The structural transformation of the Indian economy-

With special reference to the service sector

Sunanda Jha Dr. D. Bag

Research Scholar, SM, National Institute of Faculty, SM, National Institute of Technology
Technology, Rourkela, Odisha. Rourkela, Odisha.
e-mail-jhasunanda1@gmail.com

Abstract:

This review article provides an overview of literature on the structural shift in the economy
from primary and secondary sector towards the tertiary sector. We attempt to revisit the
developments of the tertiary sector and its implications on the Indian economy as a whole.
While analyzing the structural transformation, which refers to the streamlining of economic
activity across the broad sectors of the economy agriculture, manufacturing and services, we
investigate the relation between the increasing contribution of the service sector towards
GDP and employment growth. Findings in the literature show that India has witnessed a
significant structural transformation; there is a shift from the primary sector to the tertiary
sector. The service sector is playing a dominant role and its contribution to the economy is
increasing continuously. However, it is also seen that this growth does not lead to
employment growth, which has been termed by authors as jobless growth. We have also
highlighted various productivity measurement models and measurement issues, due to which
we believe that the contribution of the service sector is far less represented.

Keywords: Service sector, growth, employment, Productivity.

Paper presented at the 16 Doctoral Consortium, COSMAR, IISC BANGALORE ON 12th

November 2016, at Management Science, IISC, 560012, India

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 1. Introduction:
The service sector plays a key role in both developed and developing economies. It is
an amalgamation industry and faces various challenges due to the nature of the services
which impacts productivity like intangibility, inseparability, heterogeneity and perishability
(Regan, 1963; Rathmell, 1966; Shostack, 1977; and Zeithaml et al 1985). The productivity of
a sector of the economy at the national level is measured in terms of its productive efficiency,
i.e. output divided by input (Productive Efficiency=Output/Input), which is related to the key
economic variables like employment creation, growth in household income and the
competitiveness of the economy. Despite the raised awareness both theoretical and
operational significance and contribution of this sector towards the economy are worth
debatable.
This paper aims to analyse the service sector's role in structural adjustment and
economic growth in India. It also investigates the historical experience of transformation and
structural change of the economy and explores a scenario of more rapid catch-up of the
service sector. The interesting aspect is the new service economy towards which India is
being transitioned in the form of solar power, swachh bharat, support to make in India, etc.
We review the issues raised about the service sector and its relationships with the
productivity and discuss about the structural transformation of the
economy and productivity measurement models. Further, we debate on the issue raised by
various authors on the service sector being over-stated or under-stated, in terms of
productivity and contribution towards the economy. In literature, we find that the growth in
service sector being referred as jobless growth. The service sector is labor intensive in nature
and has the potential to employ much more number of workers as compared to other sectors
of the economy. It employs more number of workers in less investment. Then why is the
growth, jobless? We have tried to explore various reasons behind this. We also highlight the
issues related to the productivity measurement in the service sector. The findings suggest that
the main reason behind all these issues is the basic nature of services due to which mis-
measurement issues exist. Also the as many of the service enterprises are unorganized and
unregistered they remain unaccounted.
This paper is organized into four sections. The first section is devoted to the
beginning of the service sector and its growth in India, its increasing contribution towards the
GDP and comparison with the other sectors of the economy. In the second section, we

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discuss its employment state. The Third section is about productivity measurement models
and measurement issues followed by the implications and discussion as the fourth section.

2. The beginning of service economy:

The Service sector, also known as the tertiary sector, has long been a neglected
segment of the economy both by the policy makers and economic researchers. It was in the
th th
19 and 20 century that there was a swing observed in the economic scenario, in which the
focus from the agriculture /primary economy shifted towards the industry, during this phase
the service sector gained very less importance it was since the Second World War that the
service sector emerged as the largest sector and attained significance in the western economy.
During this phase, the service sector in many respects became the most dynamic element and
was soon an important part of the various economies, especially U.S. For many industrialized
nations same pattern appeared, having same lag as set by the U.S. The United States is
considered by the National bureau of Economic Research (NBER) as the first service
economy and has been referred as the creator of the new set of the priorities for the economic
research and the Economic researchers (NBER, 1967), this was a breakthrough where the
service sector attained a separate identity.
With the recent developments and increasing contribution of the tertiary sector
towards the economy in the developed economies, the developing countries too are following
the same trend and now the service sector has gained significant interest and attention by both

