Service-led growth

Topic: Sectors of the Indian Economy · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 11, Ch 8 "Comparative Development Experiences of India and its Neighbours"

Meaning

Service-led growth is a growth path in which the service (tertiary) sector, not farming or factories, adds most of the rise in a country's output (GVA). India has followed this path since 1991, while China's growth was manufacturing-led (driven by factories).

It matters because India's output moved to services, but most of its workers did not. Services are now the biggest part of GVA, yet farming is still the biggest source of jobs. This gap sits behind many GS-III questions on jobs, inclusive growth and "Make in India".

• Formula (GVA): GVA (Gross Value Added: the value a producer adds) = Value of output − Value of intermediate consumption (the inputs used up to make that output)
• Formula (sector share): Services share of GVA = (Services GVA ÷ Total GVA) × 100

Explanation

How it works: the missing factory stage

• Structural transformation means that as a country develops, workers and output move from agriculture to industry, and then to services.
• The usual path (China's model):
• Farm workers move into factories.
• Factories take in large numbers of low-skilled workers.

• Services grow later, as incomes rise.

• India's path:

• Output moved quickly into services.
• Industry never grew into a big employer of farm workers.
• In 2017-18, the tertiary sector replaced primary as the largest producing sector (Class 10).
• Primary is still the largest employing sector.

Why services grew: four drivers (Class 10)

1. Basic services: hospitals, schools, police, courts, post, banks, transport and municipal bodies. - Every country needs them. - In a developing country, the government must provide them, because private firms will not reach every village.

2. Derived demand (demand for one thing that comes from demand for another): - More farm and factory output → more goods to move, sell and store. - → more demand for transport, trade and storage.

3. Income-elastic demand: - Income elasticity of demand = % change in quantity demanded ÷ % change in income. - Example: incomes rise 10% and spending on eating out rises 20% → elasticity = 20 ÷ 10 = 2. - A value above 1 means demand grows faster than income. Eating out, tourism, private schools and private hospitals behave like this, especially in big cities.

4. ICT-based services (ICT: information and communication technology): - These include software, call centres, data entry and accounting. - They grew fast and are exported. - The model has moved from software and BPO (business process outsourcing: doing office work for foreign firms) to Global Capability Centres (GCCs). GCCs are offices that multinational firms own and run in India for their own technology, research and analysis work.

The weak spot: output grew, jobs did not keep up

Sector	Output growth (1977-78 → 2017-18)	Employment growth
Industry	>9 times	≈3 times
Services	14 times	≈5 times

• Worked example: output per worker (output per worker = output ÷ number of workers)
• Services: output ×14, jobs ×5 → output per worker rose about 14 ÷ 5 = 2.8 times.

• Meaning: services added output much faster than they added jobs.

• Worked example: relative productivity (2023-24)

• Services: about 55% of GVA with about 30% of workers → 55 ÷ 30 ≈ 1.8 times the average output per worker.

• Agriculture: about 17% of GVA with about 46% of workers → 17 ÷ 46 ≈ 0.37. An average farm worker produces about one-third of the economy-wide average.

• Services have two faces:

• Top end: a few highly skilled, well-paid jobs in IT, finance and consulting.
• Bottom end: very large numbers of small shopkeepers, repair workers and transport workers who "barely manage to earn a living", because no other work is available.
• So a high services share does not by itself mean good jobs.

In India

• Who measures it:
• Sector shares of GVA are reported in the Economic Survey.
• Services export data comes from the RBI.

• Jobs by sector come from the PLFS (Periodic Labour Force Survey), run by MoSPI/NSO.

• Services' share of output:

• Services' GVA share rose from 50.6% (FY14) to 55.3% (FY25) [2].
• It reached a record 56.4% in FY26 (First Advance Estimates) [3][4].
• Services GVA grew 9.1% in FY26, up from 7.2% in FY25 [3][4].

• Rough current structure: agriculture about 16-18%, industry about 26-28%, services about 55-56% of GVA [2][3].

• Services exports:

• They reached a record US$387.5 bn in 2024-25, up 13.6% from US$341.1 bn in 2023-24 [5].

• India is the world's 7th-largest exporter of services. Its share of world services trade rose from 2% (2005) to 4.3% (2024) [3][4].

• Services' share of workers:

• Services employed 14.8% (1972-73) of workers, rising to 29.8% (2023-24).
• In 2025, services employed about 31.8% of workers, and agriculture still employed 43.0% [6].

• Urban workers are mostly in services (60.9%). Rural workers are mostly in primary (59.8%) (2023-24).

• Data caution: from 2025, PLFS follows the calendar year (January-December), not July-June. So 2023-24 and 2025 figures are not exactly comparable [6].

Don't confuse with

• Manufacturing-led growth: factories drive output and take in large numbers of low-skilled farm workers, as in China. Service-led growth gets output from services but creates fewer jobs for low-skilled workers.
• Structural transformation: this is the general shift of workers and output from agriculture → industry → services. In service-led growth, output has shifted but workers largely have not.
• Largest producing sector vs largest employing sector: tertiary is the largest by GVA share (Class 10, 2017-18). Primary is still the largest by share of workers. This is a common MCQ trap.
• Jobless growth: this is about output rising much faster than employment, and it can happen in any sector. Service-led growth is about which sector drives output. In India the two overlap (services output ×14 but jobs only ≈×5, 1977-78 → 2017-18).

Prelims Hooks

• Services' share of GVA: 50.6% (FY14) → 55.3% (FY25) → 56.4% (FY26, First Advance Estimates), a record high [2][3].
• India's services exports were US$387.5 bn in 2024-25, up 13.6% (RBI data). India is the 7th-largest services exporter, with a 4.3% share of world services trade in 2024 [3][5].
• India's post-1991 growth is services-led. China's growth is manufacturing-led.
• The four Class 10 reasons for services growth are basic services, derived demand, income-elastic demand and ICT-based services. "Income-elastic" means income elasticity is above 1.
• Services' share of workers was 29.8% in 2023-24, while primary was 46.1%. Agriculture alone was 43.0% in 2025 (PLFS) [6].
• GCCs are units that multinational firms own and run in India for their own work. They are not outsourcing vendors like BPOs.

Mains Points

• Growth without enough jobs:
• Services output grew 14 times but jobs only about 5 times (1977-78 → 2017-18).
• About 46% of workers still produce only about 17% of GVA.
• The high-skill part of services (IT, finance, GCCs) employs few people and needs skills most farm workers lack.

• Way forward: labour-intensive manufacturing (textiles, food processing, construction), PLI (production-linked incentives: payments to firms linked to extra output), and reforms in labour, logistics and MSMEs (micro, small and medium enterprises).

• Strength worth building on:

• Record services exports (US$387.5 bn in 2024-25) [5] and a rising services GVA share (56.4% in FY26) [3][4] show that India has real strength in services.

• This works best alongside manufacturing, not instead of it. Services exports help pay for imports, while factories absorb low-skilled workers.

• Two-faced services sector and inclusion:

• Most services workers are low-earning small traders and transport workers who have "no alternative".
• Policy should give them social security (e.g. the Social Security Code, e-Shram), easy credit and skilling, so these jobs become productive.
• The state must also keep providing basic services (health, education, policing) in poorer areas.
• The fall in agriculture's share of workers from 44.8% (2024) to 43.0% (2025), with manufacturing's share rising, needs to continue before it can count as real structural change [6].

Related concepts

• Basic services
• IT-enabled services

Read more

• India since the 1970s: services lead output, agriculture still holds the jobs