The Service Sector as India's Road to Economic Growth?

Among fast growing developing countries, India is distinctive for the role of theservice sector. However, sceptics have raised doubts about both the quality andsustainability of the increase in service sector activity and its implications foreconomic development. Using National Accounts Statistics and cross-county data, weshow that the growth of services has been broad-based. We show that the growth ofservice sector employment is not simply disguised manufacturing activity. We alsofind that the skilled-unskilled mix of labour in the two sectors is becomingincreasingly similar. Hence, it is no longer obvious that manufacturing is the maindestination for the vast majority of Indian labour moving into the modern sector andthat modern services are only a viable destination for the highly skilled few. To theextent that the expansion of both modern manufacturing and modern services isconstrained by the availability of skilled labour, this just underscores the importancefor India of continuing to invest in labour skills. We conclude that sustainingeconomic growth and raising living standards will require shifting labour out ofagriculture into both manufacturing and services and not just into one or the other.