Service sector as the road to economic growth: A comparison between India and China

Abstract

India and China are two countries which have grown tremendously over the last two decades. China had a head start ahead of India, which is reflected in the CAGR of GDP growth over the last two decades (10 % for China and 6.4 % for India during 1990 – 2010). It is also important to note that the path taken by both countries are contrasting in nature. India’s growth is primarily a result of the service sector, which contributed about 55% of its GDP, whereas for China service sector contributed 43% and manufacturing contributed about 46% to overall GDP as of 2009. Looking at the trends in service sector contribution to GDP for India and China there isn’t a vast difference. In India’s case, contribution to GDP increased from 41% in 1991 to 55% in 2009 and for China it increased from 34% to about 44%. The Industrial sector’s contribution for both the countries has not experienced much change. But the secondary sector has traditionally been the dominant contributor to China’s GDP [right from 1978 the contribution is above 40% to China’s GDP] and a much smaller contributor to India’s GDP [From 1978 the contribution has been between 22-24% including construction – Appendix 1]. Service sector growth (with an annual rate of 7.5 per cent) in India has outpaced industry sector (with an annual rate of 6 per cent) since 1990 and in the case of China it is just the contrary (manufacturing sector with an average rate of growth of 12.1 per cent and growth of the service sector at the rate of 8.4 per cent). There has been a lot of talk of about India skipping the Manufacturing boom in its growth path and a lot of questions have been raised on the sustainability of its service sector driven growth. Whereas China has trodden the traditional path and even now manufacturing is the major contributor with the services sector catching up. It is hence important to analyze the pattern of growth in the service sector of both these countries in a more detailed way to understand critical parameters which drive long-term GDP growth. The proposed study seeks to perform critical analysis (quantitative and qualitative) of the service sector in India and China and understand its relative importance in driving other sectors of the economy. Based on the analysis, suggestions will be made for future policy approaches towards service sector in both economies.