Chapter 2

CHAPTER 2
REVIEW OF LITERATURE
Many important contributions to the modern literature on structural changes of

the Indian economy and the role of service sector in India are available. Some important
contributors in this regard in present literature are Mohanty and Raghavan (1990),
Grover, Singh and Gupta (1993), Monga and Singh (1993), Sethi and Raikhy (1993),
Dutta (2001), Sastry, Singh, Bhattacharya and Unnikrishnan (2003) and Joshi (2004).
They emphasized that structural changes in the economy are important for estimating
the importance of various factors responsible for the growth of service sector output.
Several researchers paid attention on service sector‘s employment and productivity
growth e.g. Kaur and Dhindsa (2002), Joshi (2004), Gupta & Eichengreen (2010) and
Papola (2012). A variety of statistical techniques are used in different studies. Mainly
the data have been taken from different sources like CSO, RBI, NSSO etc. for different
time periods. Remaining studies highlight other facts related to the service sector of
Indian economy. Brief reviews of some important international and national studies are
as under.
International Literature
Francois (1990) highlighted the role of services as complementary to the

manufacturing process. A model is developed to incorporate the relationship between
services and scale, explicitly assuming that producer services are important to the co-
ordination and control of specialized production processes. The paper argues that
growth of producer service sector may be important to this process, as they result in
economies of scale. Rather than a drag on productivity, a growing producer service
sector is an important positive aspect of expanding economies because it facilitates
increased division of labor and productivity changes. The arguments presented in the
paper highlight the importance of services to production in complex modern economies.
The realization of returns to scale and the pace of development are tied to the pace of
growth of producer service sector. The disintegration of production into specialized
intermediate stages depends on both scale and supply of producer services. This
Review of Literature
suggests that an expanding producer service sector is an important aspect of growth

(Urankar, 2007). Access to producer services through direct trade or through
multinationals may help developing countries to take part in the process of
specialization.
Francois and Reinert (1996) examined the role of services in the structure of
production and trade. Working with a cross country, sample of 17 social accounting
matrices, stylized facts were developed relating to upstream and downstream service
linkages to incomes and the input-output structure of production. Expansion of services
was related to the expansion of private sector intermediate services and to increased
demand in manufacturing for service inputs. This growth in demand was found to be
more closely related to changes in the structure of production rather than to outsourcing
processes.
Aguayo et al. (2001) revealed in the present study that data has been used of 22
Latin American countries from the Economic Development Report and applying
dynamic regression models found that the value-added of the service sector is related
with mainly the exports of tourist services and with the value-added of both agriculture
and industry sectors. The results show an important positive impact of the production of
the agriculture and industry sectors on the service sector, besides tourism. Besides
tourism, the industrial evolution is also very important to improve the development of
services through some inter-sector relations. The model suggests that some stagnation
of services development in many countries is due largely to a lack of industrial
investment, especially in countries with a low level of tourism. The main conclusions
are that both factors, industry and tourism, need to be increased to contribute service
sector development.
Li et al. (2003) reviewed international experiences and examined the factors

behind the lagging service sector in China, and build a Computable General
Equilibrium (CGE) model which may facilitate the process of designing a strategy for
service sector trade and development. The study first examined the current issues in the
development of China‘s service sector, and then discussed the potential benefits of
services trade. One important cause for China‘s lagging service sector development was
21
the lack of competition and low levels of marketization. To develop this sector, it is
crucial to open this sector for domestic and foreign competition, which will lead to
deepened market-oriented reforms, structural transformation, and productivity gains. In
other words, liberalizing services trade will create opportunities for a more rapid
expansion of the service sector (including services export), which will facilitate growth
and poverty reduction. They then employ a CGE model designed specifically for it and
simulate the potential impact of service sector liberalization on employment and output.
Their analysis based on simulations suggests that service sector liberalization could
produce substantial benefits for China in terms of economic growth and consumer
welfare. With a successful reform, service sector could become an important driving
force of China's economic growth in the coming ten years. However, the employment
adjustment induced by service sector liberalization is smaller as compared to output
adjustment. During the process of services liberalization, service sector experiences
slight employment loss, mainly due to the productivity improvement in service sector.
While the job loss could be offset by the expansion of labour demands in non-service
sectors, and eventually, by the booming of aggregate demand in the long run, the
structural adjustment would involve certain adjustment costs. This highlights the
importance of implementing complementary policy measures to reduce strains in labour
market during the process of further liberalization. These complementary policy
measures may include those aiming at increasing the flexibility of labour market,
increasing labour mobility across sectors, increasing investment in human capital, as
well as establishing a good social security system.
Breitenfellner and Hildebrandt (2006) endeavoured to see the relationship

between tertiarization and per capita income in European Union and other developed
countries by using cross section and time series analysis. Present study analyzed data on
23 service activities from period 1983-2003, grouped into four subsectors (distribution,
business, social and personal services) and made a conclusion that process of
tertiarization is compatible with growth in both employment and productivity. They
investigate the long term growth trends, observed the tertiary sector and analyzed the
share of individual subsectors in total employment and productivity in EU as compared
to other developed countries like USA. Services are extremely heterogeneous, they are
22
difficult to define, differentiate and categorize. Despite such difficulties they are getting
attention at national and international level. The study quotes that International Labour
Organization (ILO) estimated that in 2006 total share of employment in service sector
in European Union (EU) and other developed countries increased from 66.1% in 1995
to 74.1% in 2005. The service industry is a crucial source of employment and there is
still room for expansion. The evolving service culture with social skills and innovation
promotes both growth and employment.
Aydin (2007) argued that inter-industry linkages help us to determine the

development strategy of an economy. Author determined the backward and forward
linkages and key sectors (industries with large backward and forward linkages) of the
Turkish economy by applying Chenery Watanabe and Rasmussen methodology.
Production structure of the Turkish economy has been found by using 1998‘s input
output tables from Turkish Statistical Institute. Present study is based on the two
methods. First, inter-sectoral linkages developed by Chenery and Watanabe and then on
the basis of Rasmussen method. Input output tables of 1998 with 97 × 97 sectors have
been used which later on aggregated into 29 × 29 sectors to make it manageable and
easy to calculate with the help of software packages available. Leontief inverse matrix,
Ghossian inverse matrix and also weighted Leontief inverse and weighted Ghossian
inverse are the base of Rasmussen method. In Turkey economy, there were eleven key
sectors calculated by Chenery Watanabe method and Rasmussen method showed the 10
key sectors.
Buera and Kaboski (2009) analyzed the role of high-skilled labour in the
growth of the service sector as a share of the U. S. Economy and found that the
consumption of services has driven the growth of the economy. The importance of skill-
intensive services has risen than low-skill jobs and this has raised the wages and
quantities of high skilled labour. Study found that share of service sector in value-added
has grown steadily from 60 percent to 80 percent in 1950 to 1980 respectively and this
increase is explained by the growth in the consumption of services. The share of low-
skill industries declined while the output of high-skill industries increased by more than
25 percent over the same period. High skilled labour has got a larger relative
productivity advantage and as labour productivity grew, income rose and the
23
consumption expanded to more costly services. So, increased importance of specialized

high-skilled labour led to the rise of the service economy. The study concluded that
specialization (high skilled labourers) plays an important role in the service sector of the
US economy and specialized workers are highly productive in the market.
Kefela (2010) reviewed the international experience on service sector

expansion, examining the current challenges and discussing the potential benefits of
services trade. There is growth in services due to urbanization, the expansion of public
sector and increased demand for intermediate and final consumer services. Present
study shows that world service sector is the fastest growing sector of the global
economy and it accounts for two thirds of global output, 30 percent of global
employment and 20 percent of global trade. Many services such as dental care and
automobile maintenance are generally considered non-tradable but information and
communication technology (ICT) is enabling trade in knowledge based services and
creating tremendous export opportunities. Countries that invest in skilled human
resources and develop strong service sectors can benefit by supplying services to meet
growing worldwide demand, in addition to serving domestic customers. Service sector
has an important role in improving production efficiency and it plays an important role
in developed as well as developing countries which account for over half of the Gross
Domestic Product. This paper focuses specifically on the service sector and India‘s
recent growth has been led by dynamism of its service sector since 1991. Most of the
growth in services has been in information technology (IT), business process
outsourcing (BPO) services and knowledge based activities and other sectors like
telecommunication, financial services, community service and hotels and restaurants. In
all South Asian countries though service sector employment has shown a rising trend
but its contribution to total employment is much lower than its contribution to country‘s
GDP.
Olczyk (2011) analyzed the structure of the Polish economy by using three input
output tables of years 1995, 2000 and 2004. Backward and forward linkages are
identified with the help of Rasmussen method. Given methodology found Key sectors
which showed the sectors with large backward and forward linkages. Original input
output tables have 48×48 sectors but for convenience and comparability author has
24
aggregated the sectors into 27. From 1995 to 2004, there were five sectors out of 27
sectors which were responsible for generating 50% of value of total production in the
initial years of the polish economy that were trade, foods, agriculture, construction and
real estate (49.8%). In 2000, these sectors were trade, food, construction, other services
and agriculture (52.7%) whereas in 2004 they were trade, food, other services,
construction and transport sector (48.7%). Throughout the given period, there were ten
sectors which have strongest backward linkage in Polish economy. These were
Agriculture, Food & Beverage Products, Wood & Wood Products, Pulp & Paper
Production, Non-Metallic Products, Metal and Metal Products, Transport Equipment,
Other Industrial Products, Construction, Transport. On the other hand, there were seven
sectors which showed forward linkages throughout the given period from 1995 to 2004.
There were: agriculture, Chemicals, Metal & Metal Products, Production & Distribution
Electricity, Trade, Post & Telecommunication and Other Services. Author observed that
the number of key sectors from 1995 to 2004 decreased from 10 in 1995 to 6 in 2000
and 2004.
Indian Literature
Rao (1979) in one of his pioneer studies on Indian economy and its structural
changes, using Net Domestic Product (NDP) figures from 1950-51 to 1976-77, its
sectoral shares, annual and compound growth rates and value of factor incomes at
current and constant prices, found that: (i) the growth rates and productivity per worker,
of secondary and tertiary sectors especially of the secondary sector in the economy went
up and that of the primary sector declined, (ii) but the service sector was growing faster
than the commodity sector mainly due to the growth of informal sector employment.
The author concludes that the most startling feature of the structural change is the
failure of the occupational structure to coincide with that of the sectoral NDP.
Mitra (1988) in his paper analyzed structural changes in the economy from
1950-51 to 1984-85 using National Income data by sectors of origin at 1970-71 prices
for the said period and its percentage distribution. The study revealed that (i) the
proportion of agriculture in the national income has declined, that of the secondary
sector has failed to gain and service sector has overtaken the secondary sector, (ii) the
25
emergence of services as the principal sector of economic activity cannot be readily

attributed to any impulse from the material producing sectors and it has an autonomous
character and it has expanded due to rise in public administrative and defense services,
(iii) the expenditure under public administration and defense, emerges as additional
output so capital output ratio is low and does not lead to much capital formation and
therefore growth, (iv) growth of the service sector needs more outlays but this may
squeeze resources from other sectors inhibiting their growth and the depressed rate of
material production sectors may push the government to further concentrate on the
service sector and this can be harmful.
Datta (1989) tried to find out the sources of service sector growth in India with
specific reference to the implications of the rapid growth of distributive trade and
transport for Net Material Product (NMP) in India for the period 1950-51 to 1983-84.
NMP is defined as the unduplicated aggregate of material goods produced in an
economy, including trade and transport. The growth of Public Administration and
Defence (PAD) that are excluded from NMP are also analyzed. CSO published data on
NMP, NDP and the Net Product in the Tertiary sector and its sub sectors at constant
prices along with their three yearly moving averages are used for analysis. The
important findings are (i) trade and transport services are complimentary to material
production and the growth of trade in services in India over 1950-51 to 1983-84, has
responded to changes in the structure of material production and (ii) a major part of the
value added in the tertiary sector constitutes a part of NMP and even after adjusting for
value added in PAD there is no much difference in the growth rates of NMP and NDP
in India over the study period.
Bhattacharya and Mitra (1990) wanted to investigate the pattern of growth of

the tertiary sector and its implications on growth and distribution in India in the post-
independence period, 1950-51 to 1986-87. Data in the present study has been used from
National Accounts Statistics and World Development Reports. With the help of income
elasticities and growth rates, the study observed that the tertiary sector has grown
relatively faster than other sectors throughout the post independence period of the
Indian economy. Sectoral composition has changed significantly over the years.
Percentage share of different sectors (Agriculture, Industry and Services) in NDP at
26
factor cost (at 1980-81 prices) in 1960 was 50:20:30 which has significantly changed in
1981 i.e. 37:26:37. The average annual growth rates of income from commodity and
service sectors in the seventies were 2.8 and 4.0 percent respectively. In the eighties
(1981-82 to 1987-88) relative growth rates were 4.0 and 6.1 percent respectively. So the
gap between the growth rates of services and commodity sector has widened in the
eighties as compared to seventies. Average inflation rate in seventies and eighties were
7.6 and 8.8 respectively, due to shortfall of agricultural production and hike in import
prices particularly oil prices in seventies and in eighties agricultural production fell due
to severe drought. The findings of the study are: (i) the service sector in India is
growing rapidly ahead of the commodity sector and relative disparity between the two
sectors has increased, (ii) service sector has become predominant even before the
economy has become a highly industrialized one, (iii) the commodity output has a very
poor relationship with services income, implying that services income is independent of
the commodity sector income, (iv) the employment elasticity of the service sector over
the study period was lower than that of the commodity sector, (v) the share of services
in the National income is much larger than its corresponding share in employment. The
authors reveal that the service sector has become the predominant sector even before the
economy could become a highly industrialized one and the share of services in national
income is much larger than its corresponding share in employment. The author suggests
policies like raising commodity output, curbing unproductive services activities, real
wage rate regulation in public services and an appropriate tax structure to make tertiary
sector growth sustainable in the long run.
Mohanty and Raghavan (1990) analyzed the growth and structural

