Productivity Dynamics In India’S Service Sector: An Industry-Level Perspective

The rapid rise of service sector in India, as in its developing counterparts in Asia, follows the pattern of skipped industrialization and raises concern for sustaining economic growth in India. While the share of services in India’s GDP has risen over much of the post-independence period, the economic liberalization in the 1990s paved the way for the emergence of service sector as a key player in India’s growth story. The present paper examines the productivity dynamics in service sector at detailed industry level—the India KLEMS (K = capital, L = labor, E = energy, M = materials, and S = services) panel dataset version 2015. Our results suggest that labor productivity in Indian service sector has been growing substantially over decades, and much of this productivity gain is accruing through acceleration in market services labor productivity. This observed productivity gain in market services, and in particular information and communications technology (ICT) intense services, might indicate the role of increasing ICT in contributing to labor productivity growth. The labor reallocation effect is positive for the period 1980–2011 and has increased in the 2000s, suggesting a structural transformation which is growth enhancing. The paper also examines the dynamics of total factor productivity in the service sector, measured using KLEMS growth accounting framework. The observed growth pattern in the service sector has not been uniform across all services in India. The performance of market-based ICT intensive sectors is impressive, especially in telecommunications and financial services. However, by and large, we find a dominance of capital deepening in accounting for growth.