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the policy makers and the academicians and has emerged as a major force for the economic
development. The service sector is labor intensive, and this interest attributes to various
factors, like employment creation capacity, its effect on the productivity growth of the
enterprise and the economy and its vibrant link to the other industries of the economy.
Some of the researchers have pointed out that there exists an unbalanced growth
between the productive manufacturing and the unproductive service sector (Baumol, 1967).
Baumol (1967) believed that if this unbalanced growth of productive and unproductive
service sectors continued, it would cause an increase in resources to allocate towards stagnant
growth industries, ultimately slowing down the productivity growth of the economy as a
whole. All these arguments rest on the empirical evidence that he found in the 1960s in the
development of productivity, in which the service sector is characterized as labor intensive. It
was only in 1999 when Oulton challenged the theory of Baumol and stated that all services
are not stagnant and also proved that relatively high productivity growth was recorded and
observed in certain service industries, his theory was based on the examination of the
historical data of the country.
After recognizing the growing significance of the service sector, it has been realized
that the analytical literature on service sector is relatively scarce. Here an overview of the
service sector and its growth in India in terms of productivity has been offered along with the
contribution of the service sector when compared to the other sectors is presented
analytically. This will explain the shift in employment in the economy and the relationship
that exists between the various industries and the service sector.

2.1. Service sector in India:

The literature has dwelt on the inter sectoral linkages we have a good number of
literature, where various techniques have been used to find out the inter sectoral linkages like
the I-O approach (Dhawan and Saxena, 1992), Causality and econometric model too has been
used by various researchers ranging from Rangarajan in 1982 till date. It established that
there exists a strong degree of association between the industrial sector and agriculture was
established. An addition of 1% growth in the agricultural sector stimulates 0.5 % output
growth in the industrial sector (Rangarajan, 1982). The relationship between the Primary and
the secondary sector is dependent on the exponential growth of emolument and employment
in the secondary and tertiary sector that is the service sector (Bhattacharya and Mitra, 1989).
Although there is an increase in the contribution of this sector towards the total income of the
nation and is increasing, its overall employment is lower than the primary and the secondary

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sector. This contradiction added to an increase in divergence between the growth rate of the
other sectors, which negatively influences countries BOP, inflation rate, and distribution of
income within the economy (Bhattacharya and Mitra, 1990). Bhattacharya et al. (1997) found
that there exists a significant relation between service sector, agriculture and industrial
sectors, which in turn helps in employment creation or generation. Hansda in 2001 using
detailed Input-output analysis of the 1993-94 data established a strong correlation between
the tertiary and the secondary sector (industry), reflecting that the service sector inputs were
used in the industry. This resulted in the industry's dependence on the agriculture and the
services sector (Sastry et al, 2003), much more than in the 1970s and 1980s. Further, any
change, rise or fall in the gross demand in the primary or the tertiary sector may possibly
cause production constraints in the industry or the secondary sector, and thus may affect both
the demand and the production linkages (Sastry et al, 2003). By complete analysis of the
correlation between all the sectors of the economy, for a period of fifty years i.e. 1950-51 to
2000-01 by using the granger causality framework, it has been established that there exists no
substantiation of the relationship between the agriculture/primary and industry/secondary
sector. It established that the agriculture sector has a unidirectional causation with the various
subsectors of the service sector like, ‘trade, hotels, restaurants, communications’ services and
the ‘financing, insurance, real estate and business services’. Further, it also establishes that
the industry has a bi-directional causality with both of them (Bathla, 2003). In this literature
survey, it is found under the co-integration framework, that there exists a strong proof of
having long run symmetrical relationship between all the sectors, Agriculture, Industry and
the service sector.
In 2004, using KLEMS data was an attempt to empirically find the contribution of
the tertiary sector towards industrial growth. For this analysis Banga et al. used data from
1980-81 to 1999-2000. He found that the share of the tertiary sector towards the growth in
output has increased considerably. It increased by 2.07% per annum during the 1990s from a
meagre 0.06% per annum during the 1980s. It was also derived that the relative contribution
towards output growth in the 1980s by service sector was around 1%, which recorded an
increase of about 25% in the 1990s (Banga and Goldar, 2004). Further, in 2007 by
Balakrishnan and Parameswaran using a structural break in the main sectors of the economy
an explanation of the growth transition in India was provided. It is found in the literature that
undergoing economic growth and subsisting with rising living standards require shifting labor
out of agriculture into both manufacturing and services and not just into one or the other
(Eichengreen and Gupta, 2010). Apart from this, there are various issues raised about the