characteristics of the Indian economy since the first five year plan by using CSO data,
on GDP and its sectoral shares at constant prices. The study found that share of primary
sector in the GDP has shown a continuous decline which has been offset by rise in the
GDP of the secondary and more specifically of the tertiary sectors. Tertiary sector has
continued to grow irrespective of fluctuations in the other sectors. They mainly tried to
analyze the increasing role of tertiary sector in a modern economy. They experienced
that industrialization at the outset gives rise to demand for a wide variety of service
sector oriented activities but during the study it was found that there was hardly any
27
attempt to examine the potential source of demand that may originate in the tertiary
sector. They calculated exponential growth rates in various components of GDP.
Growth rate of primary sector was found to be 2.2 per cent between 1950-51 to 1987-88
while it was 5.4 per cent for secondary sector and 4.7 per cent for tertiary sector during
the same period. It was further found that the share of service sector in GDP in India
was around 38 per cent which was lower than in most of rapidly growing developing
countries. The share of primary sector in GDP was found to be declining from 54.9 per
cent during the first plan to 32.11 per cent in the VII Plan (1985-88) which implies that
the secondary and tertiary sectors have grown at a faster pace during that period. The
share of service sector in GDP has increased from 29.4 per cent during Ist Plan (1951-
56) to 40.2 per cent during the 7th Plan (1985-88). During the fourth and fifth plan
periods though agricultural growth picked upto 2.7 per cent, the deceleration in the
secondary sector continued. Again it was the growth in the tertiary sector output (4.5
per cent) that acted as a buffer and helped in improving the overall growth in GDP to
3.6 per cent. During the first plan it was the primary sector and particularly agriculture
that was found to be accounting for the largest share (49 per cent) of GDP followed by
tertiary (29.4 per cent) and secondary (15.7 per cent) sectors. However in the 1980s the
economy seems to have turned a full circle and it is the tertiary sector which accounts
for the largest share of GDP (40.2 per cent) followed by agriculture (29.8 per cent) and
manufacturing (21.1 per cent). Since the tertiary sector does not include material
production, the value added in this sector is estimated from the income receipt side,
which shows a continuous increase. The study concluded that while agriculture and
manufacturing have shown phases of stagnation and growth, the tertiary sector has
shown a uniform trend which shows that the sectoral composition appears skewed in
favour of tertiary sector. They opined that service sector growth needs no alarm and in
fact government should take measures to enhance its role, in view of the need of the
economy to create a strong infrastructural base (like transport, communication and
housing) as also it creates and provides more employment opportunities for the people.
Further, higher growth of the commodity producing sectors has to be sustained by
demand impulses in the tertiary sector in the absence of adequate demand response
28
from agriculture. Thus, there is interdependence from the demand side between
secondary and tertiary sectors.
Nagaraj (1990) made an attempt to examine various alternative hypotheses on

the long term growth rate of India's GDP using 1980-81 series of National Income,
fitting trend to the time series data. A comparison of the old (1970-71) and new series
shows that while movements of GDP over 1950-51 to 1984-85 are identical but a sharp
decline in the growth rate of 'Public Administration and Defence' (PAD) is discernible
in the revised series since 1977-78. However, the trends in the growth rates of real GDP
excluding PAD show a clear increase of real GDP in the 80s validating one of his
hypotheses that service sector growth is due to growth in services besides PAD services.
The study reveals that the secondary sector grew faster than the other sectors in the 80s
that invalidates one of his hypotheses that tertiary sector growth rate has been higher
than that of primary and secondary sectors since 80s.
Nagaraj (1991) explained on the basis of CSO data for the period 1989 to
1990 that there is excess growth of tertiary sector in India. The study explored that in
1987-88 the share of tertiary sector in NDP was at 39.7 percent which was higher than
not only of the secondary sector (26.3 percent), but as well that of primary sector which
was at 34 percent. However, it needs to be appreciated that even in 1950-51, the
share of tertiary sector in NDP was higher at 26.6 percent than that of the secondary
sector at 15.1 percent, though both of these were lower than that of the primary sector at
58.3 percent. But when the changes in share as percentage of their initial values are
compared then over the entire period of study the secondary sector has come to acquire
greater share of 74.2 percent as compared to 49.2 percent of tertiary sector. However,
the change in the share of primary sector has become negative at -41.7 percent.
Moreover, in the sub-periods of 1950-51 to 1959-60, 1960-61 to 1969-70, 1970-71 to
1979-80 and 1980-81 to 1987-88 the secondary sector has almost shown a higher
percentage growth rate of NDP at 5.6 percent, 5 percent, 4.5 percent and 6.9 percent
respectively as compared to 4.2 percent, 4.4 percent, 4.6 percent and 6.4 percent of the
tertiary sector respectively. The study summarized that it is the secondary sector
which has grown at a faster rate than the service sector over the entire period.
29
However, the growth rate of the secondary sector witnessed drastic slowing down with
considerable fluctuation during the period 1965-66 to 1979-80, whereas the service
sector has displayed a much steadier growth since 1950-51. Therefore, as a result of a
higher initial share and steadier growth rate of service sector has come to acquire a
relatively higher share in NDP as compared to the other two sectors by the end of
the time period.
Sathe (1991) in his paper examined the sources of structural change in the
Indian economy for the period 1951-52 to 1983-84. An analysis of sources of growth in
the total output was carried out from the demand side and from the supply side. The
supply side considers the changes in output due to changes in the productivity of the
factors of production. On the other hand, the demand side considers the changes in
output as a result of changes in the demand for goods and services. The study says that
whole idea behind planning in India was to bring about a ‗Structural Change‘ in the
economy so that the ‗unnecessary rigours‘ of an industrial transition are avoided.
Grover, Singh and Gupta (1993) analyzed inter-sectoral relationship in Indian

economy during the period of planning (1951-52 to 1987-88) and worked out the
compound growth rates. They found that structural change that took place in the Indian
economy is indicated by its sectoral composition of Gross Domestic Product and
employment. They found that during this period, the percentage share of various sub-
sectors of the service sector was in the range of 2 to 8 percent. The maximum increase
in percent share was recorded by transport, communication and trade (8.03 percent)
followed by public administration and defence and ‗other services‘ (3.52 percent) over a
period from 1951-52 to 1985-88. The annual compound growth rate was recorded to be
the maximum at 5.35 percent in transport, communication and trade as compared to
other tertiary sub-sectors, while it was 4.78 percent in banking, insurance etc, 4.77
percent in public administration and ‗other services‘. It was found that as
industrialization proceeds, the share of manufacturing and service sector increases and
that of agricultural sector declines. They found that structural changes are taking place
in India, but at a slow pace. The composition of GDP has changed steadily over the
planning period. The share of non-agricultural sector increased from 40.22 per cent
30
during first year plan to 64.03 percent during first three years of seventh five-year plan.
The annual compound growth rate and percentage contribution of different sectors and
sub-sectors to the Gross Domestic Product showed that there have been continuous
shifts towards manufacturing and tertiary sector. From the experience of other countries
they found that in the course of their economic development they disclosed a general
tendency for primary sector employment to decline relatively to employment in
industries and services. They concluded that there is, of course, no unique relationship
between the rate of growth of Gross Domestic Product and the degree of shift in the
occupational structure. They found that an inter-sectoral shift of labour force depends
upon the availability of various types of natural resources, facilities and various other
institutional factors. Talking about the structural changes in employment they found that
in 1981, 73 per cent of workers were dependent on agriculture, 12 percent on industry
and 15 percent on services while for the developed countries, the percentages were 6.38
and 56 respectively. They found that the share of service sector had increased from
25.97 percent to 37.22 percent during sixth five-year plan. They concluded that
occupational distribution of India reflects the economic backwardness of the country as
according to 1981 census, more than 70.6 percent of the working population was
engaged in agriculture and allied activities.
Monga and Singh (1993) attempted to study structural dynamism and growth in
Indian economy during 1965-86 using Weighted Average Method. They found that the
share of tertiary sector in the total NDP increased from 30.2 per cent in 1970-71 to 36.4
per cent in 1980-81 and then to 41.0 percent in 1985-86. They observed that in the
service sector, the share of almost all the sub-sectors have increased overtime. It was
found that the decline in the share of primary sector in total NDP was absorbed only
marginally by the secondary sector but perceptibly by the tertiary sector. They also
experienced that there is a significant substitution of not only primary sector by both
industrial and service sector, but also of industrial sector by the service sector in India.
The rate of substitution of primary sector by the service sector was found to be higher
than that of primary sector by the industrial sector. It was also remarked that a uniform
technological policy for the country as a whole may not be feasible and therefore,
suitable technological policies for different sectors may have to be framed. The
31
structural shifts were also observed in relation to the flow of funds to various sectors of
the economy by banks and other lending institutions. At the global level it was
experienced that in the low income economies group barring India, there was decline in
the share of not only agriculture but also in that of service sector in the GDP with the
rise in the share of industry in 1984 as compared to 1965. Thus they concluded that
there has been continuous increase in the share of service sector in India‘s GDP.
Sethi and Raikhy (1993) examined the growth and structural changes in India‘s
national income during the period 1948-49 to 1984-85 with the objective to bring out
implications for future growth pattern. They estimated distributed lag model of different
orders and worked out NDP and growth rates of different sectors and overall in the
different time periods. They divided the study period into two sub periods, period-I
(1948-49 to 1969-70) and period-II (1971-1985). They observed that NDP in tertiary
sector - I experienced 5.18 per cent growth rate per annum during the entire study
period. Among the sub-sectors of tertiary sector, highest growth rate (6.53 per cent) was
observed in case of transport and storage followed closely by communication (6.49 per
cent), trade, hotels and restaurants (THR) (4.90 per cent) and railways (4.27 per cent).
Railways, THR (Tourism, Hotel and Restaurant) experienced high growth rate in period
- I, where as the growth rate was higher in period - II in case of transport and storage
and communication. They found that the NDP in tertiary sector - II experienced growth
rate of 4.87 per cent during the entire study period. Among the sub-sectors the highest
growth rate was observed in case of banking and insurance (7.25 per cent) followed
closely by public administration and defence (7.24 per cent); real estate, ownership of
dwelling and business services (4.37 per cent) and other services (2.44 per cent). During
period I also, the sequence of the growth of different sub-sectors was the same, but
during period II the only difference was that public administration and defence
experienced the highest growth rate of 8.92 per cent. While examining the relative share
of different sectors it was found that with the economic development, share of
agricultural sector in national income decreased from 61.3 per cent in 1948-49 to 39
percent in 1984-85. On the other hand, share of secondary sector in NDP increased from
14.8 per cent in 1948-49 to 21 per cent in 1984-85 while the share of tertiary sector as a
whole increased from 23.9 per cent in 1948-49 to 39.7 per cent in 1984-85. The authors
32
argued that the rapidly increasing share of sub-sectors like public administration and
defence are also less likely to build the base for productive capacity in the country; it is
only helping in giving the superficial jump to the national income. They concluded that
though significant changes have taken place in the composition of national income of
the country, these changes have to be viewed with caution. They suggested that changes
in sectoral composition of output and employment be planned in such a way that for a
few decades, there is a shift towards secondary sector, instead of towards tertiary sector,
so that the productive capacity of the economy could be strengthened. Growth of public
administration and defence, which is largely unproductive, could be contained. With the
decrease in share of agriculture in labour force, more job opportunities should be
created in non-agricultural sector.
Ansari (1995) tested whether per capita income and government expenditure
have a positive contribution to the growth of the service sector in India, Pakistan and Sri
Lanka. The paper uses, annual data of National Income by industry of origin from
National Accounts Statistics (NAS) of the three countries under study for the period
1973-1991.Generalized Least Square method is applied and per capita service output is
regressed on the per capita income and per capita government expenditure for each
country. Author tried to explain some theoretical explanations and the relative growth
of service sector in India, Pakistan and Sri Lanka – the three important south-Asian
countries and estimated a regression equation for individual country. Present study
checks relevance of the secular trend and the Bacon-Eltis views of structural changes to
these countries by using combined time series and cross section approach. It estimated
the growth of the service sector in these countries affected by rise in per capita income
and government expenditure. All three countries have experienced large decline in the
GDP share of the agriculture sector. Indian agriculture, with the greatest GDP share, has
registered the fastest decline (-11.4 percent points) followed by Pakistan (-10.1 percent
points) and Sri Lanka (-6.6 percent points). Manufacturing sector showed significant
increases in its share in GDP. GDP share of the manufacturing sector increased the
fastest in Pakistan (3.3 percent points) followed by India (2.7 percent points) and Sri
Lanka (1.0 percent points). The service sector in Pakistan has shown the highest
average GDP share (47.9 percent points) over the period 1973-91 followed by Sri Lanka
33
(43.2 percent points) and India (37.1 percent points). In case of government expenditure
as a proportion of GDP, India claims the highest increase (9.1 percent points) followed
by Pakistan (7.4 percent points) and Sri Lanka (5.1 percent points). Both rising per
capita income and government expenditure show the rapid growth of service sector in
these countries. Thus with the increasing role of services, a series of studies have
emerged that have classified services according to their nature, stage of consumption,
thereby providing a framework to define what falls in the category of `services'. While
services have long come out of such categorization, the debate seems to have shifted its
focus to other aspects of services like the causes of service sector growth, its
significance, low productivity of the sector, sustainability of service led growth and the
like. There have been various theoretical and empirical studies focusing on various
aspects of service sector in economic growth.
Patnaik and Chandrasekhar (1995) made an effort to analyze the India's

transition in 1991 to a regime of ‗structural adjustment‘, which is an event of great
historical significance. But this is shrouded in a great deal of misconception. Some of it
was nurtured for ideological reasons precisely because of the significance of the event
itself. The first such misconception is that 'structural adjustment' became inevitable
because the earlier regime had brought the economy to a point of ‗collapse‘ in the real
sectors of the economy. Secondly, it cannot even be contended that the genesis of
speculation, even if unrelated to the immediate performance of the real economy, could
be located in some long term tendency towards stagnation or collapse of the economy.
On the contrary, the second decade of the 1980s saw the most pronounced industrial
boom ever witnessed in the history of the Indian economy; and thirdly, the vulnerability
of the economy to speculative forces was itself‘ in part a result of its gradual
'liberalization'.
Sethi (1997) examined whether the post independence period of economic

