India�s accelerated economic growth in recent years has been a focus of significant policy discussion and analysis. The services sector has played a pivotal role in this acceleration. Growth in services picked up in the 1980�s and accelerated in the 1990�s. Since then, it has become a dominant contributor to economic growth. The prime movers of the growth in services are hotels and restaurants, communication and banking and business services (computer related services, renting of machinery, accounting and research development) with recorded growth rates above 10 per cent on the average from the 1990�s.
Two issues are often raised regarding the services sector. One relates to the complementarity between manufacturing output and services sector output on the one hand and the complementarity between public investment in infrastructure and the private investment in services sector. The second issue is the impact of the rapid growth in the services sector on inflation.
There is a vast literature in economics supporting complementarity between the industry and services sector. Fast growing services like trade and transport, which are also called producer services, reflect the complementarity between industry and services sectors. Also, the importance of infrastructure in facilitating services is well recognised. We have conducted a regression analysis to test whether such a complementarity exists and the extent of such complementarity between the services and the two sectors of manufacturing and infrastructure. We have also looked at the impact of public investment in infrastructure on private investment in services. The results show that, there is a strong, positive impact of real output in manufacturing sector on services sector output with an elasticity of 0.75 and real output in infrastructure has a positive impact on services output with an elasticity of 0.74. The public investment in infrastructure has a positive impact on private investment in services with elasticity of 0.22. These elasticities seem to suggest a significant complementarity between services, manufacturing and infrastructure sectors.
On the service sector growth and inflation, it has been argued that a rapid growth in the services sector tends to push up the rate of inflation since the services is not a commodity producing sector. The rationale is that there will be a demand-supply gap created because of the increase in output without a simultaneous change in consumer goods produced. A faster growth in services may also lead to a divergence between the inflation rates in traded and non-traded goods sectors. We did an empirical analysis by estimating the impact of the share of the services sector output in GDP on the price level (as reflected in the wholesale price index) while adjusting for monetary policy by using a dummy variable. The regression results clearly showed that an increase in the share of the services sector in total output does not have a positive impact on the wholesale price index provided there was en effective monetary policy in place.
Thus, the growing complementarity between the industrial and services sectors augurs well for the medium-term growth performance of the Indian economy. Further, the significant complementarity indicated in the analysis between infrastructure and the services sector suggests that India has to improve her infrastructure substantially to strengthen the services sector as well as the manufacturing sector. The analysis also show that fears about the inflationary effect of services sector growth appear to be unfounded.