Structural Transformation in India : The Role of the Service Sector

Services led development strategies have raised concerns based on the historically low productivity growth of services. In this paper, I investigate which conditions make these strategies successful by looking at the most prominent example, India. I show that (i) the fastest growing industries in services grow faster than in manufacturing; (ii) services grow faster than manufacturing not because of sluggish manufacturing productivity; (iii) the distribution of educational attainment is skewed towards tertiary educated workers and (iv) the service sector is the most skill intensive; (v) returns to schooling are larger for the high-productivity services. To quantify and rationalize these facts, I construct a multi-sector model of structural change with high and low-skilled workers that takes into account heterogeneity in productivity growth within manufacturing and services. The calibrated model suggests that the large supply of high-skill workers combined with higher skill intensity in the most productive industries in the service sector seem to be behind the take-off in services productivity