planning has brought about considerable changes in the Indian economy or not. He
analyzed growth and structural changes in national income along with sectoral
decomposition of NDP of India over the period 1950-51 through 1987-88. He observed
that, at current prices (1997), the NDP of India increased from a mere Rupees 8,566
crores during 1950-51 to Rupees 2,60,532 crores during 1987-88, indicating an average
34
annual growth rate of 10.2 percent of which the fastest growth rate (12.4 percent) was
observed during the period 1972-73 to 1987-88. The tertiary sector, as a whole,
experienced an overall growth rate of 4.6 percent. The pattern of growth followed by
tertiary sector-II (Financing, Insurance, Real Estate and Business Services; Real Estate,
Ownership of dwellings and Business Services; Banking and Insurance; Public
Administration and Defence; Community, Social and Personal Services) was, more or
less, the similar one as followed by the main sector itself. However, the growth rates of
tertiary sector-I (Trade, Hotels and Restaurants; Trade; Hotels and Restaurants;
Railways; Transport, Storage and Communication; Storage; Transport by other means;
Communication) over the sub-periods exhibited a U-shaped pattern within the minimum
rate (4.4 percent) achieved during the 60‘s. As regards the effects of inflation, the
maximum impact was observed in case of tertiary sector-I. On the other hand, the
minimum impact of inflation was noticed in case of tertiary sector-II, which was
associated with a relatively smaller difference (5.7 percent) between apparent and real
growth rates. During this period, within tertiary sector-I, the fastest and the slowest
growing sub-sectors were observed to be ‗Communication‘ and ‗Hotels and
Restaurants‘ respectively. Within Tertiary Sector-II, the sub-sectors viz., ‗Banking and
Insurance‘, and ‗Public Administration and Defence‘ were the ones to have registered
fairly high growth rates (7.0 and 6.4 percent respectively). Rate of growth in both the
sub-sectors was comparatively faster during 80‘s. During the study span of 38 years
(1950-51 to 1987-88), relative shares decreased from 58.3 to 34.0 percent at a rate of
1.32 percent in case of primary sector, increased from 15.1 to 26.3 percent at a rate of
1.41 percent in case of secondary sector and increased, again, from 26.6 to 39.7 percent
at a rate of 1.08 percent in case of tertiary sector. Within tertiary sector, the relative
shares increased from 10.6 to 17.7 percent at a rate of 1.41 percent in respect of tertiary
sector-I, and from 16.0 to 22.0 percent showing a rate of growth of 0.84 percent in
respect of tertiary sector-II. The study finally observed and concluded that country had
skipped the intermediate stage of economic transformation (i.e. increasing share of
secondary sector in NDP) and had undergone the lop-sided structural changes in
sectoral composition. He further said, the rapidly rising shares of sub-sectors like public
administration and defence, which are largely unproductive, have not led to any
35
significant acceleration in economic growth instead they have helped only in giving a
superficial jump to the national income and, thus, causing inflation in the country.
Katti (1998) revealed the relationship between service sector and employment
in India for a period of 1980 to 1996. The main objective of the study was to
compare the growth of employment in the organized public and private sectors of the
service sector of India. At the outset the study highlighted the fact that service sector
was contributing about half of the world GDP. The advanced countries have
predominantly service economies in the sense that these were producing on an average
about 60 percent of the GDP and generating about 60 percent of total employment.
Even in low income countries, the service sector is contributing more than one third of
their total GDP. In India, during the years 1980 to 1995, the percentage share of
agriculture sector in GDP declined from 38 percent to 29 percent, while during the same
period the percentage share of industrial sector increased from 26 percent to 29 percent
and that of service sector from 36 percent to 42 percent. The study found that unlike
developed world where the shift from agriculture to industry and then much later from
industry to services took place, in India, it appeared to be directly shifting from an
agricultural oriented economy to be dominated by service sector. In India only, about
10 percent of the working population was employed in organized sector. Out of
which, more than 55 percent were employed in service sector and less than 30 percent
in the industrial sector. So far as the composition of employment in both organized
public and private sectors with reference to service sector is concerned in 1989 the
percentage share of organized public sector was much higher at 72.05 percent as
compared to organized private sector with just at 27.95 percent. Out of this in organized
public sector, the share of sub-sector local bodies was the highest at 7.73 percent.
The average annual rate of growth in organized public sector was higher at 14.2 percent
between the years1981 to 1986 as compared to 1986 to 1991 at 7.8 percent. It was just
marginal since 1991 till 1995 and then experienced a marginal decline in 1996 over
1995. However, the employment in organized private sector of the service sector did
not experience any significant increase since 1981 to 1995. Only in 1996 it increased
quite significantly over the previous year. Thus, organized public sector played an
important role in providing employment in service sector of the economy. The study
36
summarized that in future the investment and creation of employment will not be
mainly driven by the industrial sector. The service sector will soak in the bulk of
investment and this will generate huge employment. The Government needs to
shift its thinking to create those institutional structures which encourage private
investment in the service sector and must also remove any other delays and roadblocks.
It will lead to generation of far more employment opportunities as compared to
investment in public sector of the economy.
Sethi and Raikhy (2000) examined the structural change in Punjab economy
from the period of 1970-71 to 1997-98 on the basis of various issues of Statistical
Abstract of Punjab by statistically applying the coefficient of variation to different
Indices. The relative share of different sectors in the net state domestic product (NSDP)
was found to be indicating that the structural changes are taking place in the state
economy at a rapid rate. The share of primary sector at constant prices decreased from
60.33 percent in 1970-71 to 43.24 percent in 1997-98, while that of secondary sector
increased from 13.98 percent to 27.29 percent and that of tertiary sector from 25.70
percent to 29.48 percent over the same period. Moreover, in case of tertiary sector the
share of all its sub- sectors except that of real estate and dwellings increased. However,
the maximum increase was observed in case of banking and insurance, public
administration and defence. While a rapid increase in the share of banking and
insurance is a welcome sign, but that of relatively productive segment of public
administration and defence is rather unfortunate. During the entire period of study from
1970-71 to 1997-98 the growth rate of workforce indicates that the overall employment
in the state increased at a rate of 2.26 percent per annum. However, these rates of
workforce were not at all uniform in respect of workers engaged in different industrial
activities. In case of agriculture sector, though the number of cultivators has
experienced a low, but positive rate of growth. The number of agricultural labourers
has increased at a rate of more than 3 percent. This increase is mainly due to a rapid
increase in female agricultural labourers. However, the tertiary sector has absorbed the
labour force to a significant extent as the growth rates of workforce in all the
classifications falling under it have been well above 3 percent. The study concluded
that both for NSDP and workforce the index of structural change experienced a little
37
decline during eighties as compared to seventies. However, during the nineties the
structural change has been quite rapid for NSDP, but fairly slow for workforce. The
index of Imbalanced Growth which was worked out on the basis of structural changes
in NSDP and workforce indicated that the degree of imbalance in the Punjab economy
became much higher during nineties (i.e., the period of liberalization). This may be
termed as structural distortion and calls for suitable measures to correct it.
Singh (2000) analyzed the structural change in Punjab economy on the

basis of input-output tables for the years 1969-70 (Alagh, Bhalla and Kashyap,
1980) and 1983-84 (Saluja, 1990). The main objective of the study was to examine the
structural changes that have taken place in the state economy during the Green
Revolution era of 1969-70 to 1983-84 by using Chenery-Watanabe U-W classification
and basic Leontief formalism. Traditionally, the Punjab economy had been
dominated by the agriculture and its allied sectors. The share of primary sector in the
total net state domestic product came down to 43.24 percent in 1997-98 as against
49.50 percent in 1980-81. On the other hand, during the same period the share of
secondary sector improved from 18.47 percent to 27.29 percent respectively. The
major contribution in this improvement has been due to manufacturing related sector.
The share of tertiary sector in the net state domestic product depicted a marginal decline
from 32.02 percent to 29.49 percent over the entire period of analysis. A look at the
sectoral linkage pattern is indicative of the fact that in agriculture related sector,
backward linkages are confined to a few number of sectors, but a high forward linkage
is a general phenomenon. It implies that agriculture sector generates a below average
input requirement from other sectors, while its own output is widely used by other
sectors. On the industrial front, the economy is dominated by small-scale units. The low
forward linkage is limited to a few number of manufacturing sectors of the Punjab
economy. Without import leakage in 1969-70, cotton ginning and textiles, rubber,
leather and plastics and non-metal mineral products were the sectors with both high
backward and high forward linkages. In 1983-84 cotton and textile, rubber, leather and
plastics were still the key sectors. Other sectors which joined this key sector
category were edible oils and food processing, chemical and fertilizers, basic metal
industries and miscellaneous industries. While at the all India level it may be seen that
38
over the years 1973 to 1978 input coefficients of all commodities increased by about
11.63 percent per annum. This increase is 15.09 percent for the period 1973-74 to 1989-
90. For Punjab the input coefficients have increased on an average at 10.64 percent per
annum through the years 1969-70 to 1983-84. This again confirms that input structure
has experienced a change in the positive direction. The crux of the study is that the
Punjab model of capitalist development has developed the agriculture and its allied
sectors well, but it has failed to integrate it with rest of the sectors. In spite of being so
developed, the agriculture is still characterized by low backward and low forward
linkage pattern. The proportion of inter-industry use to total output has registered a
negligible improvement since the year 1969-70. A slight shift has occurred in favour of
intermediate manufacturing characterized by high forward and backward linkage.
Overall technological pace is picking up. The study suggested that further development
of the state is possible only if secondary and tertiary sectors are developed and their
integration with the agriculture is strengthened.
Datta (2001) analyzed the growth of tertiary sector and its causes, from 1950-
1999. The study is based on NAS and author's own estimates and uses regression
models and observed the trend of relative shares of agriculture, manufacturing and
services in GDP of the Indian economy during the period 1950-51 to 1996-97. The
study shows that during this period, the share of the tertiary sector in GDP at constant
prices (1980-81) increased from 26 percent to 37 percent. But he found that the share of
material services (comprising distributive trade and financial services but excluding
transport which has been classified with industry) increased rapidly form 10 percent to
22 percent which implies that the share of non-material services actually declined
marginally from 16 percent to 15 percent. Present study analyzed the trend of the
relative shares of the tertiary sector. The author‘s estimates are different from official
estimates in two important aspects. Firstly, the estimates on the share of banking
services are based on the new approach that is different from the official approach. The
new estimates showed the improvement in the banking sector‘s share in GDP to be
lower than that under the official estimates. Secondly, official estimates of the public
administration and defence have been revised resulting in slower growth of the sector.
His study showed that the share of distributive trade in the tertiary sector increased
39
rapidly during 1950-51 to 1960-61 but increased relatively slow but steadily during the
next three decades covering the period from 1960-61 to 1990-91. The increment for
banking was dramatic from just 2.7 percent in 1950-51 to as much 7.8 percent in 1995-
96. The rate of this increment was rather moderate during the first two decades but
accelerated during the later decades. Among the sub-sectors of the tertiary sector most
prominent growth was experienced in the financial services. The sub-sector ‗Trade‘ also
experienced an increase in its share in value added in the tertiary sector which means
that the increase in its share in GDP is significant. Information Technology Services
(ITS) which constituted a very small part of ‗other services‘ even in the first half of the
1990s has been growing at a phenomenal average rate of 4.5 percent per annum during
the present decade. Over the four years 1994-95 to 1998-99 the size of this industry was
found to be grown three folds. The study finally concluded that this industry has
economic potential for future growth. The findings of the study are: (i) the tertiary
sector has grown in importance due to fast growth of trade and finance, (ii) the rising
share of distributive trade in GDP is due to growth of manufacturing and construction
and (iii) finance has grown due to conducive government policies related to banking,
finance and industry. The book is devoted primarily to an assessment and interpretation
of the tertiary sector and its major components in India during the second half of the
twentieth century. Various reasons have been sited as factors leading to the rapid
growth of services, both, in the developed countries and developing countries, such as
linkages of distributive trade, banking and insurance, etc, to manufacturing activities,
rising sophistication of service activities, and income elasticity of demand for certain
services being very high.
Hansda (2002) tried to understand the sustainability of services as also of

services-led growth of the Indian economy in terms of the inter-sectoral linkages as
emanating from the input-output transactions tables for 1993-94 both at the
disaggregated level of 115 activities and the aggregated level of 10 constructed national
accounts categories. At the disaggregated level, the Indian economy is found to be
predominantly services-intensive. In the process, industrial activities turn out to be the
major pace setter for services-growth. On the other hand, services have the largest
inducing effect on the economy. The inducing impulses from services might have
40
worked mainly through forward linkages. However, since the forward linkage is
inherently less effective than the backward linkage, the inducing impact of services on
the rest of the economy could be limited. Nevertheless, the service sector is found to
have the largest expansionary potential (multiplying effect) on the rest of the economy.
Therefore, the study concludes that the services led growth augurs well for the Indian
economy and for sustaining the overall GDP growth there must be growth impulses
from other sectors.
Kaur and Dhindsa (2002) analyzed the nature of transformation of

employment in primary, secondary and tertiary sectors in relation to economic
development and liberalization process, over the period 1981 to 1998. They observed
the nature of employment during pre-liberalization and post-liberalization periods by
dividing the time period into 2 sub-periods; sub-period I covering pre-liberalization
period during 1981-89 and sub-period II covering post-liberalization period during
1990-98. They found that growth in the tertiary sector employment was faster than the
growth in the other sectors over the last two decades. The study analyzed growth rate of
employment in sub-sectors of tertiary sector and found that financial sector was the
most efficient and probably the most formalized of the industries in the service sector.
Financial sector was found to be the most dynamic and growing sector in the last
decade i.e. in the post-liberalization period. Along with it the employment in wholesale
and retail trade showed the minimum growth rate. They also found that employment in
all sub-sectors of tertiary sector grew faster than employment in the other sectors of
economy during the new IT revolution of nineties. They also noticed that during this
period highest growth rate of 1.61 percent was recorded by service sector followed by
1.21 percent of total employment. They calculated compound growth rates of
employment in the sub-sectors of the tertiary sector (1981-1998). It was the
employment in finance, insurance, real estate etc. that recorded the highest growth rate
(3.10 percent), followed by community, social and personal services (1.70 percent).
Least growth rate (0.71 percent) was recorded by the sub-sectors transport, storage and
communication. As regarding the sub-sectors of the service sector, employment in
wholesale and retail trade showed the minimum growth rate closely followed by
employment in finance, insurance and real estate in the first sub-period. However, in the
41
second sub-period, both the sectors swapped their positions. It was also found that
employment in all sub-sectors of tertiary sector grew faster than employment in the
other sectors during the new IT revolution of nineties. They concluded that if tertiary
sector grew more than the secondary sector, it might show some side effects like
inflation etc. because it is a ―Consumption-oriented‖ rather than ―Production-oriented‖
sector which is undesirable. They compared the growth rates of both the sub-periods
and found that there was decline in the growth rates in all the sectors in post-
liberalization period as compared to the pre-liberalization period. A number of reasons
for this trend were listed such as pattern of allocation of investment followed by
technology adopted in service sector, expansion of literacy, availability of skilled labour
force, population growth rates etc. They found inverted U-relationship in case of share
of wholesale and retail trade employment in service sector and per capita NNP (Net
National Product). This relationship suggested that as per capita NNP increases,
employment in wholesale and retail trade sub-sector of service sector increase.
Kohli (2002) tried to analyze dynamics of service sector growth in India for the
period 1950-51 to 1998-99. The objective of this paper was to examine whether there
will be change in the production of commodity from primary to manufacturing activities
and a marginal or substantial increase in the share of service sector in GNP. The author
worked to find out sectoral composition of GDP at factor cost at current prices in
various years at the national level. In 1950-51, the ratio of the three sectors was
56:15:29, in 1998-99 this ratio had got transformed to 31:24:45. However, share of
service sector in GDP and its contribution to employment generation has increased over
time. This trend is observed in all the countries. Trade, hotels and restaurants, sub-
service sectors contributed highest (34.1 percent) to GDP in 1996-97 followed by
financial sector in the 1990s. The share of service sector in GDP increased from 29
percent in 1950-51 to 34.0 percent in 1977-78 and 42.8 percent in 1996-97.
Employment in the service sector has also increased in India since independence.
Finance sub-service sector is providing employment growth rate of 3.45 percent due to
its high employment elasticity. The study found out that employment in both rural and
urban areas in tertiary sector has increased. In rural areas it increased from 197.8 to
290.3 million during 1972-73 to 1993-94 where as in the urban areas it has increased
42
from 38.5 to 81.8 million during the same period. A gender wise analysis of service
sector showed that a large number of females are employed in the sector doing usually
the simplest, most respective and least skilled tasks. It was found that the increase in the
employment of females in the urban service sector was higher than in case of males.
The female employment was found highest (6.40 million) in the financial sector. It was
also found that the labour absorptive capacity that depends upon the technology
adopted, increased in tertiary sector while declined for both other sectors. Rising trend
of employment in the service sector was also observed at regional level in states. In
1991, as compared to 1981, the number of states in the high category of employment of
service sector increased from 4 to 8. These states are Punjab, Haryana, Gujrat, Kerala,
Maharashtra, Tamil Nadu and West Bengal. A regression model was also built and the
results indicated that the favourable technology adopted labour intensive techniques,
which has resulted in the increasing trend of service sector employment, but in future it
is likely that labour saving devices may reverse the trend. The study suggested
government to formulate and adopt appropriate development policies to generate
employment in the secondary sector and to sustain the growth of service sector
employment.
Naik (2002) identified the factors leading to decline of Indian manufacturing

