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Business Research Methods

Research Proposal Submission on
Growth of the Services Sector in India vis--vis the Manufacturing
Sector



Tarun Chadha
PGP 015 / 121
Indian Institute of Management
Kozhikode


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Abstract ................................................................................................................................................... 4
Introduction ............................................................................................................................................. 5
Research objective and research questions ............................................................................................. 7
Literature Review .................................................................................................................................... 8
Explanation of the proposed methodology ........................................................................................... 10
Significance of the study and the limitations ........................................................................................ 12
References ............................................................................................................................................. 13

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Abstract

This paper seeks to determine the reasons that drive Indias growth story as a Services dependent
economy, which is in sharp contrast to the other economies in the Asian neighborhood and in the list
of newly independent nations that are mainly driven by the Manufacturing sector. It hopes to capture
the key demographic, economic, geographical, political, policy and socio-cultural issues that have
impacted Indias growth story in this way. The systems dynamic methodology will be used to
determine the key causes for the preponderance of the Services sector in Indias growth. Secondary
economic and political literature will be reviewed to establish causal loops if any. A thorough
understanding of the key stakeholders will be established, to appreciate the role played by each of
these prospectively and retrospectively in arriving at the current situation. In understanding the
reasons for the dominance of the Services sector, future actions that can be taken to give greater
impetus to the Manufacturing sector will also be established. The key limitation of the study is that
the inferences drawn from the experience of neighboring countries might not be directly
applicable/replicable to India given the deeply embedded cultural differences of these countries.
Keywords: Indian services sector, manufacturing sector growth, system dynamics

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Introduction

Since the economic liberalization in 1991, India has witnessed as a steady growth rate of GDP of over
6.5%. While most young independent nations experience growth that is mainly driven by the
manufacturing and agriculture sector, the services sector has been the main driver for Indias growth
story is the past two decades. This is in sharp contrast to China, another young nation that shares
similar geographical drivers, which has witnessed growth that is mainly driven by the manufacturing
industry. The share of industry in GDP was 46% in China and 20% in India in 2010. In the same
period, the share of agriculture and allied activities was 14% and the share of Services was 66% for
India. Other Asian nations like South Korea and Vietnam have also experienced growth that is mainly
driven by the manufacturing industry. Thus India represents a peculiar case in the Asian region and in
the list of newly independent nations in its position as a nation that has witnessed a strong growth
trajectory that has been mainly driven by the Services sector.

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 - 91 2000 - 01 2008 - 09 2010 - 11
Agriculture and Allied Activities Industry and Manufacturing Services
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Stakeholder Analysis

There are various stakeholders in the growth of the Services sector vis--vis the Manufacturing sector
in India. The stakeholders can be classified broadly under the categories above. Each of these
categories encompasses many stakeholders.
Stake
Power Formal or voting Economic Political
Equity
Public sector
companies, private
sector companies

Economic
Foreign investors,
Domestic investors
Financial Institutions
Influencers Policy makers Government

Growth of
Services sector
vis-a-vis
Manufacturing
Sector
Private
Sector
companies
Public Sector
companies
Government
Policy makers
International
investors
Domestic
investors
Financial
institutions
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Research objective and research questions

The overall objective of this research is to appropriately judge the factors that have led to the Services
sector in India grow more rapidly than the Manufacturing sector, and learning from the examples of
countries like China if policies can be adapted for a better performance of the Manufacturing sector in
India.
The following are the research questions,
1. Does Indias Services dependent growth pose an impediment to Indias future economic
growth in terms of employment, import dependency etc.?
2. What are the reasons for the rapid growth of the Services sector in India?
3. What are the reasons for the slow growth of the Manufacturing sector in India?
4. What are the key drivers for the growth of the Manufacturing sector in countries like China,
and can these be adopted by India to realize a batter growth trajectory?

