Higher Service Sector Growth Is Redefining India's Growth Narrative

India’s services sector’s activity accele-rated last February providing some relief to policymakers. It boosted hopes of GDP growth in the quarter ending March 2019. This was after the economy lost momentum in the third quarter of the current year when it grew by 6.6%, the lowest in five quarters.

- Tushar K. Mahanti

The Nikkei/IHS Market Services Purchasing Managers' Index rose to 52.5 in February from January's 52.2, staying above the 50-mark that separates growth from contraction. The upturn was driven by a quicker expansion in new work orders that supported a faster increase in output and job creation.

Despite input price pressures remaining high, firms did not fully pass that on to customers, suggesting overall inflation could remain below the central bank’s medium-term target of 4% in the coming months, giving the bank room for lowering policy rates. According to this survey, the service providers are optimistic about growth in the year ahead, although the expectations index still remained below the ong-term average.

It is good news. India’s economic growth in recent years has largely been dependent on the performance of the service sector, which has grown steadily to become the biggest contributor to GDP. India in fact, is often cited as an example of an economy that is modernising by jumping directly into services without passing through manufacturing. The weight of manufacturing in India has been relatively stable over the past two decades, at much lower levels than China and other ASEAN countries. Business services – a high value added sector – represent a larger share of economic activity in India as compared to Europe.

Contribution to GDP apart, the sector’s growth is all the more important as it generates a large number of jobs. As per the ILO’s estimates, among the top 15 economies, the services sector accounted for more than two-thirds of total employment in 2016. If India’s share at 30.6% was lower compared to others, the share increased by about 5.5 percentage point over the decade, between 2006 and 2016.