and points that rapid growth of service sector before manufacturing is not natural but
forced growth. With growth rates in both agricultural and industrial sectors falling short
of requirements to absorb the growing labour force, those without work are forced to
indulge in some subsistence activity. Prevalence of poverty testifies it. Only knowledge-
based services cannot sustain in the long run unless it is adequately supported by a
growing manufacturing sector. The past policies created a high cost industrial structure,
Indian manufacturing has shown very low competitiveness due the existence of too
many, small scale unregistered units, low scale and investment in plant and machinery
and fragmentation of units. Also rigid labour laws, poor quality infrastructure, high
power costs are not conducive to manufacturing growth. Present study argued that
improvement in the manufacturing sector's growth rate is important for the growth of
the service sector, to sustain the consumption demand arising out of rising income level.
Thus, industry drives service sector growth.
43
Acharya (2003) determined the trends in the growth of GDP since the 1950s. In
his study period since 1980s is split into two parts with the crisis of 1991 forming the
dividing line. By comparing the two periods the study made the following conclusions.
First, average economic growth of 6.4 percent in the post crisis period is higher than the
average economic growth of 5.6 percent of the 80‘s. Second, this acceleration is entirely
attributed to the service sector while growth surged to 8.2 percent in the latter period
from an already high 6.7 percent in the 80s. But if we study the service sector for the
four years, ending 2000-01, then it was found that a part of the growth in services
during these years simply reflected the revaluation of the sub-sector ‗public
administration and defence‘ because of higher pay scale resulting from decisions of the
fifth pay commission. Thus, higher salaries showed a faster growth of this sector in the
national accounts. These ‗pay commission effects‘ were mainly spread over three years
1997-98 to 1999-00 for the centre and states and thus led to about half a percent of GDP
growth in each of these years. The study analyzed fifty years period from 1950-51 to
2000-01 and gave the following conclusions: In the 50s, 60s and 80s industry grew
faster than services. In the 70s the service sector grew marginally faster. But in the 90s
the service sector grew at 7.6 percent and thus was appreciably higher than the
industrial growth with the average of 5.7 percent. In the fifty years, that is, from 1950-
51 to 2000-01, service sector growth averaged 5.5 percent, which is marginally below
the industrial growth average of 5.7 percent. In the four years, 1997-2001, the study
observed that the service sector grew at a rate of 8.1 percent. But India‘s Ninth Plan
performance showed that overall growth actually slowed down significantly during
1997-2000 to just 5 percent. Thus even an 8 percent growth of service sector could not
compensate for the slow expansion (at just over 3 percent) of the agricultural and
industrial sector. Thus the study finally concluded ―services are all hugely important,
but they cannot by themselves assure rapid and sustained growth of the Indian
economy.‖
Bhowmik (2003) made an attempt to examine the service intensities of

production in the different industries in the Indian economy between 1968-69 and 1993-
94 with an input output approach using six input output transaction tables (1968-69,
1973-74, 1978-79, 1983-84, 1989-90 and 1993-94 published by Central Statistical
44
Organization). In present study author aggregated the 60 sectors into 34 sectors. Out of
34 sectors, nine sectors come under services (Other Transport, Storage & Warehouses,
Communication, Trade, Hotels & Restaurants, Banking, Insurance and Other Services).
All tables had been deflated at 1973-74 prices to eliminate the price effect. Two
methodologies have been used in this paper that are Direct Services Intensities and
Direct Plus Indirect Services Intensities which shows that average direct service use per
unit of output increased from 8.97% to 14.13% in 1968-69 to 1993-94 respectively and
the average direct plus indirect service use per unit of output increased consistently
from 15.83% to 27.81% for the same period. It is found that the ratio of total service use
and total output exhibits a rising trend over the years. It is interesting to know how the
output of the services sector is used as an intermediate good by other sectors of the
Indian economy. Nearly 40% of the industries had an above average use of services in
their production. Metal Products, Machineries, Trade and Banking played a key role in
terms of service intensity.
Jeromi (2003) analyzed the performance of the major sectors of Kerela's

economy in the two decades (1980-2000) using annual average growth of state income
as also of each sector. The important findings of the study are: (i) Kerala's economy
driven by service sector depends on expatriate remittance (ii) agriculture sector growth
has declined with the decline of food production and also of commercial crops
following the large imports of such products, (iii) the state is industrially backward due
to weak traditional industries, sick SSI's, lack of investment and negative image of
labour and, (iv) with low growth of productive sectors. The study suggests that the state
must improve agriculture productivity and increase private investment, develop tourism,
advanced health care services, IT and research institutions, areas where it has
comparative advantage and this can sustain service driven growth in the state.
Rao and Dev (2003) compared sectoral growth of Andhra Pradesh during and
after the period of economic reforms using time series data. Their major findings are, (i)
Andhra Pradesh has not been able to step up its State Domestic Product (SDP) growth
rate in the post reform period compared to the other states due to weak economic and
social infrastructure, (ii) also its agriculture growth has declined sharply, due to fall in
private capital formation, lack of credit access to small farmers and government's
45
restrictive policy, (iii) Industrial slowdown has been due to fall in the number of
registered manufacturing sector and change in policy towards IT and software services,
(iv) its social sector and education sector have lesser allocations and are of poor quality.
The study reveals that though service sector contributes 50 percent of SDP to sustain the
commodity sectors still the industry needs to grow to generate adequate demand for
services.
Sastry et al. (2003) in their study examined the linkage of growth among the
agriculture, industry and service sectors of the economy with due objective to suggest
an appropriate strategy for accelerating the growth rate. For this purpose they used both
Input-Output (I-O) and Simultaneous Equations Framework. It was observed that there
is a major shift away from the agriculture towards service sector and industrial sector.
The contribution of agriculture, industry and services to GDP was in the ratio of
24:22:54 respectively in 2000-01 as compared to 46:16:38 respectively in 1970-71.
During the 1990s, however, there was a sharp rise by about 8 percent points in the share
of the service sector and almost a similar fall in the agricultural sector, with a very little
change in the share of the industrial sector. A comparative analysis of I-O tables 1968-
69 and 1993-94 reveals shifts in the production linkages in favour of agriculture
moderately and service sharply. As per 1968-69, to produce one unit of services, input
requirements were 0.017 units of agriculture, 0.132 units from industry and 0.096 units
of its own. However, in 1993-94, the input requirements changed to 0.034 units, 0.150
units and 0.195 units respectively. Demand linkages of the service sector in 1993-94
remained almost similar in case of agriculture where as there was an increase in the
demand linkages in case of industry. Service sector comprises of different
heterogeneous components viz. trade, hotels and restaurants, transport, storage,
communication, construction, finance, insurance, real-estate, business services, social
and personal services. Among these, first seven components display some type of
relationship with agriculture and industrial development while remaining components
appear to be less prone to other two sectors, at least in the short-run. In their study the
authors also calculated regression coefficients for the three sectors and they were found
compatible with the I-O table of 1993-94. The impact of the industrial sector on
enhancing growth in the service sector was worked out to be much larger at 0.49 as
46
compared to agriculture sector (at 0.21). The study concluded that despite the
substantial increase in the share of service sector in the GDP, the I-O table suggested
that the agricultural sector still plays an important role in determining the overall
growth rate of economy through its linkages to the other sectors of the economy. The
empirical results highlighted the need for a proper balancing of the ―inward-looking‖
(emphasis on agriculture) and ―outward-looking‖ (enhancing the scope of exports)
strategy. The study also bears several important policy implications in designing an
appropriate growth strategy. It highlights that the sustainability of relatively high GDP
growth in recent years driven by growth of the service sector alone would be difficult to
maintain over a long horizon. This is because in the absence of adequate growth in other
sectors of the economy, the service sector in the long run would be adversely affected
by demand constraints. Also, as a production of services requires inputs from other
sectors, there could be supply constraints due to slowdown in the growth of productive
capacity in the rest of the economy.
Bhattacharya et al. (2004) explored a regional econometric model and

forecasted growth rates of aggregate and sectoral Gross State Domestic Product (GSDP)
for three states of Andhra Pradesh, Karnataka and Uttar Pradesh. The major findings of
the paper are: (i) for Andhra Pradesh, services growth is explained by both commodity
growth (elasticity 0.35) and growth of services at the national level (elasticity: 1.26) and
there has been an increase in the services growth rate after economic liberalization (ii)
for Karnataka the impact of services output on industrial output is much higher than
agriculture and real public expenditure (1.14) and service sector output is influenced by
the industrial output but there seems to be a negative impact of economic reforms on the
services (iii) in case of Uttar Pradesh (U. P.), service sector growth is explained by the
growth of the commodity sectors and service sector growth at the national level and the
liberalization policies of the 1990s appear to have adversely influenced service growth
and (iv) based on medium term growth forecasts, U.P. may continue to be one of the
slowest growing economies of the nation.
Gordon and Gupta (2004) in their paper tried to analyze the cause and factors
behind the growth of the services in India. The study opined that the growth
acceleration of the services in the 1990s was mostly due to fast growth in
47
communication services, financial services, business services (IT) and community