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Literature Review

1. The article, India Vietnam: A Comparative Analysis of Economic Performance,
International Journal of Business Insights & Transformation (Oct 2008 Mar 2009, Vol. 2
Issue 1) examines economic performance of India and Vietnam since 1990, when two
countries launched their respective economic reforms. The paper also identifies the key
policy challenges facing each country which need to be addressed to manage reform and
sustain growth. The analysis suggests that while the two countries achieved rapid economic
growth over the period 1990 2008, their growth patterns are distinct in three aspects: (i)
Economic growth has tended to accelerate for India as reforms progressed while decelerate
for Vietnam; (ii) The service sector was the major driver for Indias growth performance,
while the industrial sector played this role for Vietnam (iii) Vietnam relied heavily on capital
investment, while India relied on TFP growth for sustaining high growth in GDP and labor
productivity.
2. The article, The Post-reform Performance of the Manufacturing Sector in India, Asian
Economic Papers (May 2004), will be used to analyze the development of the manufacturing
sector in India. Manufacturing played an important part in sustaining India's economic
growth in the 1970s and 1980s. The economic reforms of the early 1990s did not lead to
sustained growth of the manufacturing sector. After acceleration in the mid-1990s, growth
slowed in the decade's second half. The analysis presented in this paper reveals that
manufacturing-sector growth in the post-reform period is "input driven" rather than
"efficiency driven," with significant levels of technical inefficiency. The paper advocates
policies to improve production efficiency by encouraging investment in research and
development, technical training for workers, and technology-aided managerial processes.
3. The paper, Manufacturing productivity in China and India: The role of institutional changes,
China Economic Review (Dec 2009), is used to undertake a comparative study of
productivity in the manufacturing sector of Indian and China using data from survey of
manufacturing industries of the two countries.
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4. The report, Economic Sectors: Manufacturing, Country profile India (2004) focuses on the
condition of the manufacturing sector in India. They key elements in the report highlight the
key reasons for the industrial growth following the beginning of the economic policy reforms
process in 1991. The article also focuses on the information technology sector and the
services sector and the key drivers for the growth of these sectors.
5. The article, Services Sector and economic growth in India, Applied Economics (Dec 2010),
examines the long-run equilibrium and short-run dynamic relationship between services
sector and Gross Domestic Product (GDP) and between services and nonservices sectors in
India. The model is estimated using the optimal single-equation and the maximum-likelihood
system estimators. All the estimators consistently suggest the cointegrating relationship
between services sector and GDP as well as between services and nonservices sectors. The
estimates of long-run elasticity parameters are statistically significant and dimensionally
consistent across the estimators. The conventional Cumulative Sum (CUSUM) and the new
CUSUM and Moving Sum (MOSUM) tests suggest the stability of the equilibrium residuals
and reinforce the cointegrating relationship between the model series. The error correction
model provides some support for unidirectional Granger-causality from services sector to
GDP. The impulse response and variance decomposition analyses instead suggest the
bidirectional causality between services sector and GDP and between services and
nonservices sectors. The stable growth of services sector is essentially crucial to absorb the
adverse effects of exogenous weather shocks in agriculture and industry and provide
resilience to the economy.

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Explanation of the proposed methodology

The study would be intensive and across various industries and geographies, primarily focusing on the
Asian region. Methodology would primarily involve case studies and review of secondary material.
Further, in-depth interview with key policy and decision makers will be conducted. It would be done
in the following steps.
1. Search existing literature for studies done on the reasons for the growth of the Services sector
in India.
a. Understand whether Indias Services industry dependent growth can be an
impediment to Indias economic future in the form of future employment, skill-level
required in a largely poor economy, import dependency etc. The growth trajectory of
various developed countries will be considered as case studies to understand the
typical stages of development of a young economy.
b. Search literature focused on policy issues and trajectory followed by India post
liberalization vis--vis other Asian countries like China and South Korea and identify
whether these can be adopted by India realize larger growth in the Manufacturing
sector.
c. Identify if Indias geographical location offers it advantages (disadvantages) with
regards to the Services (Manufacturing) sector.
d. Establish correlation (if any) between Indias social and cultural fabric and whether
this has any bearing on Indias advent as a Services economy.
e. Identify economic and policy objectives that have shaped Indias growth in the past
twenty years, and how these can be changed today.
f. Identify key drivers of the manufacturing sectors and reasons for the relatively slow
growth of the manufacturing sector in India.
2. In depth interviews will be conducted with representatives of the policy makers, government
decision makers and economists to better understand the key drivers.
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3. Investment data for domestic and international investors will be gathered to help understand
the sentiment towards India as an investment opportunity. A representative sample of the
domestic and international investors will also be interviewed to understand better their
concerns and optimisms towards the manufacturing and the services sector.

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Significance of the study and the limitations

The study will help establish a cause-effect relation between the policies enacted by governments and
the growth trajectory achieved. This will in effect be used to establish a relation, if it exists, between a
pattern of growth and the ensuing economic effects. Specifically, the study will help determine how a
services led economic growth in the nascent stages of a country can affect key economic performance
indicators like unemployment, reliance on import, industrial and capital productivity etc. Further, a
good understanding of the policies enacted in industrial led countries like China will help determine
the policies that can be enacted in India to give impetus to the Manufacturing sector.
A key limitation of the study lies in the socio-economic differences and the deeply embedded cultural
differences that characterize countries like India on one side, and countries like China, Vietnam and
South Korea on the other side. These differences might result in the inability to replicate the growth
models and policies enacted by these Asian countries in an Indian context.


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References

Khuong Vu, India-Vietnam: A Comparative Analysis of Economic Performance,I nternational
J ournal of Business I nsights & Transformation,Oct 2008 Mar 2009
Kalirajan, Kaliappa, The Post-reform Performance of the Manufacturing Sector in India, Asian
Economic Papers, May2004 (Kalirajan, 2004)
Pandey, Manish, Manufacturing productivity in China and India: The role of institutional changes,
China Economic Re(Singh, 2010)view (1043951X), Dec 2009
Economic sectors: Manufacturing, Country Profile. I ndia, 2004
Singh, Tarlok, Services sector and economic growth in India, Applied Economics,Dec 2010