- The service sector in India has experienced robust growth and now makes up a larger share of GDP than agriculture, unlike other countries where industry has surpassed agriculture. - Economic reforms since 1991 have contributed to strong GDP growth in India and increased foreign investment. Within this growth, the service sector in particular has expanded. - There are demand-side and supply-side factors that help explain the growth of the service sector, such as increasing trade, foreign investment, and technology improvements that boost supply, as well as higher incomes increasing demand for services. - However, productivity growth has been slower in services than manufacturing, and despite high contribution to GDP, service sector growth in India has not translated to comparable employment growth.

1. THE SERVICE SECTOR AS
A DETERMINANT OF
ECONOMIC DEVELOPMENT
Ms Amita Marwha
Lecturer, Deptt. of Economics
Isabella Thoburn College

2. • The growth of India’s services sector, its
contribution to GDP, and its increasing share
in trade and investment has drawn global
attention. Unlike other countries, where
economic growth has led to a shift from
agriculture to industries, in India, there has
been a shift from agriculture to the services
sector.

3. • In the post reform period India did experience
robust economic growth rate which although was
lower than china but still made India the 12th
largest economy in the world by nominal value
and 4th largest by Purchasing Power Parity .It also
resulted in lower inflation ,and significant
increase in foreign investment. Foreign portfolio
and foreign reserves have increased significantly
since reform began in 1991 and have contributed
to healthy foreign currency reserves ($ 284.1
billion in 2010).

4. Service Sector
• Definition of Services sector
• Earliest attempt to define service sector was made by Hill
(1977, p.336) who argues that “goods and services belongs to
different logical categories”. For Hill (1999), ‘the original
intangibles consist in additions to knowledge and in new
information of all types and new creations of artistic or
literature nature’. These originals exist independently from the
creators and from how they are registered. They have no
spatial coordinates and belong to ideas and information.
Property rights on originals, so-called intellectual property
rights, can be defined. These products are immaterial or
intangible goods, according to Hill (1999). Once an original is
produced, it can be used during a long period of time on a
copy form. According to Hill ‘services are heterogeneous by
essence, but not so heterogeneous that they include all
intangible goods’

5. • Hill divided services into
• Services Affecting Goods -Examples of services affecting goods are
the transportation of goods, postal deliveries, repairs, cleaning and
maintenance. In each case goods which already belong to some
economic unit are transformed in some way as a result of the
activity of the producer unit.
• Services Affecting Persons- These consist of changes in the physical
or mental condition of the consumer which are the direct
consequence of the activity of the producer, such changes being at
the request of the consumer. For example, services, such as
passenger transportation, hairdressing, and various forms of
medical treatment involve changes in the physical condition of the
consumer, while services such as education and communication
involve changes in mental condition.

6. • Bhagwati(1984) argues that services can be divided into
two categories ;first those that necessarily require the
physical proximity of the user and the provider; and
second, those that do not essentially require this though it
may be useful. Services that require essential physical
proximity have been further categorized into three groups
that are:
• Mobile provider and immobile user, e.g., shifting labor to
the concentration site in other country.
• Mobile user and immobile provider, e.g., hospital services.
• Mobile user and mobile provider, e.g., lectures, haircut, etc.

7. • For the purpose of classifying international transactions in
services the most commonly used classification is provided
by Sampson and Snape(1985) and modified by Sapir and
Winter(1994).This classification which is based on the
constraints on the physical location of producers and
consumer in realizing the transaction has been adopted by
World Trade Organizations (WTO) under the general
agreement on trade in services(GATS) the agreement
applies to four ‘modes of supply’
• Mode 1:cross border supply of services(that is not requiring
the physical movement of supplier or customer)
• Mode 2: Provision implying movement of the consumer to
the location of the supplier.
• Mode 3: services sold in the territory of a member by legal
entities that have established a presence there but
originate in the territory of another member.
• Mode 4: provision of services requiring the temporary
movement of natural person.

8. Service sector contribution to growth
• What explains Growth in India’s Service Sector?
• The literature states that the process of economic
development has been associated with structural changes.
Work done by Fisher (1935), Clark (1940) and Kuznets
(1971) states some stylized facts related to industrialized
countries. Rowthorn and wells (1987) states a pattern of
similar structure in which most of the industrialized
countries when reach to the advanced stages of
development, experience a shift in the structural
framework of the country, in which the share of
manufacturing sector declines, where as the share of
service sector increases in total output and employment
which is attributable to both demand side and supply side
factors operate that lead to higher growth in the service
sector as compared to the other sectors.