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service sector, as the growth in services may be overstated (Bosworth, Collins and Virmani,
2007). The services output is more in the nature of intermediate goods like business services
rather than final consumption goods, which seems to be the case in India (Nandakarni, 2012).

2.2. Indian service sector growth overstated or understated? Evidence on growth:

The sectoral performance trend in constant prices with base year 2004-05 shows that
the contribution of the tertiary sector towards the GDP is the highest. Having second highest
percentage share of growth of about 15.98 % in 2013-14, lagging behind the primary sector,
this is showing a growth percentage of about 40.02 %. In contrast, the secondary sector's
growth percentage has been recorded as 8.3% in the same quarter of the year.

Sectoral contribution:

2013-­­14 (A) 50
40

30
2012-­­13 (Q) Ter@ary Sector 20
10

0
2011--­12 (P) Secondary Sector 2011-­­12 (P) 2012-­­13 (Q) 2013-­­14 (A )

Base Year Primary Sector Primary Sector 27.45 31.17 40.02

2004-­­05
Secondary Sector 12.25 10.96 8.37

0 100000 200000 300000 Ter@ary Sector 17.2 17.56 15.98

Fig.1:Source: MSME annual report 2013-1 ((p), sector wise Performance at constant price and the growth percentage
recorded in the various sectors of the economy

sectoral growth trend Change in Sectoral share in Indias GDP:1951-52 to 2012-2013

(% Growth rate YOY)
70.00
60.00 Agriculture -­­ Financial Year 1951-52 2012-13 %change 1951-52& 2012-13
50.00 Share to Total Agriculture 1.49 1.79 0.30
40.00
GDP Industry 5.50 3.12 -2.38
Services 2.67 6.59 3.91
30.00
20.00 Manufacturing
-­­ Share to Total Change in % Growth rate between 1951-­­52 and
10.00
GDP 2012-­­13
0.00
1951-­­52

1961-­­62

1971-­­72
1976-­­77

1986-­­87
1991-­­92

2001-­­02

2011-­­12

Agriculture, 0.3
1956-

1966-

1981-

1996-

2006-

Services -­­ Services, 3.91

­­57

­­67

­­82

­­97

­­07

Share to Total
0 0.5 1 1.5 2 2.5 3 3.5
GDP
Industry, -­­2.38

Fig2: sectoral growth trend, MSME sectoral data (1951-2013#) is used for this graph. Fig.3:Source:data.gov.in,planning commission.

We compare the sector wise percentage share of GDP at constant (2004-05) prices for
2004-05 with the prices for 2012-13 taken from the MOSPI annual report 2012-13. The
contribution of the secondary sector has been constant at 25%, whereas the service sector's
contribution has grown by 6% and there was a drop in the contribution of the primary sector
by 6%, which fell down from 22% in 2004-05 to 16% in 2012-13. This shows a shift in the
sectors, where the primary sector is overtaken by the service sector.
Now when we have another look at the sectoral growth trends (fig1) and of the
contribution of various sectors towards GDP we find the Gross Domestic Product (GDP) has

