The services sector in India

Abstract

This paper discusses the role of services in India’s economy. Through analyzing global data on the relationship between services, manufacturing, and GDP, we show that the relationship of services to economic growth is complex and usually involves a consideration of the manufacturing sector. In India’s case, somewhat unusually, services and manufacturing grew independently of each other for many years. This independence was in large part due to public policies that encouraged low value-added, capital-intensive manufacturing through protectionist policies. This helps explain why both services and manufacturing were relatively low value added compared to other countries, such as China, that consciously sought to integrate the two sectors. We discuss policymakers’ options for promoting higher value-added services in India, what this means for the manufacturing sector, and the linkages between services and manufacturing.