Academic journal article IUP Journal of Applied Economics

Does Service Sector Growth Explain Manufacturing Growth in India?

Academic journal article IUP Journal of Applied Economics

Does Service Sector Growth Explain Manufacturing Growth in India?

Article excerpt

The Indian economy registered significant growth after liberalization in the 1990s. The service sector and the manufacturing sector have been significant contributors to the growth of the economy. In this paper, an effort is made to understand whether the growth in the service sector had any influence on the growth of the manufacturing sector by using the data for the period from 1970-71 to 2009-10. The results of cointegration test show that there is no long-term relationship between the growth in the two sectors.

Introduction

According to the IMF Report of 2010, the Indian economy is the 10th largest in the world in terms of nominal GDP and fourth largest in terms of the purchasing power parity. The countries' growth progressed at a rapid pace following the strong economic reforms undertaken by the then government. The major contributor to India's rapid economic growth during the 1990s has been the performance of the manufacturing sector. By 2010, India has been able to find its place among the top 10 manufacturers in the world. The output in the manufacturing sector grew by 5.7% from 1993 to 2005. The general explanation extended for the revival of the manufacturing sector is the policy reforms in manufacturing industries. However, a point which may have been ignored in explaining the manufacturing growth is the influence of the service sector.

It is understood that effective functioning of the manufacturing depends on the availability of certain critical service inputs like finance, transport, telecommunication and many more. Moreover, reforms in the 1990s have enabled a significant transformation in the service sector. It allowed for greater foreign and domestic competition within a greatly improved regulatory environment. Indian firms were no longer dependent on the inefficient public monopolies, but they were allowed to source their requirements from a wide range of domestic and foreign private sector providers operating in an increasingly competitive environment. As a result, firms in the manufacturing sector had access to better, reliable and diverse business services. These improvements have definitely enhanced the firm's ability to become more competitive and efficient and thereby contribute to its growth.

The objective of this paper is to examine whether the service sector growth influenced the manufacturing growth in a positive manner during the post-liberalization period in the Indian economy. To meet the objective, the paper is structured as follows: it presents a brief review of the reforms post 1991, followed by a review of the related literature. Then, it tests the hypothesis that the service sector growth influenced the manufacturing growth in a positive manner during the post-liberalization period in the Indian economy based on the data of manufacturing and service sector for the period 1970-71 to 2009-10, and discusses the results. Finally, it offers the conclusion.

Indian Economic Reforms Post 1991

The Indian government had introduced significant economic reforms from 1991 as a part of an IMF structural adjustment package which was primarily designed to take care of Balance of Payments (BOP) imbalances. The BOP crisis forced India to procure a $1.8 bn IMF loan and this acted as a major turning point in India's economic history. The IMF bailout forced the then government to pursue significant reforms. In response to the crisis, the government immediately introduced stabilization measures to reduce the fiscal deficit. The fiscal tightening and devaluation of the rupee by approximately 25% adequately reduced the current account deficit. The process continued with the government's Eighth Five-Year Plan from 1992 to 1996.

India's industrial policy was one of the areas where significant changes were made during the economic liberalization of the 1990s. The early reforms set the trend for a probusiness approach to industrial policy. It allowed India to slowly transform itself, from a centrally-planned and operated economy to a market-driven economy, integrating with the global trend towards less regulated economies. …

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