Growth of the services sector in India: notional or real?

It is often argued that the rapid growth of the services sector in India maybe notional rather than real. This is because increased ‘contracting out' to specialist providers results in economic activity, which was earlier subsumed in manufacturing or agriculture value added, to be accounted for as service sector contributions to GDP. But our statistical analysis of input-output coefficients from National Accounts Statistics shows that, in India, during the period from 1979-80 to 2006-07, greater ‘contracting out' of services by firms or households in the industrial and agricultural sectors, which alters aggregate accounting, is not an important explanation for the increasing share of the services sector in total output. This is an important result, particularly because the period after the mid-1990s saw a notable increase in the share of the services sector in total output, while that of industry remained largely unchanged. At the same time, we find that at a disaggregated level, ‘contracting out' is irrelevant for most service sub-sectors, and has only a very small effect on the increasing importance of banking and business services.