services. The authors found that the factors like high income elasticity of demand for
services, increased input usage of services by other sectors and rising exports were
important in boosting services growth in the 1990‘s. Supply side factors including
reforms and technological advancements also played a significant role. The paper
showed that the employment growth in the Indian service sector has been quite modest,
thus underscoring the importance of industry and agriculture also growing rapidly.
Study showed that on an average service sector grew more slowly than industry
between 1951 and 1990. Growth of services picked up in the 1980s and accelerated in
the 1990s, when it averaged 7.5 percent per annum, thus providing a valuable
proportion to industry and agriculture, which grew on an average by 5.8 percent and 3.1
percent respectively. The most visible and well-known dimension of the take-off in
services was noticed in software and IT-enabled services (including call centers, design
and business process outsourcing). Regression equations are estimated separately using
time series data for each service activity, and then pooled data for various activities. The
dependent variable is the annual growth rate in the ith services activity in year t. The
independent variables include the growth rates of (i) the commodity producing sectors,
intended to capture demand for services (ii) the volume of external trade of goods, and
(iii) the value of exports in services. To smooth the noise in annual data, all growth rates
are measured as three-year moving averages. The paper also showed that almost all
services sub-sectors in India grew faster than GDP over time, but the pick-up in growth
in the 90s was the strongest in business services, communication and financial services
followed by community services and hotels and restaurants. The growth in public
administration and defence, real estate, storage, transport and personal services in the
1990s averaged around 6 percent and was broadly similar to that in the previous
decades. In the four decades period, 1950-1990, agriculture‘s share in GDP declined by
about 25 percent points, while industry and services gained equally. The share of
industry stabilized since 1990 and the entire subsequent decline in the share of
agriculture was picked up by the service sector. Thus, while over the four decades,
1950-1990, the service sector gained a 13 percent share, the gain in the 1990s alone was
8 percentage points. Even though India experienced profound changes in output shares,
48
the same is not true for employment shares. Although share of services rose from 42
percent to 48 percent of GDP during the 1990s, the employment share of services
actually declined by about one percentage point during the decade. Thus, it was found
that though activities shifted to services, employment creation in services lagged far
behind. The study tried to conclude by saying that increase in the use of services input
in other sectors over time may be partly responsible for the increase in services share in
GDP. Though large growth potential of Indian services exports is well known, but in
this paper they brought out the conclusion that there is also considerable scope for
future rapid growth in the Indian service economy provided that deregulation of the
service sector continues. However, since service sector growth has been relatively
jobless hence agricultural and industrial sectors should also grow.
Joshi (2004) in her study analyzed the sectoral composition of GDP and
employment for the period 1950-2000. The author found that during the process of
growth over the years 1950-51 to 1999-2000, the Indian economy has experienced a
change in the production structure with a shift away from agriculture towards industry
and the tertiary sectors. The study found that the share of service in real GDP, at 1993-
94 prices, increased from 28.09 percent in 1950s in 44.22 percent in the 1990s. Service
sector output increased at a rate of 6.63 percent per annum in the period 1980-81 to
1989-90 (pre-reform period) as compared with 7.71 percent per annum in the period
1990-91 to 1999-2000 (i.e. post-reform period). It was further noticed that agriculture
and manufacturing sectors have experienced phases of deceleration, stagnation and
growth, the service sector has shown a uniform growth trend during the period 1950-51
to 1999-2000. Talking about the employment scenario during the period 1983 to 2000 it
was revealed that structural changes in terms of employment were slow as primary
sector absorbed about 60.4 percent of the total workforce even in 1999-2000 followed
by the tertiary (22.7 percent) and secondary sectors (16.8 percent) respectively. Tertiary
sector also witnessed deceleration in growth rate of employment during post-
liberalization period (1994-2000) due to sharp decline in employment growth in
community, social and personal services to 0.55 percent in the post-liberalization period
as against 2.90 percent in the pre-liberalization period. The study also quoted former
President Abdul Kalam and Y.S. Rajan (1998) who highlighted the complementarily of
49
the three sectors. They said, ―India should try to strengthen primary and secondary
sectors which will help to build a major economic infrastructure for the service sector
and use it for employment generation.‖ In the study the author suggested to adopt
appropriate development strategy to overcome the problems of unemployment and
poverty. The author said that there should be development of tertiary sector (non-
commodity sector) along with the commodity producing sector in order to provide a
boost to the economy. The author concluded that in this new era of globalization, the
interdependence of various sectors is going to increase further. She said though overall
growth in the country should be cumulative result of the growth of the three broad
sectors, it is the service sector which will continue to enable the country to attain an 8
percent plus GDP growth rate. This vigorous growth she said will be through inter-
sectoral linkages. This will generate momentum for creation of employment
opportunities and help poverty elevation.
Babu (2005) tried to investigate the nature of economic growth in India, its
effect on sectoral linkages in terms of employment and output since 1990s. Growth
rates and shares of GDP and its sectors by industry of origin are used. Findings of the
study are (i) in the last two decades, growth has been propelled by the service sector, (ii)
in the 1990s the gap between the tertiary sector and the agricultural sector and
manufacturing sector widened, (iii) But 60 percent of the workforce is employed in
agriculture sector, while other sectors, are not fast in generating employment. This is
due to change in production, demand linkage resulting from change in the composition
of GDP, rapid technological growth which has reduced the dependence of industry on
agriculture and increasing service sector dependence on itself than on other sectors.
This has weakened production and hence demands linkages. Service and manufacturing
are dependent on primary sector only for demand linkage and the study prescribes
strengthening sectoral linkages.
Bagchi et al. (2005) have critically explored the Gujarat model of growth by
studying the trends in the growth rates from 1970-2000 using State Income,
Employment and Annual Survey of Industries data. The paper uses linear, semi-log and
quadratic equations with OLS to calculate trends in growth rates .The findings of the
paper are, (i) the primary and agricultural sectors' growth has been stagnant and
50
declining, (ii) the secondary and the tertiary sectors in the state of Gujarat have shown
statistically significant and high rates of growth, mainly due to registered manufacturing
sector and trade, transport, banking, real estate etc., (iii) the economic growth sustained
by secondary and tertiary sectors have made no positive impact on primary sector, (iv)
ratio of domestic product per worker in the non —agriculture to agriculture sector has
increased and (v) since 1990s, the factory sector turned capital intensive and labour
displacing. The paper finds growing intersectoral inequality and the rural sector being
marginalized from the growth process.
Banga (2005) studied the pattern of growth in India's service sector and its
causes. The study utilized data obtained from some available archives which have been
used as a data sources such Central Statistical Organization (CSO), Reserve Bank of
India (RBI), National Account Statistics, World Development Indicator (2004) of the
period 1980-2002. Study shows that service sector has emerged as the largest and
fastest growing sector in the global economy in the last two decades, providing more
than 60 percent of global output and in many countries as even larger share of
employment. The growth in services has also been accompanied by the rising share of
services in world transactions. Testimony to the rise in international supply of services
is the fact that trade in services has grown as fast as trade in the period 1990-2003 (i.e.
6% per annum). The share of services in total FDI stock has now increased to around
60% since 2002 as compared to less than half in 1990 and only one quarter in 1970s. Its
growth has in fact been higher than the growth in agriculture and manufacturing sector.
It now contributes around 51 percent in GDP. India‘s service sector has witnessed
tremendous growth in the last ten years. But this growth has not been accompanied by a
corresponding growth in employment, in service sector. It is found that growth in
service sector has been lopsided and jobless. Some sectors have witnessed a double
digit growth rate in the last decade, e.g. communication and business services, while
some have experienced a fall in their growth rates, e.g. railways, real estate and
dwellings. The sectors that have witnessed negative growth rates and those that have
experienced slow growth rates are also the sectors that have large potential for
generating employment, e.g. construction, transport and professional services. It is also
argued that in terms of its service-led growth, India is not an outlier. Growth in services
51
has led to higher use of services in manufacturing sector. This has in turn led to higher
output and productivity growth in the manufacturing sector, which implies that the
service sector will be able to generate its own demand in the future. Most of the studies
on the Indian economy support the view that domestic reforms and higher liberalization,
in terms of lowering of barriers to trade and allowing FDI, have improved growth in
corresponding service. This increased external demand may also play an important role
in sustaining the dynamism of services. There has been no coherent overall policy for
services in line with the industrial policy and agricultural policy. Consequently, the
depth and pace of reforms lack uniformity across sectors. Along with the national and
institutional efforts to liberalize reforms so as to maximize the benefits of higher trade
and FDI in services. Full gains of trade liberalization in services can be acquired by an
economy only if certain economy wide efforts are made to make general environment
more conducive trade and investments in services. Macroeconomic policies like high
tariff rates, large deficits and rigid labour laws may have as adverse effect on
competitiveness of services as on goods. However, it is beyond the scope of this paper
to analyze the ways to overcome these weaknesses. But strong and financially
independent regulation and economy wide efforts to improve business environment can
go a long way to sustain the dynamism of India‘s service sector. The findings of the
study are: (i) the service sector has grown relatively in terms of its contribution to GDP
and also its growth rate since 1990s, (ii) among the subservices, wholesale and retail
trade had the highest share in the total GDP in the last decade, but in terms of the
growth rate business services and communications have experienced the maximum
growth in the 1990s though their share in the GDP is quite low, (iii) the share of
services exports in India's total foreign trade increased from 19.3 percent in 1995 to
24.9 percent in 1998, due to mainly travel, communication and software services and
(iv) the growth of India's service sector can be attributed to structural changes and
reforms, that led to increase in the usage of services as inputs by other sectors.
Dasgupta and Singh (2005) explained whether the services are the new engine
of Indian economic growth or not? Their study utilized the data obtained from some
available archives which have also been used as the data source e.g. Gorden and Gupta
(2004), Joshi (2004), Palma (2004) etc. using the regression analysis on cross-sectional
52
analysis of data from thirty developing countries over the period 1980-2000. The study
reveals that a faster growth in services than in manufacturing industry in many low and
middle income countries, is apparently challenging the idea that manufacturing is the
main engine of growth in economic development. The Indian economy has expanded at
a rate of 5.5 to 6 percent per annum over the last twenty years. After 1997, the growth
rate of services became much faster than that of either industry or agriculture. Finally,
in relation to manufacturing versus services, data indicates that both are closely related
to the growth of GDP. In the structural analysis of economic growth, it is customary to
argue that high R-square for services does not indicate a directly casual relationship,
rather it is derived from the close relationship between manufacturing and GDP growth.
The implication is that the growth of services depends largely on the growth of
manufacturing.
D’Souza (2005) analyzed the implications of sectoral transformation in the

Indian economy, by using the demand and supply conditions. The important findings
are, (i) as income rises over time, the income elasticity to productivity growth ratio of
agriculture declines relative to industry and labour shifts to manufacturing and
eventually services become the labour absorbing sector as the income elasticity to
productivity growth ratio rises in services, whilst the ratios in the other two sectors
continue to decline, (ii) in India, growth in employment in the service sector has been
due to low productivity growth in this sector with many individuals performing low-end
services such as petty trading and personal services rather than to a high income
elasticity of demand for the output of the service sector that stems from productivity
improvements in manufacturing, as the economy transforms itself away from a mature
manufacturing sector.
Jeromi (2005) traced the reasons for the slow growth of Kerala's economy and
the impact of economic reforms in Kerala. Average annual growth rates, percentage
shares and relative shares of the primary, secondary and tertiary sectors and their sub-
sectors are used. The important findings are: (i) the primary sector showed a negative
growth rate of 1 percent, growth of secondary sector fell to 3.7 percent and growth of
tertiary sector grew to 9.3 percent during the reform period, (iii) the reasons sited for the
negative growth of primary sector are poor performance of agricultural sector, (iv) the
53
causes of low industrial growth sited in the article are, lack of investment ,weak
industrial structure, inefficient public sector enterprises, (v) the tertiary sector seems to
driving the growth process in Kerala, with trade, transport, banking and
communications showing higher growth rates due to the consumption induced growth
of inward remittances and tourist earnings and the private investment in higher
education.
Papola (2005) made a comparative study of the changes in the path of economic
transformation of India with some other developing Asian countries viz., China,
Indonesia, Thailand, Philippines, Malaysia, Republic of Korea and Pakistan on the basis
of World Development Report (2004) for the year 1960 and 2002. The study found that
in consonance with the historical experience of developed countries the share of
agriculture in GDP has continuously declined in all of these developing Asian countries
including India. During the study period of 1960 to 2002, in terms of percentage it
declined sharply in China from 30 percent to 15 percent, in Indonesia from 50 percent
to 18 percent, in Thailand from 40 percent to 9 percent, in Philippines from 26 percent
to 14 percent, in Malaysia from 36 percent to 9 percent, in Republic of Korea from 37
percent to 4 percent, in Pakistan from 46 percent to 23 percent and in India from 55
percent to 24 percent respectively. Thus, the largest decline in share of agriculture has
been registered for Republic of Korea. In China, Indonesia and Malaysia industry
remains the most important sector. During the same period the percentage share of
industry in GDP increased in China from 49 percent to 51 percent, in Indonesia from 19
percent to 43 percent and in Malaysia from 18 percent to 47 percent. In contrast to that
in Thailand, Philippines, Republic of Korea, Pakistan and India service sector has
emerged as the dominant sector of the economy. During the year 1960 to 2002 the
percentage share of services in GDP increased in Thailand from 41 percent to 48
percent, in Philippines from 46 percent to 53 percent, in Republic of Korea from 43
percent to 55 percent, in Pakistan from 38 percent to 54 percent and in India from 29
percent to 51 percent respectively. Thus, India registered the fastest growth in services
as compared to all other developing countries in Asia under study. In 2002, the
corresponding percentage share of employment in these service sector dominating
countries was 33 percent in Thailand, 47 percent in Philippines, 62 percent in Republic
54
of Korea, 34 percent in Pakistan and 22 percent in India. The study concludes that
during these two comparative years under analysis the percentage share of agriculture in
GDP has sharply declined in all these developing countries of Asia including India. On
the other hand, their percentage shares in industry and services have shown a significant
rise. The industry remained the most important sector in China, Indonesia and Malaysia,
while in Thailand, Philippines, Republic of Korea, Pakistan and India services have
emerged as a dominant sector of the economy. Most interestingly the two neighbouring
countries of India and Pakistan remarkably share almost similar structure of economic
development. However, in comparison to other service sector dominating countries, the
corresponding employment generation potential of services in India has been very low.
Dasgupta and Chakraborty (2006) tried to explain the changes that had taken
place in the production structure of the Indian economy during the decade of the
eighties and in the nineties. The Input-Output Transaction Tables provided by the
Central Statistical Organization (CSO), Ministry of Statistics and Programme
Implementation, Government of India, for the years 1983-84, 1993-94 and 1998-99
have been utilized to measure and compare the sectoral linkages. They aggregated the
commodities in each table and reduced the transaction matrix into (72×72) one. All the
tables are converted to 1993-94 prices to make them comparable. All these 72 sectors
are further classified into three broad categories namely Ricardo Sectors, High-
Technology sectors and Heckscher-Ohlin sectors on the basis of inputs used in the
production process. The Ricardo sectors are characterized by the importance of natural
resources in their production. The goods which are produced with advanced technology
are included in the category of high-technology sectors. Finally, the Heckscher-Ohlin
sectors are produced with standard technologies (labour-capital). With the help of Input
Output Technique authors wanted to find out which sectors have gained the importance
and to what extent structure of the economy has changed. The analysis reveals that agro
based industries like cotton textiles, jute, hemp and mesta textiles, other textiles, paper
and paper products and other resource intensive sectors like non metallic mineral
products, coal tar products etc. have shown strong linkages in terms of both backward
and forward linkages. Investment in these sectors can speed up the industrialization
process. The capital intensive basic industries like iron and steel, electricity, non ferrous
55
basic metals, construction, synthetic fibre and resin, fertilizers, technology intensive
sectors like other chemicals and labour intensive sectors like miscellaneous
manufacturing, transport services, trade, banking and insurance etc. are supposed to
play the role of engine in the process of growth. Present study shows that a rapid
structural change is taking place since last two decades. India is emerging as a producer
of the high-technology intensive goods instead of resource intensive goods which would
be consistent with the dynamics of growth.
Datt (2006) explored the emerging structure of Indian economy on the basis of
Central Statistical Organization data for a period of 1960-61 to 2000-01. The main
objective of the study is to examine the changing economic structure of 17 main states
in the process of economic development of India. These states include Punjab, Haryana,
Maharashtra, Gujarat, Tamil Nadu, Karnataka, Himachal Pradesh, Kerala, Andhra
Pradesh, West Bengal, Rajasthan, Madhya Pradesh, Jammu & Kashmir, Assam, Orissa,
Uttar Pradesh and Bihar. The present study found that over the period 1960-61 to 2000-
01 except in the state of Punjab where there was a relatively slower decline in the share
of net state domestic product (NSDP) in agriculture, most of the other states indicated a
sharp decline in the share of agriculture. In 2000-01 Punjab and Haryana, the main
beneficiaries of Green Revolution still have higher shares in agriculture in the range of
33 percent to 40 percent. In contrast to that the industrialized states like Maharashtra,
Gujarat and Tamil Nadu experienced steep fall in the share of agriculture to a level of
13 percent to 18 percent which is much lower than the all India figure of 24 percent. In
case of Assam, Bihar, Orissa and Uttar Pradesh, the share of agriculture in NSDP
declined, but still ranged from 32 percent to 38 percent. During the same time period,
the share of industry in NSDP indicates a significant increase in Maharashtra, Gujarat
and Tamil Nadu to a level of 32 percent to 38 percent, thus, enabling these states to
switch over to service sector. On the other hand, there has been a little increase in the
share of industry in states like Jammu & Kashmir and Orissa where it merely accounted
for 12 percent and 18 percent respectively. In the state of Jammu & Kashmir the
disturbed political climate, restrictions on Indian businessmen to invest in Kashmir and
the growing terrorism were the factors restricting the industrial development of the
state. However, tourism and other services allied with tourism did lead to a big jump in
56
the share of service sector. By 2000-01, the service sector become the driver and
magnet for several states like Maharashtra, Gujarat, Karnataka, Kerala, Tamil Nadu and
West Bengal where its share ranged around 50 percent. In relatively poor states like
Rajasthan, Madhya Pradesh, Assam, Orissa, Bihar and Uttar Pradesh the tertiary sector
became a leading sector, but not to the same extent as in forward and richer states. The
study found that so far the relative shift in the percentage share of employment in
various sectors of these states is concerned; there is no uniform pattern that abides by
the experience of developed countries. However, Kerala showed a singularly different
pattern with NSDP derived from agriculture declining to 25 percent accompanied by
low level of employment share of 40 percent. This was accompanied by 20 percent
share of NSDP in industry with 25 percent employment and also 55 percent share of
NSDP in services with 33 percent employment. The pattern of development in West
Bengal followed more or less similar to that of Kerala. Maharashtra is another state
which has shown asymmetry in its relative share of three sectors. This state enjoyed a
second place in terms of per capita income in 2000-01 with a small proportion of 14
percent of NSDP being generated from agriculture, but it carried a heavy burden of
labour employed at around 57 percent in agriculture. This was followed by 33 percent
share of NSDP in industry with barely 17 percent employment. In case of services, its
proportion in NSDP was 53 percent with a labour absorption of around 26 percent. This
implies that output labour ratio in Maharashtra was only 0.24 of agriculture, 1.85 for
industry and 2.1 for services. The state of Gujarat has also followed the similar pattern
like Maharashtra.
The study concluded that there is need to analyze the production and
employment pattern of every state and evolve suitable policies to strengthen agriculture
in the first instance which provides livelihood or employment to nearly two-thirds to
three- fourths of the labour. A breakthrough in agriculture will provide a push to
industry and services as a consequence of the increase in labour and land productivity
in agriculture. The industry has lagged behind the growth of services. This transition
witnessed in most of these states to a post-industrial service economy without passing
through a process of industrialization has been noted as a major weakness of the
outcome of the development process undertaken in the country over the last 50 years.
57
Chakravarty (2006) analyzed the determinants of service sector growth in India