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gained remarkable momentum and has increased to 5.6% in the 1980s, an increase of 2.7%
over the 1970s.In 1970s it was about 2.9 %. This growth was because of the support of all the
sectors of the economy. Since the 1980s, the secondary and tertiary sector growth trend has
been upwards, whereas agriculture and allied activities had a downward trend. In order to
find out the sectoral linkages when the interdependence among the three sectors of the Indian
economy, i.e. primary, secondary and tertiary where agriculture & allied activities are
considered as primary, industry as secondary and services as tertiary, in an open economy
like India. When we compare the data for 2004-05 to 2012-13, it is seen that the service
sector or the tertiary sector dominates the economy accompanied by the declining
contribution of the primary sector, its contribution towards GDP slipped down from 22 % to
16%.
Strong linkages exist between the three economic sectors; the primary sector has the
production and demand correlation with the secondary and the tertiary sectors. It also
demands linkages with the secondary sector as it is dependent on the secondary sector for
various inputs of the primary sector like pesticides, fertilizers, etc., which helps in increasing
the output or productivity of the primary sector, so it can be said that for increasing the
productivity of the primary sector the demand for the industrial products increases. The
primary sector affects the tertiary sector positively as the productivity increases and income
increases and as a result, the demand for the tertiary sector also increases. The tertiary sector
also acts as the intermediary input between the primary and the secondary sector that
provides the linkage between the two other sectors being a mediator.
As far as manufacturing is considered, there is a positive and significant affiliation
between the two sectors. With the expansion in the secondary sector the demand for the
tertiary sector or the service increases for smooth functioning of the organization and the
demand for the various services like trading, transportation, hospitality, banking, business
services and social services etc. increases. The growth of the service sector depends on the
growth and development of the inputs of the secondary sector. In turn, growth of the tertiary
sector depends on the inputs of the secondary sector. Now, as the per capita income rises due
to the high-income elasticity of demand for services the growth linkage between the
secondary and the tertiary sectors become stronger with increased demand for each other’s
output. In recent years, the economy has seen unparalleled growth with respect to
distribution, communication, and financial services. The Financial services have repeatedly
recorded an increasingly high growth in the last few years, benefiting from significant
spreading out in the economic activity.

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 The service sector's productivity depends on the value of the products and service
offered, which is further dependent on the utility, uniqueness, quality, convenience and
availability of the product or service offered.

3. Does service sector lead to employment growth? Is the growth jobless?

The service sector as a whole is an amalgamation industry and comprises of a variety
of services. It is composed of various subsectors like retail trade, Hotels and Restaurant,
Transport, Financial, insurance, Storage and Communication, real estate and business
services, Community, social and personal services, giving employment at all levels. As many
service enterprises are unregistered the employment provided by them remains unaccounted,
such types of enterprises operational expense is very less and operate at very low scale by
hiring employees and providing direct service to the consumers. Examples of such enterprises
are many, from a vehicle repairing shop to seasonal vendors who serve according to the
seasonal requirement. Due to this in the employment survey remains a gap where we
miscalculate the employment generated and offered in the service sector. All parts of this
sector are from a bus conductor to a home delivery boy. Due to this variation, various issues
exist in the service sector regarding the share of various subsectors towards GDP and towards
employment. Moreover, due to this the labour productivity of the various subsectors vary
widely (Pais, 2014) because of which the growth and productivity varies considerably.
When we look at the share of this sector towards GDP, it is growing, but when we
consider employment, it is not. Various researchers have found various disparities in the
share of services towards total GDP and the consequent share in the total employment. The
service sector's growth has been termed jobless, jobless growth refers to a stage where output
in terms of GDP rises but the employment rate lags behind (Datt, R., 1994).

Total employment
%change 2000-2012 change in sectoral share in Indias GDP 2001-02 to 2012-13

Industry
Services, 8.28
8.7 Services
4.1 Industry, 0.46

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

0 0.5 1 1.5 2 2.5 3 3.5
Agriculture,
Agriculture -8.74
-­­12.7

Fig.4: Source- data.gov.in, planning commission.GDP and major industrial sectors of the Economy.

