Structural change and the changing relationship between the industrial and the service sector : Evidence from Indian states

Purpose – This paper aims to examine the relationship between the industrial and the service sector outputs at the aggregate level and for different sub-services in India and also tries to find out whether the relationship is changing over time. Design/methodology/approach – This paper studies a panel of 16 major Indian states in India over the period 1980-2011. Using an econometric analysis, it proceeds to estimate the increase in inter-linkage between the output of the service sector and the output of the industrial sector. This study considers a variable coefficient model where the output elasticity of the service sector with respect to the output of the industrial sector changes with time. The changing element here is considered to be the result of the changing structure of production within these industries. Findings – It has been observed that the output of the services sector at the aggregate level and the output of the industrial sector are highly correlated, and demand generated for services output from the industrial sector over the period 1993-2011 is mostly due to the changing structure of production within these sectors. Originality/value – This paper takes the initiative to estimate the increase in inter-linkage between the output of the service sector and the output of the industrial sector resulting from the changing structure of production within the industrial and the service sectors.