black Box

Abstract

It is now widely recognized that the pattern of growth in India in recent years has been an unconventional one. Virtually all labor-abundant developing countries—such as Taiwan, South Korea, and China—saw the shares of manufactures in GDP and employment rise and those of agriculture fall during their high-growth phases. In contrast, during its recent high-growth phase, India has witnessed the share of manufactures in GDP stagnate despite a decline in the share of agriculture in it. Moreover, the movement of workers out of the agricultural sector has been extremely piecemeal, with the absolute number of workers in agriculture still rising due to the rising size of the workforce. An additional diff erence between the experiences of countries like Taiwan, South Korea, and China and that of India has been with respect to labor-intensive manufactures. While the former set of countries saw these products’ share of GDP and employment rapidly rise, India experienced no such change during the high-growth phase. In India, services have grown more rapidly than manufactures. Th e somewhat exceptional pattern of growth in India poses several puzzles. First, why have manufactured goods in general and labor-intensive products in particular responded sluggishly to the liberalizing reforms since 1991? Second, why have services grown more rapidly in the post-reform period? And fi nally, why has the transition from a primarily agrarian and rural to an urban and modern structure been slower in India? Specifi cally, why has the movement of labor out of agriculture into industry been slower than in other fast-growing developing countries? To be sure, economic reforms, including opening to trade and foreign investment and freeing up domestic controls, have helped improve the OUP UNCORRECTED PROOF – FIRST-PROOF, 06/19/12, NEWGEN