during the recent years in 16 states of the economy. The Gross State Domestic Product
(GSDP) data by industry of origin for some major states and for the country as a whole
is collected from National Accounts Statistics (NAS) for the period 1980-81 to 2002-
03.The period under study is divided into two parts, one the initial phase of
liberalization from 1980-81 to 1992-93 with 1980-81 as base and the later phase of
liberalization from 1993-94 to 2002-03 with 1993-94 as base. The output elasticity of
demand for services output is found using three independent variables, the state's own
agriculture and industry and the output of agriculture and industry in the rest of the
Indian economy and with service sector output as the dependent variable. The main
objective of the study is to find out the determinants of service sector growth in India
during recent years. Basically this study is a demand side analysis where the service
sector output of a specific state is not only a function of the outputs of that state's own
agriculture and industry, but also the output of the commodity producing sector of the
rest of Indian economy. The selected states include Rajasthan, Maharashtra, Haryana,
Karnataka, Gujarat, Himachal Pradesh, Tamil Nadu, Madhya Pradesh, Uttar Pradesh,
Orissa, Andhra Pradesh, Bihar, Kerala, West Bengal, Assam and Punjab. Further, these
states have been classified into high, medium and low growth states on the basis of
their performance of service sector growth rates during the period 1980-81 to 1992-93.
The high growth states with a service sector growth rate of above 6.5 percent, includes
Rajasthan, Maharashtra, Haryana, Karnataka and Gujarat. In all of these states while
agriculture showed an insignificant elasticity, the responsiveness with respect to
industry was generally significant in both the periods. During the initial phase of
liberalization, the corresponding elasticity for industry varied from 0.76 in Haryana to
1.17 in Maharashtra. However, Maharashtra showed an interesting trend of insignificant
elasticity for industry in the later phase with a significantly high elasticity for the rest of
the economy. The rest of the economy played a significant role only in case of Haryana
and Gujarat in the initial period, but in the later period this trend persisted only for
Haryana. The important findings of the paper are: (i) the industrial sector turns out to be
the most important determinant of service sector growth in different states, (ii) the 'rest
of the Indian Economy' commodity producing sector is an important determinant in
58
determining the service sector performance of a specific state depending on its labour
cost, infrastructure facilities etc. and (iii) for all the states under study, except for the
service sector, no significant change can be observed in the growth performances in the
other two sectors in the post reform period, including industry. The study recommends
diversification over time in the commodity producing sector to foster growth in
services.
Rath and Rajesh (2006) attempted to make an assessment of performance of

services at the aggregated as well as the disaggregated level in terms of their shares in
GDP, employment, expenditure, tax etc. and identify some critical issues in India‘s
service-led growth. Ordinary Least Square (OLS) method was carried out for the period
1980-81 to 2006-07. Data has been taken from different archives of India that are
Central Statistical Organization (CSO), National Accounts Statistics (NAS), Reserve
Bank of India (RBI), Economic Surveys and Ministry of Finance. They argued that due
to growing tertiarization of several economies, several sectors have emerged as the
largest and fastest-growing sector in the global economy. They say that the higher
growth in service sector has added a dimension of stability to India‘s growth process.
Growing complementarities between the industrial and service sectors augur well for
the medium-term growth performance of the Indian economy. In the aftermath of nearly
one and a half decades of sustained growth, service sector has led to widening of not
only the tax base but also the buoyancy of taxes. With regard to inflationary impact of
service sector expansion, the paper finds that growing service sector share in GDP has
coexisted with low and stable inflation on account of inflation moderating forces
operating, inter alia through the synergy between the two growth drivers. They observed
that communication sector has been one of the fastest growing sectors encouraged by
liberalization, which has increased the competition and brought down the prices
remarkably in such a way to make it affordable to the common people. Financial
services and transportation sector also showed the substantial expansion. On supply
side, service sector has been the growth driver in the recent growth process with more
than sixty percent share in Gross Domestic Product (GDP). Their estimates suggest that
a 10 percent rise in PFCE (Private Final Consumption Expenditure) results in 11.9
percent rise in services and a 10 percent rise in industrial output results in 6.8 percent
59
rise in services output. The regression analysis suggests that a 10 percent rise in services
tax revenue results in 3.5 percent rise in total tax revenue. The study concludes that the
consumption of various services is growing at an increasing rate and services tax allows
more adequate revenue growth to support public services. Finally, the authors argued
that the higher growth in service sector has added a dimension of stability to India‘s
growth process.
Singh (2006) in this paper provided an integrated analysis of the role of the
service sector in recent Indian economic development. Paper included an examination
of the potential for spill-overs from IT, ITES (IT enabled services) and other service
sector such as financial services, to the rest of the economy. The author took an Input-
Output analysis of linkages to understand these possible spillovers and growth
potentials. The study also considered the particular role of international trade in services
of growing importance. The contribution of the service sector was found striking
particular in the 1990s, which had not only rapid growth rate averaging over 6 percent
since 1992 but also contributed over 60 percent in India. He found sharp increase in the
share of services in GDP from 37 percent in 1980 to 49 percent in 2002 while the share
of manufacturing remained about the same, at 16 percent. The study also observed that
the terms of trade moved against the service sector in the latter part of the 1990s, with
finance, insurance, real estate and business services and trade, transport, storage and
communication together contributing to that decline. Having a disaggregated view of
service sector growth in India, it could be noticed that 12 of 15 services sub-sectors in
India grew faster than GDP over the 50 years period beginning in 1951, but the growth
acceleration in the 1990s, which was responsible for India becoming an outlier in
service sector‘s share was the strongest in business services, communications and
banking services followed by hotels and restaurants and community services. These five
sub-sectors together accounted for the entire acceleration in service sector growth in the
1990s. It was also noticed that FDI inflows into India moved increasingly away from
manufacturing and towards service sector. This flow is heavily concentrated in
telecommunication and financial services. Study also observed that though services
crossed 50 percent as a share of GDP in the 1990s, they contributed only about 10
percent total tax revenue. Study also accounted for the slow growth of employment in
60
services. It was found that, while the share of services in employment increased from 20
percent in 1970-71 to 23.5 percent in 1999-2000, this was much less than the growth of
the service sector‘s share of GDP, which increased from 32.1 percent in 1970-71 to 48.5
percent in 2000-01. For this the author also observed that labour productivity in services
has grown much faster than in the rest of the economy. This paper also argued and tried
to conclude that manufacturing, services and agriculture are all important and broad
policy steps to improve growth and employment across the economy are desirable.
Along with this, it is also provided with an integrated appraisal of India‘s growth
experiences and future potential along this growth path.
Verma (2006) in her paper tried to capture the reasons for falling share of
agricultural output and rapidly increasing share of service sector output of the growing
Indian economy. She observed sharp increase in the rate of growth of service sector
trade after liberalization. The study focused on two steady state years, 1970 and 1994
and it was found that it was 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. In 1951, the share of agriculture in total
GDP was about 60 percent and steadily declined over the years to account for 24
percent of GDP in 2005. Industry doubled its share from 15 percent in 1951 to 31
percent in 2005. The service sector‘s share grew rapidly to about 48 percent in 2004
(about 52 percent in public administration and defence included) from 26 percent in
1951. Out of the three sub-periods (1951-80 and 1981-90 and 1991-2005), during the
first and second sub-periods industrial growth was leading service sector‘s growth,
however, service sector‘s growth overtook that in industry during the third sub-period.
The service sector‘s growth rate, as a percentage of GDP, in the 90s was 2 percent. The
sub-sectors contributing most to the rapid growth of services in the last sub-period were
communication, banking and insurance with the average growth rates of 10.9 percent
and 3.5 percent respectively. Over a span of 9 years starting in 1995, the share of
service sector exports in total exports has grown from 17 percent to about 35 percent.
Service sector imports have also increased from 28 percent in 1995 to about 40 percent
of aggregate imports in 2004. There has been a dramatic reduction in the capital-output
ratio in the service sector, starting with the value of 11 in 1970 and falling to about 1.7
61
in 2004. She observed that the pattern of sectoral employment differs from the pattern
of sectoral output as like the employment in the service sector is relatively low at 19
percent although its share in total GDP is the highest (52 percent). In order to analyze
factors contributing to this high growth of service sector, a growth accounting exercise
at the sectoral and aggregate levels for the years 1971, 1981, 1992 and 1997 was
conducted. The results showed that the average growth rate of total factor productivity
(TFP) in services exceeds that of industry and is highest among the three sectors. In the
service sector, TFP as well as changes in employed labour were largest contributors for
the whole study period 1971-97. While labour employed accounted for about 50 percent
of the increase, changes in TFP were responsible for 49 percent of the increase and the
residual one percent was attributed to physical capital.
Acharya (2007) analyzed in his paper presentation in Global Development

conference that since 1996-97 the growth of agriculture has dropped to barely 2 percent
compared to earlier trend rate ranging between 2.5 – 3.0 percent is in India. The reasons
are many and include declining public investment by cash-strapped states, grossly
inadequate maintenance of irrigation assets, falling water tables, inadequate rural road
networks, unresponsive research and extension services, soil damage from excessive
urea use (encouraged by high subsidies), weak credit delivery and a distorted incentive
structure which impedes diversification away from food grains. Tackling these
problems and revitalizing agriculture will take time, money, understanding and political
will. The share of agriculture in GDP has declined to hardly 20 percent. But agriculture
is still the principal occupation of nearly 60 percent of the labour force. Thus better
performance of this sector is essential for poverty alleviation and containment of rising
regional and income inequalities.
Banga and Goldar (2007) carried out an analysis of the contribution of services
to output growth and productivity in Indian manufacturing using the Capital Labour
Energy Materials Services (KLEMS) production function framework, using panel data
for 148 three-digit level industries for 18 years, 1980-81 to 1997-98. The results show
that the growing use of services had a significant favourable effect on growth of output
in Indian manufacturing in the 1990s, when major trade and industrial reforms were
carried out. The contribution of services input to output growth in manufacturing
62
(organized) was about one per cent in the 1980s and it increased to about 25 per cent in
the 1990s. The study found that when total factor productivity index is regressed on a
set of explanatory variables including the ratio of services input to employment, a
positive relationship is found between services input and industrial productivity. It
seemed from the results that the increasing use of services in manufacturing in the
1990s have favourably affected productivity.
Saluja and Yadav (2007) explained the data sources and the methodology of
estimation of gross value added (GVA) along with the problems encountered especially
with the unorganized segment. The authors estimated the number of enterprises and
workers based on different Enterprise Surveys (ESs) and Employment &
Unemployment Surveys (EUSs). The study discusses the methodology and data sources
for broad service sectors. The annual estimates of the public and private corporate
sectors were based on the current data (with limitations in the case of the private
corporate sector) while for the unorganised sector the benchmark estimates were carried
forward by using a specially constructed gross index of trading income (GTI). This
index has a number of problems: (1) The market share ratios are based on very old data.
(2) These shares relate to the entire trading activity and not only the unorganized part.
They point out that as far as national accounts are concerned, the only sources of
information relating to the unorganized segment of the service sector, and in fact the
unregistered manufacturing sector also, are the enterprise surveys. However, much of
the information obtained from the surveys still needs improvement. In the trade sector,
it is for the first time, with 1999-2000 as base, that the results of the survey covering the
entire informal sector have been considered for estimating GVA per worker. In the
previous surveys the GVA per worker of own account enterprises (OAEs) was much
less than that from non-directory trade establishments (NDTEs), e.g., for the 1996-97
survey the GVA per worker from OAEs was about 40 per cent of the corresponding
estimate from NDTEs. The estimates of GVA for the trade sector based on the
workforce from employment and unemployment survey (EUS) 1999-2000 and GVA
per worker from enterprise survey (ES) 1999-2000 for moving the GVA to other years
are not satisfactory. Also the details of the index of trading activity in the series with
1993-94 and 1999-2000 are not available in the write-ups for these two series.
63
However, this index used for the 1980-81 series does not seem satisfactory. Some
thought has to be given to searching for new indices for this purpose. The result of the
different enterprise surveys conducted by the NSSO and CSO vary widely in many
cases. There may thus be errors in the workforce estimates prepared for the year 1999-
2000 based on the employment and unemployment survey for 1999-2000 and the
population census 2001. In fact the estimates used by the CSO for estimating GVA
from various sectors are different from those from the above mentioned source. There
are problems in the estimates of GVA per worker, as the results vary over different
surveys. Saluja and Yadav (2007) have not analyzed the details of GVA per worker. In
this respect it can only be said that moving the GVA per worker to other years by
making use of consumer price index numbers may not be satisfactory. Actually in some
services change in value addition may exist in real terms also. In fact the change in
productivity is not being taken into account. Even when there is no change in
productivity, using the consumer price index is not satisfactory, as it covers only a part
of the value added. There are problems with the use of physical indicators for
estimation of workforce for future years. For some services the growth rates of
employment between employment and unemployment survey (EUS) 1993-94 and EUS
1999-2000 are used to get the workforce estimates for different years. If the estimates
are not reliable, the growth rates also cannot be reliable. Also, in expanding services the
past growth in workforce may not be a reliable indicator. For the series with 1993-94 as
base, in the case of unrecognized institutions, the workforce estimates are also based on
the enterprise surveys and are carried forward to 1993-94 by making use of the growth
rate between enterprise surveys (ES) 1983-84 and 1991-92. Fortunately for the new
series, the base year and years of the EUS are same. In the document released by the
CSO in March 2006, the physical indicators for moving the GDP estimates to
subsequent years have been mentioned. In addition to the growth between two EUSs, in
a number of cases like research and development the indicator is growth in population,
which is not appropriate. The indicators show no effect of the increased efforts towards
reducing unemployment. Of course, there is no alternative to the enterprise surveys and
employment-unemployment surveys; their periodicity can be reduced.
64
Sharma et al. (2007) made an attempt to present the salient features of changes
in the methodology and coverage of service sector in the new series (base 1999-2000)
of national accounts statistics. In recent years, India‘s service sector becomes more
dynamic with rapid growth of telecommunication and information technology. GDP
marks a structural shift in the Indian economy by rise in the service sector‘s share and
brings it closer to a developed economy. The percent share of service‘s sector in GDP
grew from 40.6 to 49.3 in 1990-91 to 1999-2000 respectively, whereas the secondary
sector‘s share remained static around 24.5 percent in the above time period. Agriculture
sector has shown a contrast to services with its share in GDP coming down from 34.9
percent to 27.6 percent in the same time period. Authors argued that without access to
efficient banking, accountancy, transport, telecommunication or insurance, producers
and exporters will not be competitive. The expansion of service sector rapidly is
contributing more to economic growth and job creation than any other sector. They
concluded that services in respect of communication, health, trade, hotels and
restaurants, transport other than railways and other services are fast moving into the
private sector of the economy.
Shetty (2007) examined the issues relating to estimation, the issues concerning
the quality of the data base and the nature and the extent of data gaps embedded in the
estimation of various components of the service sector. He points out that of the seven
major industrial categories for which the CSO regularly publishes the GDP series, four
comprise the service sector, namely, (1) trade, hotels and restaurants; (2) transport,
storage and communication; (3) financing, insurance, real estate and business services;
and (4) community, social and personal services. Under each of these categories, there
are very many sub-categories such as, ―trade‖, on the one hand and ―hotels and
restaurants‖, on the other, or ―financing‖, ―real estate‖ and ―business services‖, or in
transport, ―railways‖, ―road transport‖ and ―transport by other means‖. He finds out that
the quality of the database is weak in respect of: (1) the private corporate sector; and (2)
the unorganized part of each of the service sector activities. In respect of the second
category, questions have been raised on two crucial components involved in the end
results: workforce estimates and estimates of value added per worker based on
enterprise surveys as follow-up of the decadal economic censuses, which are used to
65
work out the benchmark estimates. There is also the third component, namely, the
chosen sectoral indicators used to carry the benchmark estimates forward for the recent
years. The author concludes that the entire methodology of estimating GDP originating
in different segments of the service sector requires a close look. ―It is necessary to seek
answers to the following issues: First, the method of workforce estimates, applying the
worker population ratio (WPR) of NSS to the population projections made by the
Registrar General of India (RGI), may have to be given a fresh look. Second, are there
methods of validating the results of the various enterprise surveys in regard to estimates
of value added per worker? Such critical evaluation of these results, separately for trade
and other segments of the service sector, will alone bring out their usefulness for
national income purposes. Third, what about the representative character of the follow-
up (enterprise) surveys, the results of which are constantly found wanting in so far as
the national income estimates are concerned? An examination of their inherent
sampling and non sampling errors needs to be carried out. Fourth, there are a series of
secondary indicators, which are employed for carrying the benchmark estimates
forward, which may also be critically evaluated. Fifth, a critical review is required of
the method of estimation of the private corporate sector‘s contribution to the GDP of the
service sector. This has very often raised the question of the representative character of
the sample and the variable chosen for blowing-up purposes. Has there been any
progress in resolving this long-standing issue? Sixth, financial services are a special
category and the coverage of the unorganised segment in them appears weak even as
this segment is said to be growing. A comprehensive study of the financial service
sector is called for. Seventh, there is the most complex question of deflating the service
sector output, obviously separately for each of the segment. Is there scope for revising
the existing methods in this respect? Finally, there may be other incidental issues, the
examination of which may help in understanding the dynamics of the various estimation
procedures.‖
Verma (2007) explained the rapid growth of value added in the service sector in
India and examined the factors driving this services led growth in the economy. A
sectoral growth accounting exercise for the period 1980-2003 shows that changes in
total factor productivity (TFP) were the largest source of service sector value added
66
growth in India. Measured service sector TFP growth is also much higher than
measured TFP growth in agriculture and industry, and increased substantially following
the inception of market based liberalization policies from 1991. In contrast, measures of
service sector productivity growth in the advanced economies are low, and the service
sector is widely considered to be the ‗unproductive‘ sector of the economy. However, in
India‘s case, it is the service sector which is the most productive sector of the economy,
as measured in terms of the growth rate of the total factor productivity in this sector.
The study develops a three sector neoclassical growth model to evaluate the quantitative
performance of differential TFP growth across sectors in accounting for the structural
transformation of India. In the model, agents are assumed to view consumption of
agricultural, industrial and service sector goods as gross substitutes, but their
preferences over goods are homothetic. The model displays ‗unbalanced growth‘ in
which the aggregate output, the aggregate consumption and the aggregate capital-labour
ratio grow at different rates. A version of the model that is carefully calibrated to Indian
data, and in which average rates of TFP growth by sector from India are the primary
inputs, performs well in accounting for the evolution of value added shares of the three
major sectors of economic activity over the period 1980-2003. It also accounts well for
the growth rates of the GDP shares of all three major sectors of economic activity over
this period for the structural transformation of GDP. It cannot match the evolution of
employment shares.
The performance of the model improved significantly when the post 1991
increase in service sector TFP growth is accounted for. Study finds that the
liberalization policies adopted by India from 1991, and especially the deregulation and
privatization of business and communications services, explain the improvement in
service sector TFP, and hence the dominance of service sector activities in India‘s
recent GDP growth. It accounts for the rapid growth of the service sector in one of
today‘s low income, rapid growing countries like India. Study further discusses the
trends of sectoral output shares, sectoral employment shares and sectoral TFPs observed
in the Indian data and conducted a sectoral growth accounting exercise for India during
the period 1980-2003. The study shows that changes in total factor productivity (TFP)
were the largest source of service sector value added growth in India. For the same
67
period, measured service sector TFP growth was also much higher than measured TFP
growth in agriculture and industry. It increased substantially following the inception of
market based liberalization policies from 1991. The study finds that the deregulation
and privatization of business and communications services explain the rapid growth in
service sector TFP, and hence the dominance of service sector activity in India‘s GDP
growth.
Chatterjee (2008) observed that there is a rapid transition from agriculture to

