Main fields: Macroeconomics, Economic Growth, Development and Structural Change
Secondary fields: Spatial Models of Economic Development
Structural Transformation in India: The Role of the Service Sector
Abstract: The experience of industrialized countries shows that productivity growth in the manufacturing sector is consistently faster than in the service sector. India’s experience shows the opposite. Particularly, I show that the fastest growing industries in services grow faster than in
manufacturing. To investigate why this has been the case and what it will convey for structural change and growth, I construct a five-sector model of structural change including agriculture, two manufacturing and two service sub-sectors. These two sub-sectors comprise the fastest and the slowest growing industries within each manufacturing and services. Furthermore, each sector can employ high and low-skill labor. The calibrated model suggests that the large supply of high-skill workers combined with higher skill intensity in the service sector seem to be
behind the services take-off. The data imply that service sub-sectors are gross substitutes while manufacturing sub-sectors are gross complements. This will accelerate productivity growth in services and decelerate productivity growth in manufacturing.