In the graph, it is clear that the percentage change in total employment is highest in
the industry followed by services, whereas if we look at the GDP contribution the services

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sector has the highest share. This growth has not been in the proportionate to the sectoral
share due to which the growth has been termed as jobless. If we look at the statistical figures
it is seen that the share of service sector has taken a leap from 34% in the 1970s to 54% in
2010-11 whereas for employment in the service sector, which was 15% in 1972-73 to about
26.67% 2009-10 (Pais, 2014). There exists a huge gap in the productivity between workers in
the primary sector and the workers in the tertiary sector, i.e. service sector (Papola and Sahu
2012). Due to the fact that in the service sector large proportion of jobs are unprotected. In
addition, domestic workers who are in large proportion are not considered as the workers in
this sector (Jonakin 2006; Pais, 2014), the jobs in this sector are often discussed in the
literature as an informal or unorganized sector, and due to this, the job in the service sector is
associated with the informal sector (Pais, 2014).
Now, since the informal sector is in fact the service sector, it has a fairly large share in
output and employment generation. One reason the association between services and the
informal sector, is the importance of providing jobs in urban areas. Perhaps due to low skills
and limited education, most urban migrants would settle for informal work. It is easier for
migrants to find work in simple mending jobs such as a street vendor, peddler, and shop
assistants, as compared to formal sector where a minimum level of skill in term of education
or experience is required to become a part of the unit. At significantly higher income levels,
the share of informal sector falls (ADB 2005), while that of the service sector raises even
more (Noland, Park, Estrada, 2012).
Mitra (1988) pointed out the lopsided growth in services contribution towards GDP.
He also mentioned about the absence of subsequent increases in services employment in the
1980s. It is also mentioned in literature that the growth in service sector is not sudden, it is
because of the relative higher base in 1950s and there has been steady growth since then
(Pais, 2014).

3.1.Employment scenario of Services sector:

According to the Global Employment Trends of 2014 by International Labor
Organization’s (ILO), the World Services Employment is 7.3 percent. The services sector
accounts for more than 50% of total global employment growth. Its share in the world
income has reduced from 68.8 % in 2001 to 66 % in 2013, whereas its share of employment
has shown a boost from 39.1 per cent to 45.1 per cent in 2013. When we look at the Indian

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 tertiary sector, it has significant contribution towards income and comparatively lower share
towards employment .The share of services towards GDP and employment has grown in the
last 12 years. (Economic survey, 2014-2015)

Table 7. 5: Sector-wise Employment Trends (UPS)

Absolute number (million) (Share Employment elasticity
in % in parentheses)
1993-94 1999-00 2004-05 2009-10 2011-12 1993-94 to 1999-00 2004-05 2009-10
99-00 to 04-05 to 09-10 to 11-12
Agriculture 204.3 214.7 226.8 220.5 204.4 0.3 0.7 -0.2 -0.5
(61.1) (58.5) (54.5) (51.6) (47.1)
Industry 53.5 61.7 81.0 93.1 106.1 0.4 0.9 0.3 0.9
(16.0) (16.8) (19.5) (21.8) (24.4)
Services 76.6 90.6 108.0 113.7 123.9 0.3 0.5 0.1 0.5
(22.9) (24.7) (26.0) (26.6) (28.5)
Total 334.4 367.0 415.7 427.4 434.4 0.2 0.4 0.1 0.1
(100.0) (100.0) (100.0) (100.0) (100.0)
Source: Economic survey2014-15

Table 7. 5: Service sub-Sector-wise Employment Trends (UPS)

Absolute number (million) (Share Employment elasticity
in % in parentheses)
1993-94 1999-00 2004-05 2009-10 2011-12 1993-94 to 1999-00 2004-05 2009-10
99-00 to 04-05 to 09-10 to 11-12
Trade, hotels, and 26.8 34.1 46.5 48.4 50.5 0.4 0.8 0.1 0.3
restaurants (8.0) (9.3) (11.2) (11.3) (11.6)
Transport, storage, 11.0 15.0 18.7 19.9 22.8 0.5 0.4 0.1 0.6
and communication (3.3) (4.1) (4.5) (4.6) (5.2)
Financial, insurance, 3.7 4.8 7.5 9.4 10.7 0.5 1.6 0.4 0.6
real estate and business (1.1) (1.3) (1.8) (2.2) (2.5)
services
Community, social, and 35.1 36.7 35.3 36.1 39.9 0.1 -0.2 0.1 1.1
personal services (10.5) (10.0) (8.5) (8.4) (9.2)