9. • A. Supply-Side Factors: Trade Liberalization and Reforms
• Increased trade.
• Higher foreign direct investments in services and
• Improved technology.
• B. Demand-Side Factors
• High income elasticity of demand for final product services.
• Contracting out of services from firms in the manufacturing sector.
• The increased demand for services by the producers of goods and
services ‘is in part due to firms externalizing service functions that
previously had been performed internally (Kirn 1987).
• Stanback et al (1981) have argued that multinational firms that
compete in increasingly complex business environments ‘have
expanded the amount of effort devoted to activities such as
planning, coordination, and control and consequently have
increased their use of services’ (Stanback et al 1981, cited in Kirn
1987).

10. Stylized Facts
• Demand for services is income-elastic
• High-income elasticity of demand for final
product services implies that at any relative
price of services the quantity absorbed rises
more than the quantity of commodities as real
income per capita increases.

11. • Productivity growth in services is slower than that in
manufacturing sector.
• Different explanations have been put forward for it.
Following Verdoon’s Law, Kaldor (1966) argued that
there will be a negative relationship between labour
productivity growth in the economy as a whole and the
productivity growth in the non-manufacturing sector
because most activity outside the manufacturing
sector particularly land-based activities such as
agriculture and many service activities are subject to
diminishing returns. Further, the unbalanced growth
models by Baumol (1967) helped in popularizing the
notion that because of their labour-intensive nature,
service-sector activities cannot be made more efficient
through capital accumulation, innovation, or
economies of scale.

12. Subsector’s Share (%) to Services
Sector, 1951-2011
0
5
10
15
20
25
30
35
1. Trade, Hotel
and Restaurants
a) Trade
b) Hotel and
Restaurants

13. 0
2
4
6
8
10
12
14
16
18
Transport , Storage
and Communication
a)Railways
b) Transport by other
means
c) Storage
d)Communication

14. 0
5
10
15
20
25
30
35
40
3. Finance, Insurance,
Real Estate and
Business Services
a) Banking and
Insurance
b) Real Estate,
Ownership of Dwelling
and Business Services

15. 0
5
10
15
20
25
30
35
40
Community, Social and
Personal Services
a) Public
Administration and
Defense
b) Other Services

16. Absolute Changes In Employment
(Millions) Since 1972-2010
-3
-2
-1
0
1
2
3
4
5
6
7
Agriculture
Industry
Service

17. • Theoretically output is expected to have a
positive long run relationship between growth
and employment as according to Okun’s law
3% increase in growth rate leads to 1% fall in
unemployment rate as output is expected to
have a long run positive effect on labor
demand.

18. 4
5
6
7
8
9
10
11
12
1980 1985 1990 1995 2000 2005
40000
50000
60000
70000
80000
90000
100000
110000
120000
130000
EMPLOYMENT (right)
serv (left)

19. • The methodology of this study takes after
Fofana’s, and as such I specify our basic model as:
• EMPTs=f(GDP,FDI,PE)………………………(1)
• Where:
• EMPTs = Total Employment in service sector
• GDP = Real Gross Domestic Product
• FDI = Foreign Direct Investment
• PE = Public Expenditure

20. The Model and the Method of Analysis
Assuming a linear relationship among
explanatory variables the explicit form
of equation (1) becomes:
EMPT = + GDP + FDI + PE + ε

21. VARIABLES NUMBER OF
OBSERVATIONS
MEAN STANDARD
DEVIATION
EMPLOYMENT
(SERVICES) IN MILLION
29 83125.0 24654.0
REALGDP
GROWTH RATE
30 6.319 2.227
PUBLIC EXPENDITURE
IN MILLION
30 4792.0 4851.0
FDI INFLOW 29 18848.0 27416.0

22. Correlation Matrix of Variabes
VARIABLE EMPLOYMENT GROWTH
RATE
FDI PUBLIC
EXP
emp 1.0000 0.6350 0.8047 0.9290
Growth
rate
0.6350 1.0000 0.5789 0.6027
FDI 0.8047 0.5789 1.0000 0.9207
Public
exp
0.9290 0.6027 0.9207 1.0000

23. Conclusion
• The above model shows that there is a
correlation between employment and
independent variables growth in million, public
expenditure, Foreign Direct Investment.
According to above regression analysis 1 unit
increase in GDP growth in million will lead to
0.13% increase in employment in service sector
keeping other variables fixed, which is alarmingly
low percentage. Public expenditure also leads to
increase in employment and have a positive
correlation with employment 0.57%.

24. Conclusion
• There is a negative correlation between Foreign Direct
Investment and employment. The explanation to this could
be that as the percentage is negative it tells us that value
addition being made in the service sector in India is more
because of capital than labour.
• As the sector like communication, trade, banking which are
showing high growth rate are generally also witnessing
increase in productivity or increase total factor productivity.
• In India as a result although we are witnessing a high
contribution of service sector in the Gross Domestic
Product of the country but it is not resulting in increase in
employment and hence India will continue to witness
Jobless growth until and unless India will see growth in
manufacturing sector also.

25. Thank You