services with the share of industrial sector in national output lagging behind. Service
sector is contributing about 55% of the India‘s GDP. After 1991, trend growth of
services had shown an enormous rise. Author used the time series analysis, Granger‘s
causality test and growth rates to analyze the data from 1950-51 to 2007-08 which were
collected from Central Statistical Organization (CSO) and Reserve Bank of India (RBI).
He tried to analyze the relative share of agriculture, industry and services in NSDP of
the Indian economy, along with a decomposition of the sub-sectors of service sector in
India. Data has been taken from 1950-51 to 2002-03 at 1993-94 prices which shows that
there has been significant increase in services than agriculture and industry. The share
of agriculture, industry and services in 1950-51 are 60:15:26 and in 2002-03, the share
has changed to 23:24:53. It demonstrates that trend compound growth rate of services in
all the States has been more than the trend compound growth rate of NSDP at factor
cost at constant prices. In the 1950s the annual growth rate which was at nominal rate of
2% has increased to about 8% in the 1990s and it reached a maximum of 11% in 2006-
07. Though the growth of services has started accelerating during the mid 1980s, one of
the causes of this is gigantic growth of the service sector in the post globalization era
due to the trade liberalization policies.
Alessandrini (2009) discussed the evolution of labour demand in Indian

organized manufacturing by introducing the Kaldorian idea of the intersectoral linkages
between agriculture and manufacturing among the possible economic explanations of
jobless growth. On one hand, the study concentrates the attention on organized industry
in order to investigate whether the sustained path of growth of Indian economy has
positively affected the demand of those workers who receive higher wages, formal
contracts and benefits in a sector, manufacturing, considered by Kaldor as the engine of
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growth. On the other hand, it studies the role of effective demand coming from
agriculture, the sector where most of Indians live and work, in influencing and
sustaining industrial production and, therefore, labour demand. In the Kaldorian theory,
in fact, manufacturing growth, and thus industrial employment, depend on the
purchasing power of agriculture not only at the early stages of industrialization, but also
in the long-run, through demand linkages for simple consumer goods and manufactured
inputs. Since a strong productivity growth could generate job losses when aggregate
demand is insufficient, a decline in rural purchasing power could contribute
substantially to weaken industrial expansion and reduce employment. The 2008 Global
Hunger Index of developing and transitional countries (Von Grebmer et al. 2008) ranks
India at 66th position out of 88 countries. The survey says that not one of the 17 states
of the Union under study is in the low or moderate hunger category and concludes that
the entire sample is in the alarming or extremely alarming group. Furthermore, despite
the notable economic performance of Indian industry in the last two and a half decades
with an annual growth of 5.3 per cent, organized manufacturing employment growth
was less than 0.5 per cent. Rural poverty and jobless growth in manufacturing may be
strictly related if analyzed through a Kaldorian framework. The development of the
purchasing power of agriculture, in fact, is essential to stimulate the effective demand
for industrial goods and to sustain industrial production in the long run. Since a strong
productivity growth could generate job loss when aggregate demand is insufficient,
rising rural incomes unleash a multiplier effect, increasing demand for farm and non-
farm products and services, thereby stimulating rapid growth of employment
opportunities in other sectors. Taking into consideration this causal relation, the study
has investigated the role of agricultural surplus in influencing labour demand in Indian
organized manufacturing. Using a panel dataset on the 15 largest states of the Union for
the period 1980 to 2004, the System-GMM estimates confirmed the positive linkage
between a rise in agricultural purchasing power and the growth in manufacturing
employment. Again the study finds that where the increase in agricultural prices relative
to manufacturing prices has been wider, the employment in organized manufacturing
has been higher. Furthermore, labour demand growth seems to be more elastic to
aggregate output growth rather than to increments in registered manufacturing
69
production. Given that the recent pattern of growth of Indian economy has been
accompanied by increasing inequality across states as testified by numerous researches,
such result could be further an element of growing divergence between rich and poor
states of the Union. In addition, since more than two-thirds of the Indian industrial
workers are employed in informal manufacturing, analysis explores the effect of an
increase of the weight of unorganized activities on determining formal employment.
The results show that in those states where the share of the unregistered manufacturing
has risen over time, the jobless growth problem has worsened. However, the change in
the agricultural purchasing power has been modest in the last two decades and the
majorities of Indian labourers still lack a steady income flow and fall outside the social
safety net system guaranteed by a formal occupation. As a consequence, India's
potential manufacturing renaissance, especially in terms of employment, is still in its
early stages. This appears quite surprising for a country whose supply of arable land is
second only to the United States and which has successfully developed a process of
tertiarization of its economy. But modernization cannot only rely upon a strong IT
sector and labour productivity growth could not be sufficient to solve problems of acute
poverty or under-employment. The study suggests that India should look to establish
and reinforce forward and backward linkages between agriculture and manufacturing if
it wants to transform a jobless growth pattern into an inclusive growth process.
Das et al. (2010) examined the growth performance of the 31 industrial sectors
of the Indian economy for the period 1980-2004 subdivided into four-sub periods-1980-
85, 1986-90, 1992-96 and 1997-2004. These sub-periods reflect policy orientation of
the Indian economy during the decades of 1980s and 1990s. They attempted to examine
the sources of growth in Indian economy for the period 1980-2005. In particular, study
examined the relative contributions of factor accumulation and productivity growth in
various sectors of the Indian economy. A sector perspective gains significance in the
context of major reforms in economic policies was witnessed across all the major
sectors in the past two decades. The introduction of market friendly policies in the early
1990s were expected to make the economy more efficient and competitive. There were
three major observations: (i) the productivity performance of the Indian economy is
moderate with sharp fluctuations (ii) the productivity growth of the economy is driven
70
by service sector (iii) the source of growth analysis shows that factor accumulation and
not productivity drives the output growth.
Eichengreen and Gupta (2010) analyze the determinants of growth in the

service sector and assess the employment generating capacity of services in India.
Among fast growing developing countries, India is distinctive for the role of the service
sector. Using National Accounts Statistics, Input output coefficients from the input-
output matrices for India for 1993, 1998 and 2003 & growth rates have been used to
analyze the data. Regression analysis has been applied to different time periods 1950-
1969, 1970-1989 and 1990-2006 and by using cross-country data, the authors show that
the growth of services has been broad-based. The authors attempt to infer the
employment generating capacity of services in India. The study concludes that
sustaining economic growth and raising living standards will require shifting labour out
of agriculture into both manufacturing and services, not just into one or the other. They
explained different groups which show the share of GDP in the OECD countries. Share
of GDP in the OECD countries has risen sharply of financial services, computer
services, business services, communications, and legal and technical services. The
fastest growing are business services, communication services and banking. India does
not use the same technology as the advanced countries. The skill content of both
manufacturing and service sectors is increasing over time. It is not as if manufacturing
employs only unskilled labour while modern services employ only highly skilled
labour. In fact, the skill mix of labour employed in the two sectors is becoming
increasingly similar. Sustaining economic growth and raising living standards, thus, will
benefit from shifting labour out of agriculture into modern services as well as
manufacturing and not just into the latter. To the extent that the expansion of both
sectors continues to be constrained by the availability of skilled labour simply
underscores the importance for India to continue to invest in labour skills.
Mitra (2010) opined that tertiary sector has dominated over industrial sector
across a large number of developing countries. The proliferation of the service sector
and the erosion of industrial base is becoming a serious matter day by day. Data has
been taken from Indian Labour Organization (ILO) and different issues of World
Development Indicators for the period of 1990 to 2003 of different countries in which
71
1990 has been taken as base year and 2003 as terminal year. Author has applied Factor
Analysis and Regression Analysis on the given data which observed that
industrialization and tertiarization don‘t seem to be operating simultaneously except in a
few countries. The author suggested that the beneficial effects of growth reach all
sections of the population; special efforts need to be made in terms of employment
generation. To create a stable society and to reduce poverty, it is mandatory that in
employment growth wages must be higher than the subsistence level of consumption.
The author examined that the value added share of the tertiary sector dominated that of
industrial sector over the time period i.e. 1990 to 2003 in most of the countries. But
employment share in industrial sector dominated the tertiary sector only in China and
Uruguay in the base year i.e. in 1990s and only in China in the terminal year (around
2003). In the rest of the countries the dominance of the tertiary sector over the industry
is evident in both the years. Author concluded that declining share of industry
particularly, in terms of occupational structure, is indicative of the shrinking labour
absorbing capacity of the industrial sector.
Sahadeven (2010) evaluated certain macro economic implications of the

transition of the Indian economy from a traditional agrarian to a modern services
economy. Study reveals that post-reform growth has become more stable and less
volatile as compared to that in 1980s; and that while the pre-1984 growth was mainly
driven by the performance of the primary sector but the tertiary sector turned out to be
the engine of growth during the post-1984 period. The higher overall growth achieved
through an increasing contribution of service sector during post-1991 reform period has
widened the gap between the rural and urban India in terms of income and purchasing
power. The national accounts data reveal that the rural share of output has dipped
substantially between 1970-71 and 2004-05. The urban bias in distribution of national
income has been reflected in higher household saving rates which indicate that the
increased GDP during the post-reform period has been distributed favourably towards
high income group in urban India whose marginal propensity to save is higher than the
lower income group. There has been a decrease in the growth rate of total factor
productivity of the manufacturing sector during the post-reform period. In view of this it
is argued that the low investment has reduced the rate of innovation and technological
72
progress. It is not the magnitude of share of services in GDP that raises concerns.
Instead, the strength of intersectoral linkages and the penetration of services to rural
areas are vital for achieving sustainable and unbiased growth. It reveals that the positive
linkage between services and industry is not strong enough to maintain the prosperity
achieved mainly through the former. While industry and rural agriculture sectors
provide sufficient demand that pushes services growth, the later facilitates productivity
growth in the former. However, this feedback system has not strengthened enough in
the Indian context which raises concern about sustainability of service sector-driven
growth. The domestic demand in rural India is severely constrained by lack of upward
mobility of its low income people. The falling contribution of communication, banking,
insurance, real estate and business services to the rural share of national income shows
lower penetration of these segments in rural areas. It is important to note that industrial
demand and output can revive only if the prosperity of service sector trickles down to
low income rural segment. Otherwise, the rural-urban divide can deteriorate further and
pose serious threat to achievement of inclusive growth.
Singh (2010) examined the long-run equilibrium and short-run dynamic

