Productivity and Exports: An Industry-Level Analysis of the Service Sector in India

Abstract

The large share of the service sector and its status as a net exporter raise concerns about the sustainability of such growth for a developing economy like India. Given the context, the present article attempts to examine the productivity dynamics of the service sector in India at the industry level. We use the India KLEMS dataset to identify the trends in total factor productivity (TFP) growth and the growth in factor inputs. By uniquely combining the India KLEMS dataset with the trade values in the Extended Balance of Payments Services classification, we examine the dynamics between TFP growth and exports of services using panel vector autoregression technique. The trends in factor inputs show that there is capital deepening within services and the growth in employment remained comparatively lower. The results indicate a feedback effect of exports and productivity growth within the service sector. Additionally, we note that the use of more skilled labour that is better equipped to handle new technology also contributes to growth in the service sector, both in terms of productivity and exports.