Source: Economic survey2014-15

A look at the present sector wise employment trend in India based on the data from
different reports from various rounds of NSSO and CSO from the Economic Survey 2014-15
shows that over the last two decades the sectoral share of employment has changed.

%of total Total employment

employment 2000 2012 %change
%change 2000-2012

Agriculture 59.9 47.2 -12.7 Industry

Services
Industry 16 24.7 8.700001 0 0.5 1 1.5 2 2.5 3 3.5

Agriculture
Services 24 28.1 4.1

Source: world data bank, WDI

*Here CAGR method has been used for calculated employment elasticity (EE), EE = (CAGR employment) / (CAGR GDP at
FC constant 2004-05 prices) for the respective time frame.

The share of employment has been shifting in a linear fashion from the primary to
secondary, and ultimately leading to the tertiary sector. According to Table1, the share of
agriculture has reduced and that of the industry and services, it is at uplift and has recorded
growth. The share of the services in employment, which was at 28.5 % in 2011-12, was

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higher than in secondary sector by 4.1 % i.e. 24.4 per cent. In the various sub sectors of the
services, i.e. trade, hotels, and restaurants; transport, storage, and communication; and
financial, insurance, real estate and business services from 1993-94 to 2011-12, there has
been an incessant increase in the employment share. From the table it is established that there
was a continuous fall in the employment share of the community, social, and personal
services, except in 2011-12 where was an increase as compared to 2009-10 and 2004-05.
This data also shows that there has been an increase in employment elasticity in both the
secondary and the tertiary sector in 2009-10 to 2011-12 compared to 2004-05 to 2009-10.
Among services, the employment elasticity in ‘financial, insurance, real estate, and business
services’ and ‘transport, storage, and communication’ has been recorded as the highest.

4. Productivity measurement models

Researchers have suggested various models to measure productivity. The models
measure the TFP and PFP. Here various models suggested by different authors are revisited.
All these models rest on the basic definition of productivity that it is the ratio of output to
input. Ngai and Pissarides (2007) and Acemoglu and Guerrieri (2008) developed multisector
growth models following Baumol (1967). The authors assumed total factor productivity or
factor proportion differences generate employment shifts in the ‘stagnant’ service sector
during the imbalanced path of growth. Laitner (2000), Kogsamut, Rebelo and Xie (2001), and
Foellmi and Zweimuller (2008) relied on the demand-side explanation of structural change in
the economy. They used 'shift-share analysis' to examine the impact of structural change
including Maudos et al. (2008), Maroto-Sánchez and Cuadrado-Roura (2009), Timmer and
de Vries (2009), McMillian and Rodrik (2011), and de Vries et al. (2012), etc. The “structural
change effect” can be either positive or negative, which depends on whether a sector is
expanding or shrinking. When the contributions from individual sectors are aggregated, the
change effect turns negative (Δ < 0)lowering economy-wide productivity growth. If the labor
displaced from high-productivity growth sector to low-productivity growth sectors. Could
the “shift share effect” for India be negative?
The same technique is also used by Lee & McKibbin (2014) can be used to analyze the role
of tartarisation for aggregate productivity growth of the Indian Economy
! !

∆ != ( !,!!! ∗ ∆ !,!) +
!!!
( !,! ∗ ∆ !,!)
!!!

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This equation shows that the overall growth of labor productivity can be divided into two
components. The first component is the contribution from productivity growth within
individual sectors, which is representatively weighted by their share of employment (“within
effect”). The second component is the contribution from labor re-allocation that happens
across different sectors (“structural change effect”). The second component is the product of
change in employment shares and productivity levels aggregated across sectors.

