The Enigmatic Services Sector of India

The share of services in India’s GDP, at round 60%, is much higher than that in other emerging economies including China. Since the year 1991 growth of services in the economy has surpassed that of agriculture and manufacturing, a feature that defies received wisdom on the growth pattern of economies. Received wisdom, grounded in the Kuznets paradigm, is that growth in the productivity of agriculture and agricultural incomes provides the manufacturing sector both low cost agricultural raw materials and a demand for its output. In time, the continued growth in incomes promotes the growth of the services sector both through a demand for consumer services and for services as growth promoting inputs into manufacturing and agriculture. India’s services sector, though, has grown alongside an agriculture sector that is none too productive, and a manufacturing sector that accounts for a relatively low 20% of the GDP. This paper provides an explanation, grounded in the country’s history and economic policies of the pre-liberalization era, for the growth of the services sector and argues that, contrary to popular opinion, it can lead the economy.