Service Sector Growth in India and China


The accelerated economic growth of both India and China in recent years has been a focus of significant policy discussion and analysis. On one hand, this growth is led by the IT industry in India, and on the other, it is the manufacturing industry based in China. However, service sector has played a very different role in both the countries. The share of service sector in India’s GDP is 54% while its share in China’s GDP is 40.7%. Since the 1990s, China and India have witnessed spectacular average annual growth rates of 10.2% and 6.2% respectively (for the period 1992-2005). In India, service sector has become a dominant contributor, such that the success in this regard has been called as ‘India’s services revolution’. However, in China, the service sector has lagged behind the manufacturing sector.

During the 1950s and 1960s, research by Kuznets and Chenery suggested that development would be associated with a sharp decline in proportion of GDP generated by the primary sector, counterbalanced by a significant increase in industry and a modest increase in the service sector. Kongsamut (2001) conducted a study on 123 countries and showed that the sector share given up by agriculture as the economy matures goes more to the service sector and less to the industry. Furthermore, the modern view also suggests that the share of agriculture declines as the economy grows with an increase in the service sector, and the share of industry first increases and then stabilizes or declines. India’s growth trajectory fits in this pattern, quite perfectly. In the four decade period 1950-1990, agriculture’s share in GDP declined by 25 % while industry and services, both gained equally. The share of industry has stabilized since 1990 and the entire subsequent decline in agriculture has been picked up by the service sector. However, we see that despite a considerable decline in the share of agriculture in GDP, there has been no significant decline in the share of agriculture in employment. On the other hand, the share of services in GDP has risen but with no increase in the share in employment. As a matter of fact, there has been a decline of 1%. As a corollary, the employment share of service sector in China has increased steadily since 1978. As a result, China’s service sector has absorbed relatively much larger labour force than India. In India, the decline in employment has happened due to an increase in labour productivity over a period of time. This increase has been not due to the increase in relative capital intensity but due to the concentration of growth of services in sub-sectors which are more dependent on skilled labour.

The Indian information and technology industry has been the source of much discussion on the successful growth of a knowledge industry in a largely poor and developing country. IT in India is spread across four key sectors- IT services, IT enabled services (ITES), software, and e-business. These sectors combine for a 2008 annual revenue forecast of $87B (NASSCOM) with numerous analysts suggesting higher revenue. Highlighting the rapid growth of IT in India, software was a small $150MM industry in 1991, but grew to $5.7B in 2000, which is an annual growth rate of 50% (NASSCOM). The public and private sector factors that have contributed to this hyper growth of IT provide lessons for possible replication in China and other developing countries. One important policy lesson can be that high tech areas, driven by the market, can pull in global capital even if domestic opportunities are limited. India’s IT sector growth also provides a fine example of how foreign-born or out of country immigrants provide linkages to capital, technology and culture to emerging entrepreneurs in the native country.

Software is one of China’s fastest growing service industries. The Chinese software industry is inherently different than India’s and will likely take different paths. The majority of Chinese software services producers are domestic companies with domestic consumers. Since software development creates more efficient manufacturing processes, China’s software industry is in high demand. In addition, more and more Chinese are acquiring personal computers and mobile phones that require software advances.

Similar to its support of the manufacturing sector, the Chinese government has providedenormous support to the software industry through tax breaks and high tech development zones. There are currently approximately 53 State-level, new and high-tech development zones in China, the majority of which are heavily subsidized by the government. In addition, the government has established 15 national software industrial parks to encourage more R&D that will contribute to the growth of this sector. These development zones provide infrastructure and facilities for new companies and hence reduce the overhead costs of these start ups. The majority of the companies that develop in these zones belong to the service industry. More than half of the approximately 1000 foreign start ups in Shanghai in 2002 were in the service sector. Perhaps the government’s most important role comes through its support of national R&D centers in the several dozen research institutes of the Chinese Academy of Sciences (CAS). Many of the leading software industries have arisen as spin offs from CAS. This is vastly different from India, where the service sector has succeeded despite the limited interaction of the government. Infact, this can be taken as an important lesson drawn from the growth of service sector in India; that government role of minimal intervention and/or reducing the complexity of new business formation is especially important in knowledge industries.

Another major difference between the Chinese and Indian software sector is the fact that the latter is more export oriented whereas the former serves primarily domestic demand. A mere 5.6% of China’s software industry was exported in 2000 versus approximately about 70% in India in 1998. Therefore, many of the software companies currently emerging and contributing to China’s fast growth are not looking outside their borders to continue growing. Despite China’s vast size, the software industry will be forced to look beyond the borders to continue its growth. Since software is a global industry, the future and success of the Chinese software industry will in all likeliness depend on its ability to sell its products in other countries.

One of the drawbacks of the Chinese service sector growth is the constant threat of intellectual property rights violation. There is rampant piracy which is constantly contributing to the smaller and weaker size of China’s software firms. Despite the differences in the Indian and Chinese service sectors, most of India’s lessons can be applied to ensure the success of the Chinese service sector. Both India and China have earmarked two different development paths. Each has leveraged its strengths to develop its own industries. While India has been hugely successful in its service sector, it has fallen short of the manufacturing sector. As a result, China looks towards India for lessons learned and vice versa. To develop its manufacturing sector, India would need to improve its infrastructure, continue its development of human capital and provide some preferential treatment to increase FDI and foster specific industry development.

Vibhuti Rathore