Other models:
A few models are discussed in brief. We limit ourselves to classic models.

a. Kendrick-creamer model (1965)

This model is suitable at the company level for computing productivity indexes.
= !"#$%&"' !"#$%& !"#$"# !" !"#$ !"#$%& !"#$% ......(1) !"#$%&"' !"#$%& !"#$% !" !"#$ !"#$%& !"#$%

!"#$"# !" !"#$ !"#$%& !"#$%

= !"# !"# !"#$% !" !"#$ !"#$%& !"#$% (!/!/! )….(2)

The limitation of this model was that, as it dint consider all inputs of industry like energy,
business services etc. it was not suitable for computing TFP index at the industry level.

b. Craig-Harris model (1972)

This model is suitable at firm level and service sector. The model suggested is : !=
!!
(!!!!!!!)

Where, !=Total Productivity, L=labour Input,

C=capital input,
R=raw material input and
Q= other miscellaneous goods and services input, and !=output.

The limitation of this model was again same as the Kendrick model. It was not suitable at the
industry level.

c. Kedrick,1985
The efficiency and effectiveness of the resources are used to determine productivity.
There are two types of efficiency, technical efficiency and allocative efficiency. Technical
efficiency is the ability of an enterprise to get maximum output from a set of known inputs.

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Allocative efficiency is how the inputs can be used in optimal proportion to get desired
output.
There have been two schools of thought on this; one believes that both efficiency and
effectiveness are required for measuring productivity as they believe that an economic
activity can’t be productive if it is only efficient or only effective. However, the other group
believes that productivity, efficiency and effectiveness can be used interchangeably (Li,
2009), this is the primary reason that leads to measurement issues in imprecisely defined
concept and definition of productivity. Productivity is simply defined as a ratio of output to
input (Atkinson, 1995 & Li, 2009). Inputs are resources such as labour, capital. The output is
the product that is produced with the given set of input. In 1985, Kendrick said that the
broadest measure is called as the ratio of total productivity (TP) or the total output (TO) -total
input (TI).

Here TI consists of L (labour) and K (capital), which is inclusive of natural resources,

structure, equipments and inventories. M consists of all intermediate products and services
rd
like energy, material and service provided by other producers. In the 3 equation
productivity is represented as the weighted average of partial productivity (PP) of the key
factors of L, K and M, respectively. The two principal methods of measurements used to
represent productivity, namely, Partial productivity(PP) and Total Factor Productivity.,

The TFP is defined as the ratio of output-over input (Diewert & Nakamura, 2002). In any
business unit, there are more than one input and output. Some of these may be tangible and
some intangible (Li, 2009).Total Factor productivity is a complete method of productivity, "it
combines all of the partial measures into an aggregate index" (Baldwin, 2005 and Li, 2009).
Any change in TFP will reflect change in productive efficiency.
5. Measurement issues with the service sector:
The service sector has recorded sustained and rapid growth in the Indian economy,
this has raised several questions about the accuracy in the estimates of the contribution of
service sector towards the country’s GDP. The measurement of productivity as a whole is not
an easy task, the difficulty further increases when we talk of the service sector. The main
issue of measurement in services revolves around defining the Input and output .The
availability of data too is an important factor. There are various bodies that provide data for
service sector like NSSO, RBI, MSME, World Bank, IKLEMS, etc. Services cannot be
quantified, as most often in services the input and output both are intangible in nature. For
example, Innovation, knowledge, quality etc. cannot be quantified, for measuring them we

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use other techniques. The services are heterogeneous in nature which further adds to the
difficulty. The levels of aggregation and Change in quality too are crucial factors in the
service sector.

