Two steps could ensure the future economic prosperity of India. First is to maintain a dynamic informal sector. Second is to mobilise strength in information technology (IT). The informal sector can bear the burden of providing employment for India’s rapidly growing labour force. And IT can stimulate expansion in manufacturing and agriculture, as well as services.

The last decade has witnessed unusual developments in many developing countries. Faster growth in services than in manufacturing industries is one. ‘De-industrialisation’ is another. Expansion of the informal sector is a third. India is a striking example of such changes. The Indian economy has expanded rapidly with per capita income tripling in the last twenty years. India’s labour force is growing at two percent per annum. But unemployment is also growing, particularly in the formal sector. And the leading growth sector has been services, not manufacturing.

This growth of service industries has sparked controversy. Some economists predict that India’s institutional development and growing labour force will fuel greater economic growth during the next two decades. They say that India will outperform China. Some see India as pioneering a new development path, led by the service industry. Others see service growth as unsustainable in the long-term, and are sceptical about India’s future economic prospects.

Research from the International Labour Organization uses India as a case study - to explore the impact of service industry growth for economic policy, and for theories of structural change.  It analyses empirical facts about manufacturing and services at three levels: the comparative international level, the interstate level in India, and the sectoral level. It notes that:

• Since 1997, services have grown faster than industry or agriculture.
• Structural change in the economy has been slow, compared to international competitors.
• Industrial performance has been poor compared to other Asian countries such as Korea, Malaysia and Thailand.
• A majority of sub-sectors have grown faster than Gross Domestic Product (GDP) with fastest growth in business services, communication, banking services, hotels, restaurants and community services.
• The IT sector has grown fast, but still accounts for less than one percent of GDP and employs less than one million people in a total labour force of 450 million.
• In 1998-2000, just eight percent of the labour force was employed in the formal sector, with 92 percent absorbed by the informal sector.

The structural theory of economic growth says that manufacturing drives economic growth, technological progress and international trade. But the global IT industry now challenges this belief. IT generates demand for service products, enhances productivity and increases the role of services in international trade through outsourcing, call-centres and back-office services. Analysis of empirical data from India confirms that IT services can drive economic growth. But it also warns that manufacturing should not be ignored.

The researchers offer several policy recommendations:

• India must promote efficiency in its manufacturing sector - to meet demands for fast economic growth as the demand of for manufactured goods is likely to remain very high for a long time to come, at India’s present and projected levels of per capita incomes.
• As IT services are fuelling expansion in manufacturing, India should capitalise on IT strengths – to upgrade manufacture and agriculture as well as services.
• The informal sector will bear the burden of employing India’s growing labour force.
• The government should maintain as high a rate of growth of aggregate demand as possible – so that small firms can survive and expand, and the informal sector remains dynamic.

Source(s):
‘Will Services be the New Engine of Indian Economic Growth?’, Development and Change 36(6), pages 1035-1057, by Sukti Dasgupta and Ajit Singh, 2005

Funded by: International Labour Organization

id21 Research Highlight: 28 July 2006

Further Information:
Ajit Singh,
Professor of Economics
Cambridge University
Sidgwick Avenue
Cambridge CB3 9DD, UK

Tel: +44 (0)1223 350434
Contact the contributor: Ajit.Singh@econ.cam.ac.uk

International Labour Organization

University of Cambridge, UK