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India’s Service Sector Growth - A “New” Revolution

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  • Rubina Verma

Abstract

Following the trade liberalization in 1991, the Indian economy embarked on a path of rapid growth of aggregate output. In particular, it witnessed a high growth rate of service sector output while that of industry was relatively muted. As a result, the share of services in GDP has come to resemble that of a high income country while its per capita income still remains that of a low income country. Further, we also observe a sharp increase in the rate of growth of service sector trade after liberalization. In this paper, we build a quantitative model which captures a falling share of agricultural output and a rapidly increasing share of service sector output as the economy grows. We develop a three sector open economy growth model and allow the economy to trade with the rest of the world by exporting as well as importing services and industrial goods. We focus on two steady state years, 1970 and 1994, and assume trade to be balanced in these two years. In addition, we allow for exogenous productivity growth in each of the three sectors. We find that it is high productivity growth, especially in the service sector, rather than growth of trade in services which is the primary factor driving the high growth witnessed by the Indian service sector.

Suggested Citation

  • Rubina Verma, 2006. "India’s Service Sector Growth - A “New” Revolution," DEGIT Conference Papers c011_020, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c011_020
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    File URL: http://degit.sam.sdu.dk/papers/degit_11/C011_020.pdf
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    References listed on IDEAS

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    1. L. Rachel Ngai & Christopher A. Pissarides, 2007. "Structural Change in a Multisector Model of Growth," American Economic Review, American Economic Association, vol. 97(1), pages 429-443, March.
    2. Galor, Oded, 2006. "The Demographic Transition," MPRA Paper 76646, University Library of Munich, Germany.
    3. Jones Charles I., 2001. "Was an Industrial Revolution Inevitable? Economic Growth Over the Very Long Run," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(2), pages 1-45, August.
    4. David N. Weil & Oded Galor, 2000. "Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond," American Economic Review, American Economic Association, vol. 90(4), pages 806-828, September.
    5. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    6. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June.
    7. Poonam Gupta & James P. F. Gordon, 2004. "Understanding India’s Services Revolution," IMF Working Papers 04/171, International Monetary Fund.
    8. John Laitner, 2000. "Structural Change and Economic Growth," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 545-561.
    9. Arvind Virmani, 2004. "Sources of India's economic growth: trends in total factor productivity," Indian Council for Research on International Economic Relations, New Delhi Working Papers 131, Indian Council for Research on International Economic Relations, New Delhi, India.
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    Cited by:

    1. Shingal, ANIRUDH, 2010. "Services growth and convergence: Getting India’s states together," MPRA Paper 32813, University Library of Munich, Germany.
    2. Ricardo Bebczuk, 2011. "General Facts About the Service Sector in Argentina," Chapters,in: The Economies of Argentina and Brazil, chapter 7 Edward Elgar Publishing.

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