India’s service revolution has shown that industrialisation is not the only route to rapid economic development.

During the last two decades, services have contributed more than manufacturing to India’s output growth, productivity growth, job growth, and poverty reduction. A majority of FDI inflows into India are concentrated in the service sector. India has outperformed China on productivity growth rate in services. Indeed, growth in services are much faster in India than in the US.

The story of Hyderabad is inspiring, as it has catapulted itself straight from a largely agricultural economy into a major service centre. Fuelled by an increase in service exports, the number of IT companies have more than doubled, and employment increased by nearly 50 times during the last two decades. Service-led growth has mushroomed in other parts of India as well.

Thanks to the 3Ts — tradability, technological innovation, transport — services can be unbundled, splintered in a value chain just like goods, and electronically transported globally.

Unlike goods, there are no borders, customs or tariffs on the international exchange of services. Thanks to 3Ts, the number of services that can be traded and transported digitally has exploded — call centres, desktop publishing, tax returns, medical records, urban management, and much more. Labour matching can be done electronically through online platforms that can connect employers and employees globally.

Service exports have accelerated during the last two decades. There are two types of service exports — first, modern impersonal service, where services are exported electronically over long distance, without the provider of the service crossing national borders; and second, traditional personal service export, which involves movement of natural persons across borders to provide service to a consumer.

Although global trade in goods has never fully recovered since the global financial crisis in 2007, this is not the case with trade in services, which has exploded. While both traditional and modern service exports from India have exploded, what is even more striking is that the share of modern service exports (computer and information services, financial services, business services, communication) has increased at a much faster pace in India compared to the US.

The growth benefits of the service revolution has also been widely distributed. Service growth has been the largest contributor to poverty reduction both globally, and in India, with one percentage increase in service growth associated with a decrease in the poverty rate by 1.5 points. Karnataka, Tamil Nadu, and Andhra Pradesh have experienced a significant decrease in poverty, thanks to the service revolution.

The future

The future for India’s service revolution is strong. Growth will be concentrated in the coastal regions, especially in southern States such as Tamil Nadu and Kerala, as well as in States such as West Bengal and Uttar Pradesh. The medium-density places such as Ahmedabad, Pune and Bengaluru, will experience higher growth rates compared to the high-density places, such as Chennai and Mumbai.

The future of the service revolution will be in the tier two and tier three cities. Limitations to growth are mostly on the supply side, due to limited availability of employees with education that meet the requirements of the global service market.

The private sector in modern services will need to play a bigger role to promote public-private partnership models to scale up investments in education. India can create a dynamic virtuous circle of higher education leading to the growth of service exports, leading back to faster growth, and more investments in higher education. India’s demographic dividend will enable it to capitalise on the cost advantage, in terms of labour and skills, to meet the demands of the fast-growing service industries.

As broadband penetration in India continues to grow, and improvements in speed and quality, service exports will continue to increase in the future.

The writer is Senior Fellow at Pune International Development Center