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Contribution of the Services Sector to India's Growth

Changing sectoral composition and the rising significance of services

Amidst the global economic crisis, the growth rate of the Indian economy decelerated to 6.7% from an average growth of 8.8% in the period 2002–2007. This was 2.3 percentage points lower than the previous year. Table 1 [ PDF 24.4KB | 1 page ] shows the quarterly growth rate of GDP and shows that in Q4 2007–08, the impact of the global economic crisis was felt for the first time when the growth rate fell from 9.3% (Q3 2007–08) to 8.6% (Q4 2007–08). Although the quarterly growth rate of GDP fell continuously until Q3 2008–09, it stabilized in Q4 2008–09, grossing 6.7% of the annual growth rate.

India's GDP growth in 2008–09 was one of the highest in the world. This reflected the relative resilience of the country's growth impulses to a severe external shock and demonstrated the impact India's policy response had on containing the adverse effects of the global economic crisis on domestic growth.

Figure 1 [ PDF 92.8KB | 1 page ] shows the sectoral shares of total GDP between 1990–91 and 2008–09, highlighting the change in sectoral composition of India's GDP. The agriculture sector's share of the total GDP decreased from 31.4% in 1990–01 to 17% in 2008–09, and the industrial sector's share fell from 19.8% in 1990–01 to 18.5% in 2008–09. Meanwhile, the services sector's share increased substantially from 48.8% in 1990–01 to 64.5% in 2008–09. During the global economic crisis, the services sector's share in real GDP increased from 63% in 2007–08 to 64.5% in 2008–09, while that of the agricultural and industrial sectors decreased. The services sector experienced the smallest decline in growth rate compared to the other two sectors. The growth rate of the services sector fell from 10.8% in 2007–08 to 9.3% in 2008–09, a decline of 1.5 percentage points, compared to declines of 3.3 and 4.7 percentage points in the agricultural and industrial sectors, respectively.

A closer look at the composition of the Indian services sector reveals some very interesting facts (Figure 2 [ PDF 23.5KB | 1 page ]). Within the services sector, the highest share in services GDP has been domestic trade (retail and wholesale trade). It averaged around 23.2% of the total services GDP in FY1990-91–FY1999-2000, and then further increased to 23.4% in FY2000–FY2007, thereby remaining the most significant sector in terms of its share of the total services output. This is followed by real estate with an average share of 13.7% in FY1990-01–FY1999-2000, which fell by 1.0 percentage point to 12.7% in FY2000-01 to FY2007-08. Next in importance in terms of share of services output are the public administration and defense and construction services with respective average shares of 12% and 11.2% in FY1990–FY1999, which then fell marginally to 10.8% and 10.2% in FY2000-01–FY2007-08. What is interesting is that the top five services categories remained the same over time in terms of their share of the total services sector output. These services are also those that have low tradability within the Indian context. The fifth and sixth ranking are banking and insurance and transport services, which averaged 10% and 8.5%, respectively, across the whole analysis period.

What is most striking is the rise in the average share of the GDP contributed by communication services, which rose from 2.4% to 7.0%. There has been a consistent rise in the share of communication services in the total services output; however, it must be noted that the share has remained less than 10% of the total output of services at all times.

2.1 Decomposition of India's GDP growth rate: contribution of the different services sectors

Decomposing GDP growth into the growth of the three sectors of the economy (Table 2 [ PDF 20.7KB | 1 page ]), we find that in 2008–09 the Indian economy recorded a growth rate of 6.7%, of which 5.9 percentage points were contributed by the services sector. The manufacturing sector contributed 0.5 percentage points, while the agriculture sector contributed 0.3 percentage points. In fact, in 2008–09, almost 88% of GDP growth was explained by the growth of the services sector. The contribution of services to GDP growth over the years clearly shows that the main momentum for the growth of real GDP has come from the services sector, especially during global economic crisis.

Figure 3 [ PDF 94.8KB | 1 page ] shows the growth rate of the various services within the services sector. The figure shows that the maximum contribution to GDP growth rate in 2007–08, which was 6.7%, came from the domestic trade sector (retail and wholesale), which contributed 1.42 percentage points out of the 6.7% growth. This was followed by communication services (which includes telecommunication and software services) and banking and insurance services, which contributed 1.25 and 1.03 percentage points, respectively. Construction services, other services, and real estate services contributed 0.72, 0.68, and 0.65 percentage points, respectively. These were followed by transport and public administration and defense services. The contribution of hotels and restaurants and railways to services growth was less than 0.2 percentage points.

This analysis shows that the main drivers of GDP growth have been domestic trade, communication services, and banking and insurance services.

Download this Paper [ PDF 393.2KB| 37 pages ].

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