India’s great leap into services
China and India are two of the fastest growing economies in the world. But they are following very different growth paths. China is a formidable exporter of manufactured goods. India has acquired a global reputation for exporting services, leapfrogging the manufacturing sector.
Services contribute more than manufacturing to India’s output growth, productivity growth and job growth. Given the relatively large size of the service sector compared to manufacturing, India’s growth pattern resembles that of the US. This raises big questions. Can services be as dynamic as manufacturing? Can services contribute more than manufacturing to output growth, productivity growth and job growth?
India’s growth pattern contradicts an iron law of development that has held true for 200 years, since the start of the Industrial Revolution. This law has argued that industrialization is the only route to rapid economic development for developing countries. The potential for explosive growth was seen only in the manufacturing sector.
This is no longer the case. The new industrial revolution and digital technological changes have changed the growth drivers in developing and developed countries. These technological changes have enabled services to be the new driver of growth. The digital revolution, by lowering transaction costs in services and overcoming problems of asymmetric information, has made services more dynamic than in the past.
Photo courtesy of Maria Andersson.