5.1.Major reasons for low productivity in the service sector:

In the service sector, there exists a diagnostic challenge created by the sectors
diversity, which results, as the basic problem is measurement. In this sector, the output of
many subsectors are hard to measure (e.g. public education) as they are perishable and
normally consumed within a country. There may be various reasons affecting the
productivity, as has been seen in the developed countries. Factors such as , low marketing,
lag in standardization and moderately bungling management system may be the internal
factors affecting the productivity of the service enterprises. Further, the external factors that
causes low productivity are attributed to over-regulation and the prevalence of weak
competition. This sector faces analytical challenge as a whole, in manufacturing sector the
output that is produced as a result of the input can be standardized, due to this standardization
enormous attention has been paid or dedicated to this in understanding of the determinants of
productivity. The perceptible growth of the service sector's activity reflects the changing
nature of firms, particularly the off-shore dependence and the outsourcing of processes,
would also affect the measurement of productivity in manufacturing which uses service as
input (Yuskavage, Strassner, and Medeiros 2008; Houseman et al. 2011). After an intensive
survey, Francois and Hoekman (2010) concluded that the service sector's performance might
be a major factor in the productivity growth economy-wide.
6. Discussion and Research Implications:
Indian economy is becoming service driven more in terms of output than employment.
This growth has been possible because of the liberalization and reforms. The tartarisation
process of the economy has been vibrant and growth oriented. With the growing opportunity
and demand, it expanded. One of the reasons for its expansion is the new policy and reforms
by the government for promoting service industry. In the various studies in order to identify
structural transformation of the economy in terms of employment over time, sectoral
elasticity’s has been used. Econometric models were built to measure employment elasticity
with respect to GDP, which helped understand the primary determinants that affected
elasticity’s as it was. The determinants included factors like ‘labor supply, economic stability,
and openness to the outside economies, the taxation system, and the degree of
rigidity/flexibility of the labor market’. The structural transformation and the shift in
employment from primary to secondary and then to tertiary is evident in the service sector's

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growing significance. This shift is because it has the potential to employ masses with less
investment as compared to the manufacturing where initiation, maintenance and operation
holds certain amount of investment, may be in fixed assets, like machineries, land, labour and
capital which may be not required in the services. It holds opportunity for both skilled and
semi skilled manpower.
Due to the lack of employment opportunities in other sectors of the economy, the service
sector has expanded. The job in this sector are often not paid sufficiently, like trade, hotels,
restaurants, security service providers, small retailers etc. On the other hand there is a
segment in the same sector as financial or banking services, real estate and business services,
IT services which are better paid. Due to this disparity within the service sector, high-income
segments are experiencing faster growth and have more contribution towards the GDP and
are more productive in generating output whereas low-productive and low-income segments
are providing more employment opportunities and are experiencing employment growth.
When we consider the overall on-record employment in this sector it is lower than its
share in GDP due to various factors. Measurement error, though it is not solely responsible
and cannot explain the entire slowdown but is one of the main reason. Since these enterprises
are of very small scale and are not registered, they remain unaccounted by in the census.
They do not have any office space where they operate from, they keep on shifting their
location of operation due to various internal and external factors (this is true for very small,
or tiny unit level firms), like increase in competitors, increasing cost etc. These enterprises do

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not have a fixed number of employees which keeps on fluctuating due to the seasonality of
demand and demand for service. As far as on record employment is considered it is
increasing. It is seen in the trend analysis that the share of the service sector have been
continuously increasing in the past few years. This shows the increasing dominance of the
service, it is seen that the distributive services has the highest contribution in the service
sector this is because it is related to both the primary and the secondary sector. Distribution
has to play a very important role in any form of business, so it occupies the highest
percentage contribution share. It is conclusive from the literature review that this sector will
continue to contribute towards inclusive growth by raising investment, creating more jobs
and enhancing human capital,. Indian service sector needs private investments in few major
infrastructure components such as tele-communications, transport, and energy. It can attract
FDI and private investment only with stable, transparent, non-discriminatory, competitive
policy environment. Various new laws and the concerned ministries have introduced schemes
in order to develop this sector. There are schemes, which are exclusively for the small
enterprises that are operational and for new ventures. If these reforms are implemented
utilised properly and awareness about such schemes is widespread, it will enhance the
productivity and efficiency of the service sector and lead to inclusive growth. Further, with
the implementation of GST , we expect a major part of this sector's measurement error(s) will
be uncovered in coming periods..

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