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2. Review of Literature

2.3 Issues in Services Sector

2.3.2 Structural Shift of Indian Economy

many, the Netherlands and the US found considerable productivity differences not only at country level but also across industries within the main services sectors. They pointed out the importance of studies that take into account at aggregate level within the services sector.

The three basic sectors of an economy (primary, secondary and tertiary) are interdependent to each other for their demand for and supply of input and output. Each sector influences the other sectors in many ways. Therefore, examination of structural relationship among the sectors helps to understand the evolution of the relationship among different sectors in an economy.

series break in which the acceleration of growth in Indian economy took place. Rodrik and Subramanian (2005); Wallack (2003) and Balakrishnan and Parameswaran (2007) led the view that the acceleration in the growth rate of the economy started in the 1980s. In contrast to this view, Srinivasan (2005) argued that the acceleration in the Indian economy mainly occurred during 1990s, after the economic reforms of 1991. Rodrik and Subra- manian (2005) pointed out attitudinal change on the part of government in 1980s; limited pro-business rather than pro-competition policy change; large productivity response be- cause of the policy change and key role played by manufacturing as possible explanations of increase in growth rate in 1980s. Wallack (2003) explained that the increased growth was due to changing composition of GDP, because of movement of resources from slow growing sectors to fast growing sectors in the economy. Pointing out the possible expla- nations in the economic growth in India, Balakrishnan and Parameswaran (2007) argues that the acceleration of growth in the primary sector, occurring in the mid-1960s provided the original stimulus through the supply and demand linkage. Then, the growth in primary sector enters into the growth of the tertiary sectors which in turn enters into the growth of the secondary sector. However, the secondary sector does not enter in any other sector. The tertiary sector also found not to be entered into the growth of the primary sector. Arguing the difficulty to dispute such debate whether the economy experienced the growth surge in 1980s or in 1990s, Basu and Maertens (2007) opined that the growth process of Indian economy that started in 1980s further accelerated after the economic reform of 1991.

The overall performance of Indian economy is not satisfactory except the last decade in terms of growth rate. As mentioned above the economy started picking up in its growth rate during 1980s and more rapidly in 1990s. In sector wise, the performance of agriculture and allied activities were very meagre. In most of the time Compound Annual Growth Rate (CAGR) for the sector remain below 3 percent except in 1980s (1980-81 to 1989-90) and 2000s (2000-01 to 2011-12), in these two periods growth rates were 3.34 percent and 3.03 percent respectively. The growth rate in industrial sector remains constant around 5 to 6 percent per annum except in 1970s and 2000s. In 1970s (1970-71 to 1979-80) and 2000s the CAGR of industrial sector were 3.37 percent and 7.34 respectively. On the other hand, services sector outgrew the other two sectors from the decade of 1970/71 to 1979/80 till date. The sector grew at an impressive growth rate of 8.27 percent during the last decade (2000/01 to 2011/12).

In an analysis of Indian economy, Bosworth et al. (2007) critically analysed the pattern of growth and pointed out that the increase in growth rate before 1980 was mainly because of increase in use of factors, while the rise in growth in the post 1980 can be attributed more to increase in Total Factor Productivity than to increase in factors.

Similar conclusion was drawn by Rodrik and Subramanian (2004). They pointed out that the acceleration of the growth can be explained by rise in Total Factor Productivity (TFP) in the economy. According to them, India was producing below its production pos- sibility frontier before the growth surge started in 1991. Acharya (2002) suggests factors such as productivity gains in trade, finance to industry and some other services; surge in export growth, investment boom of 1993-96; improvement in terms of trade for agriculture for the remarkable growth surge in the post 1991 period. The growth in Indian economy has also been attributed to steady increase in domestic savings (Mohan, 2008; Acharya, 2002a). Mohan (2008) further adds the increased efficiency of resources in explaining the growth in the economy. Basu and Maertens (2007) pointed out that the nationalization of bank in 1969 had played a crucial role in improving saving rate in the economy. The for- mation of state-owned Unit Trust of India in 1964 may have given an extra fillip in growth of savings by making saving easier and safe (Shetty, 2007). Nagaraj (2013) termed the recent growth as private corporate run debt-led growth and pointed out that, despite sharp rise in domestic savings the growth was financed by bank credit to private corporate sector.

He asserts that the growth has been financed by bank credit to the private corporate sector, and boosted by surge in foreign capital such as Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI) and Foreign Currency Convertible Bonds (FCCBS). Nagaraj reported that, in Indian economy FDI increases from 0.6 percent of GDP in 2003-04 to 2.8 percent of GDP in 2007-8; and, the total capital inflow (sum of FDI, FPI and ECCBs) reached 10 percent of GDP just before the financial crisis struck in 2008. Further, the economy registered a relatively more rapid growth rate during the first few years of the 21st century till the financial crisis began in the US. The rise in GDP of the economy at factor cost over the period has been associated with the shift in sectoral contribution to GDP. However one noticeable factor in the growth pattern of the country is the emergence of services sector as the main contributor to the national income. The contribution of agri- culture to the GDP has declined over time; share of manufacturing to the GDP remained stagnant and contrary to that services sector gained importance in the economy in terms of

contribution. This kind of growth pattern leads to a major puzzle as mentioned by (Pana- gariya, 2008). He questions, why the growth pattern has not been accompanied by much faster industrial growth?

It can be summarised from the above literature that the growth in services sector shows a clear sign of acceleration compared to the other two sectors, and the growth rate in services became more rapid after the economic reforms in 1991. Thus, there are sufficient empirical evidences such as Gordon and Gupta (2004), Joshi (2004), Joshi (2008), Joshi (2010) that, the service sector in Indian economy is growing rapidly and is dominating the other sectors in the economy. Thus the services sector emerged as major sector in the economy both in terms of growth rate as well as in terms of contribution to the GDP.