Services sector and economic growth in India

Abstract

This study 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.