relationship between service sector and Gross Domestic Product (GDP) as well as
between services and non-service sectors in India by using single equation model and
maximum likelihood estimators. Annual data has been taken from various issues of
Reserve Bank of India (RBI) publications, Handbook of Statistics on the Indian
economy and Central Statistical Organization (CSO) for the years 1950-51 to 2001-02.
Author elaborated that India is still in the process of industrialization, while the service
sector has emerged as a dominant sector contributing around half of the real GDP.
Services industries are commonly viewed as more stable compared to agriculture and
industry. The author suggested that stable growth of service sector is essentially crucial
to absorb the adverse effects of agriculture and industry and provide resilience to the
industry.
Das et al. (2011) tried to examine the over time contribution of India‘s service
sector and its changing composition to GDP growth. They analyzed India‘s export of
services by estimating income demand elasticities and role played by the domestic
demand during the global economic crisis by using Data Envelopment Analysis and
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time series data from 1970 to 2008 from different archives of India like Central
Statistical Organization (CSO), Reserve Bank of India (RBI) Handbook of Statistics,
Economic Survey and NASSCOM. They found that during economic crisis in 2008-09
growth rate was 6.7% which was only 2.1% points lower than its average growth of the
last five years. The service sector grew at a rate of 9.3% which was one of the highest in
the world, even as agriculture and industry recorded a steep decline in their growth rates
in 2008-09. They observed that the main driver of growth in India‘s service sector is
growth in the domestic demand for services like domestic trade, communication
services, and banking & insurance services and not growth in the export of services.
Datta (2011) tried to compare the structure of the Indian economy for the three
decades up to 2006-07. The Input-Output Transaction Tables provided by the Central
Statistical Organization (CSO), Ministry of Statistics and Programme Implementation,
Government of India, for the years 1973-74, 1993-94 and 2003-04 have been utilized in
the present study. Whole data aggregated into nine sectors, among all these four sectors
belong to tertiary sector, the first three of which have been grouped by the author as
Service – I and the last one is CSP (Community, Social and Personal Services). To
determine sectoral share of all major sectors of the Indian economy during all three
decades i.e. 1974-2004, very important role had been played by final demand effect,
input structure and reallocation effect. It reveals that input structure was negative for
agriculture, it was positive for the secondary sectors and service-I. The reallocation
effect was negative for the primary and secondary sectors, but for service-I the effect
was positive. The last decade was distinct from that of the earlier two decades in that
the reallocation effect played substantially different roles in the tertiary sector in general
and service-I category in particular.
Tiwari (2011) explained that the growth associated with development caused by
service sector has the ability to transform a developing country to a developed one. The
present study has taken the data from different sources such as CSO (Central Statistical
Institute), RBI (Reserve Bank of India), WDI (World Development Indicators) and
Nirvikar Singh, ―Understanding Service Led Economic Growth‖ India (2010). Growth
rates and percentages are used to analyze the given data form time periods 1950-51 to
2008-09. The analysis shows that the sectoral share of service sector in GDP which was
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34% in 1950-51 became 64.5% in 2008-09. The important fact is that the percentage
growth difference during forty years (i.e. 1950-1990) was 12% while during the two
decades of reforms it has shown a tremendous jump of 17%. Among the various service
categories trade, hotel, transportation and communication have grown significantly
during the reforms period i.e. after 1991. India is growing economy of the world not
only in terms of market size but also in terms of technology up gradation. The ratio the
percentage share of Agriculture, Manufacturing and Service Sector in GDP in first plan
(1951-56) was 52:17:32 which shows that contribution of agriculture sector is more
than 50 percent in GDP because after independence India has to make herself self
sufficient. After reforms (i.e. 1990) in the eighth plan (1992-97) their ratio has changed
and that was 30:27:43 which showed reduced share of agriculture and increasing share
of manufacturing and services. But if we take a look at the sub-sector growth within the
service sector, only few subsectors are performing well i.e. IT, Communication, BPO
(Business Process Outsourcing) and ITES (IT Enabled Services).
Unni and Naik (2011) examined whether any of India‘s high-productivity, high
income growth in the service sector is occurring in rural India and if so to what extent.
Authors have taken data from different rounds of NSSO over the period 1993-94 to
2007-08 which shows that the communications, banking & insurance and business
services are the most dynamic segments of the service sector. Present study depicts that
share of both income and employment in these new sectors was restricted to urban
areas. The growth of employment is higher in industry than in services. In rural and
urban areas, it would appear that the new and modern industry with rapid export growth
potential was growing more rapidly, but it grows more productively in urban areas.
High productivity and high income growth of service sector has not created structural
transformation in rural India. The engine of the recent growth of service sector is BPO
(Business Process Outsourcing) and IT (Information Technology). The authors analyzed
that rural workforce has not gained much from the labour market deepening in IT
sector. In the recent years, the signs of change in the rural areas are visible in the
structure of income and employment. On the whole service sector is more productive
than the industrial sector.
75
Bhattacharya and Rajeev (2012) suggested that the promotion of high linkage
sectors is the most important way to sustain high growth path in the Indian economy.
They have used the Input Output Transaction Tables (IOTTs) published by Ministry of
Statistics and Programme Implementation (MOSPI), Government of India for the years
1993-94, 1998-99 and 2003-04 to measure the direct and indirect forward and backward
linkage coefficients. Authors have focused on estimating the linkage effect of different
sectors of the Indian economy. In case of direct & indirect forward linkage, the key
sectors are ‗mining & quarrying (energy + non-energy)‘, ‗ferrous & non-ferrous
metals‘, ‗electricity, gas & water supply‘, chemical & pharmaceuticals‘, etc. which
maintain their trend in all the aforementioned years. However, in case of direct &
indirect backward linkages, the sectors like ‗all machineries‘, ‗manufacturing of
transport equipment‘, ‗ferrous and non-ferrous metals‘ are proved to be the key sectors.
So, it is important to focus on all these sectors for sustainable development of the Indian
economy. Overall scenario of the present paper emphasized on manufacturing sector
because of its high linkage effects, so it would help the economy to grow at a rapid rate
in the long run. But it is also imperative to strengthen the linkage effect with agriculture
as well as services.
Mukherjee (2012) experienced that service sector has contributed highest in the
GDP of the Indian economy and grew tremendously fast. Author has taken data from
different sources such as Central Statistical Organization (CSO), National Sample
Survey Organization (NSSO) and Reserve Bank of India (RBI) which showed that
service sector is the second largest employer after agriculture. In 2009-10, agriculture,
industry and services respectively accounted for 16.9%, 25.7% and 57.3% of India‘s
GDP. Nevertheless, the share of services is lower than that of developed countries like
the UK (78.4%) and the United States (78.2%) but higher than that of China (41.8%).
The compound annual growth rates of services in China and India during 2001-2010
was 11.3% and 9.4% respectively. It shows that the present share of services in GDP for
China is lower than India, since it is growing at a faster rate. The author found that
where other countries‘ economic growth has led to a shift from agriculture to industries
but in India, there has been a shift from agriculture to service sector. As a result,
76
services-led growth has been a jobless growth. Overall, service sector employment in
India is low compared to its share in GDP, but it is growing.
Papola (2012) reviewed the trends in sectoral pattern of GDP growth, output,
employment, capital investment, consumption, trade and industry. The economic
reforms in 1991 are a turning point in the economic history of post-independence era
which boosts the economy. Reforms help the economy in such a way to come out from
the trap in which it was caught from last four decades. It divides the economy into two
clear phases: the pre-reform ‗dark‘ phase and the post reform ‗bright‘ phase. Present
study explained that the share of agriculture has continued to consistently decline over
the past six decades: from 57 % in 1950-51 to 40% in 1980-81 to 24% in 1995-96 to
about 16% in 2009-10. Industry and services have both increased their share, but at
different pace and in different periods. While observing the structural changes and
pattern of growth, author divided the post independence economy into four phases
which are Phase – I (Independence to Mid 1960s), Phase – II (Mid 1960s to 1980),
Phase – III (1980 to early 1990s) and Phase – IV (Easy 1990s Onwards). Structural
changes continued at an accelerated pace with share of agriculture sharply declining and
services emerging as major sector and with very small increase in the share of industry.
Within this phase, period 2005-10 has seen a sharp acceleration in growth rate, despite a
slowdown in 2008-09. Share of agriculture has declined from around 20 to 16 per cent,
that of services has increased from 54 percent to 59 percent and that of industry has
stagnated. Moreover, a faster structural shift from agriculture to non-agriculture has
been noticed. Also, there is sharp rise in the importance of the external sector especially
in post reform period. Exports and imports together accounted for about 15% of GDP in
1980-81 and the figure has gone up in 2009-10 up to 35%.
Singh (2012) observed that the resilience of the Indian economy is due to the
resilience of service sector. There is growth of the service sector and deindustrialization
takes place with the service sector as a major contributor to Gross Domestic Product
(GDP) of the country. The data in the present study has been taken from different
economic organizations like Central Statistical Organization (CSO), Reserve Bank of
India (RBI) Handbook of Statistics and Human Development Reports (2007). It takes
study period 1950s to 2008-09 which depicts that growth rates in 1950 in all three
77
sectors primary, secondary and tertiary was 2.7:5.8:4.1 respectively and due to
structural changes their composition has changed in 2000 which is 3.9:7.2:9.2. The
study has seen tremendous changes in the growth of service sector. The service sector in
India has grown at a rapid rate compared to the growth of the secondary sector with the
onset of economic development since 1990s. In 1950-51, the share of primary sector to
GDP has decreased from 56% to 22% in 2000 whereas the share of service sector has
increased from 28% to 54%. The share of secondary sector has increased at a slower
pace from 16% in the decade of 1950s to only 24% in 2000s. In the decade of 2000s the
shares of primary, secondary and service sector were 22%, 24% and 54% respectively.
The analysis shows that there was a decline in the growth rate of insurance, public
administration & defence, legal services, real estate, personal services and storage from
1980s to 1990s. After reform period, their growth rates steadily increased and share in
GDP also increased. Transport, storage & communication, and financing, insurance,
real estate and business services became highly productive sectors but with less
consumption of employment. Present study shows that services are very beneficial for
environment too. Services are tradable without any harm to environment and they can
be easily transported via satellite without any CO2 emission. The study further says that
there is relatively less use of natural resources in services compared to agriculture and
industry‘s service-led growth will put less pressure on the local, regional and global
environment. To maintain economic and social sustainability there is need to increase
investment in education, entrepreneurship, technology, modern means of
communication and transportation.
Garg and Walia (2013) observed that service sector‘s contribution is rising
tremendously in GDP, employment & exports day by day and its sub-sectors have
achieved fabulous growth over the years in Indian economy. Indian service sector got
boom by rising privatization, urbanization and demand of services. Compound annual
growth rates, percentage share & tabular analysis have been used to analyze the data
from period 1950-51 to 2011-12. Authors have used data from different archives like
CSO, various rounds of NSSO, Handbook of Statistics and various issues of Economic
Surveys published by Government of India etc. to get desired results. The study
classified the service sector into four categories that are: (a) Trade, Hotels &
78
Restaurants (b) Transport, Storage & Communication (c) Financing, Insurance, Real
Estate & Business Services and (d) Community, Social and Personal Services. Study
concluded that the growth rate of the service sector at constant prices has always been
above the overall GDP growth rate since 1996-97 except for 2003-04. Compound
annual growth rate of overall GDP was 8.5 percent left behind by CAGR of service
sector which was 10% during 2004-05 to 2011-12. The awesome growth of Transport,
Storage & Communication and Financing, Insurance, Real Estate & Business Services
made service sector more appreciable with growth of 14.7 percent and 10.4 percent
respectively in 2010-11. Only Community, Social and Personal Services recorded less
growth rate of 4.5 percent and another sector Trade, Hotels & Restaurants showed less
growth in 2008-09 but has recovered in 2009-10. In case of employment, the study
argued that service sector consumed less share of employment and hence termed it as
jobless. But presently, the service sector is the principal source of employment in urban
areas. Authors concluded that to strengthen the service sector, there is need of
complementary investments in physical infrastructure as well as in human capital.
The above significant literature which deals with service sector and structural
changes in the Indian economy focused on various diverse aspects. Different techniques
like Input Output Analysis, Regression Analysis, Growth Rates, Rasmussen Method etc.
have been used. Some researchers demonstrate divergent results related to employment
in service sector like jobless growth. This chapter gives us the mixture of different ideas
presented by different eminent economists. Present study is also a step forward in this
direction, to explore the role of service sector in the structural changes of Indian
economy over the most recent time period.
79

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CHAPTER 2

Many important contributions to the modern literature on structural changes of

Francois (1990) highlighted the role of services as complementary to the

suggests that an expanding producer service sector is an important aspect of growth

Li et al. (2003) reviewed international experiences and examined the factors

Breitenfellner and Hildebrandt (2006) endeavoured to see the relationship

Aydin (2007) argued that inter-industry linkages help us to determine the

consumption expanded to more costly services. So, increased importance of specialized

Kefela (2010) reviewed the international experience on service sector

emergence of services as the principal sector of economic activity cannot be readily

Bhattacharya and Mitra (1990) wanted to investigate the pattern of growth of

Mohanty and Raghavan (1990) analyzed the growth and structural

Nagaraj (1990) made an attempt to examine various alternative hypotheses on

Grover, Singh and Gupta (1993) analyzed inter-sectoral relationship in Indian

Patnaik and Chandrasekhar (1995) made an effort to analyze the India's

Sethi (1997) examined whether the post independence period of economic

Singh (2000) analyzed the structural change in Punjab economy on the

Hansda (2002) tried to understand the sustainability of services as also of

Kaur and Dhindsa (2002) analyzed the nature of transformation of

Naik (2002) identified the factors leading to decline of Indian manufacturing

Bhowmik (2003) made an attempt to examine the service intensities of

Jeromi (2003) analyzed the performance of the major sectors of Kerela's

Bhattacharya et al. (2004) explored a regional econometric model and

communication services, financial services, business services (IT) and community

D’Souza (2005) analyzed the implications of sectoral transformation in the

Chakravarty (2006) analyzed the determinants of service sector growth in India

Rath and Rajesh (2006) attempted to make an assessment of performance of

Acharya (2007) analyzed in his paper presentation in Global Development

Chatterjee (2008) observed that there is a rapid transition from agriculture to

Alessandrini (2009) discussed the evolution of labour demand in Indian

Eichengreen and Gupta (2010) analyze the determinants of growth in the

Sahadeven (2010) evaluated certain macro economic implications of the

Singh (2010) examined the long-run equilibrium and short-run dynamic

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