Service Sector Growth and Inequality in India: An Analysis of Household Consumption Spending

Abstract

Two important aspects of service sector growth in India in the post-1991 reform period from the demand side have been identified in the literature. Ghose (2015) suggests that the rapid service demand expansion has been driven by the rich, who have disproportionately benefited from the information and communication technology (ICT)-based service boom. Basu and Das (2017) argue that service spending by the poorer section also rose, and the service demand expansion is partly a result of the coercive nature of privatised service expansion. This article examines these two critical aspects in greater detail using the National Sample Survey Organisation (NSSO) consumer expenditure surveys from 1993–94, 2004–05 and 2011–12. The article finds clear evidence to show that the service expenditure in India was dominated by the top 20% of Indian households. Even as bottom 20% devoted larger household budget share to services over time, their share in aggregate service expenditure remained marginal. State per capita income, servicification of output, social expenditure by the government, urbanisation and changing nature of the economy post liberalisation are found to be important factors associated with variation in household service expenditure share across quintile classes. The relationships of these factors with service expenditure share differ across expenditure quintiles. Further, service expenditure elasticity estimates by decile classes indicate more than unit elasticity for various services over time, depicting non-saturating demand for services. The decile-wide rise in demand for services during this period, especially for the poorer households, is possibly due to a complex mechanism involving necessity, aspirations and enhanced access to new services and may not fit into the binary of discretion versus involuntary spending. JEL Codes: O1, L16, L80, D30, D12