Why services cannot be the engine of growth for India

Abstract

AbstractIndia’s phenomenal service-led growth in recent decades has generated debate on the role of services vis-à-vis manufacturing as the engine of growth. With the rapidly increasing importance of Information and Communication Technology (ICT) in global production systems since the 1990s, there have been claims of services having developed a growth dynamism similar to manufacturing. This article examines the role of services in India’s growth process using the concept of inter-sectoral linkages to make comparison with the role of manufacturing. Input-Output linkages and time series analysis reveal that services have been much less integrated in India’s production structure than manufacturing. They were also less important in generating indirect employment spillovers through sectoral linkages, compared with manufacturing. Service sector growth is found to be autonomously driven by final demand and therefore less dependent on its interconnections with the rest of the economy from the production side. The findings also indicate that service sector growth has stimulated manufacturing growth but not vice versa. However, the impact of services on manufacturing from the demand-side is neither sustainable nor desirable going forward. India is in urgent need of strategically developing its manufacturing sector through integrating dynamic services like ICT and internalising productivity gains. At the same time measures to address India’s inequality are critical to broaden the country’s demand base and make the growth process more sustainable and inclusive. In this sense, inequality reduction is a prerequisite for growth and should not be seen as an alternative to it.