CHAPTER - I INTRODUCTION . The development strategy for any economy has two basic objectives, economic growth and creation of employment opportunities. But there is no direct and linear relationship between economic growth and employment, though it is generally hypothesized that economic growth would give a push to production and employment. There is consensus among the economists and scholars that with growth there will be structural transformation. The central focus of these researches is to examine whether there will be change in the production of commodity from primary to manufacturing activities and a marginal or substantial increase in the share of service sector in GNP. The earlier views about this trend are challenged these days at the national and international level. It is observed that with development there is a rapid transition from agriculture to service sector while industry is lagging behind. This trend is prevalent in the sectoral share of GDP as well as contribution to employment. The service sector is rising more rapidly than industries, whereas the share of agricultural sector has declined in all the countries with the development process, be it in the developed countries like the UK and the 2 USA or less developed countries like India or Pakistan. The reason behind rapid growth of the service sector to what a large part of the service sector consists of infrastructure such as banking, insurance, finance, transport and communication, and social and community services such as medical and educational facilities. All these are requirements for development and cater to the needs of all sectors of the economy, on the one hand, and on the other hand these services improve the quality of life of the people. Other factors causing this growth are growing mobility of the population, development of tourism industry and expanding urbanization. Due to increasing complexities of modern industrial organisation, manufacturing industries have also become service oriented. The service sector consists of trade, hotels and restaurants, transport, storage, communication, finance, insurance and banking, community and social and personal services. The largest proportion of GDP was contributed by the trade and hotel industry followed by financial sector in the 1990‟s. The proportion of GDP in nineties (1993-97) rose quite visibly in trade and hotels, communication, and banking and insurance. Labour intensive techniques have resulted in the increasing trend of service sector employment. But in future it is likely that labour saving devices may reverse the trend. Hence the government should formulate the endogenous development policies to generate employment in the secondary sector and to sustain the growth of service sector employment. 3 The growth of service sector is due to the necessity of development. Its share in GDP and contribution to employment generation have increased over time. This trend is observed in all the countries. Trade service sub-sector is contributing the highest to GDP while finance service sector is providing employment due to its high employment elasticity. Female employment in the service sector is rising at higher rate than that of male. Rising urbanization process has increased service sector employment more in the urban areas. Developed states like Punjab, Haryana, Gujarat, etc. are generating more service sector employment. Labour absorption capacity of the service sector is observed to be high and rising in comparison to that of agriculture and industry sector, where it is declining. Favourable technology, literacy rate and urbanization are the major causative factors in the growth of service sector. 1 Economies of countries like the USA, the UK, Germany, Japan, Canada, Sweden, etc. have changed from being goods dominated to services dominated. The developed economies also called as service economies reveal that the service sector accounts for more employment, contribution to GDP and more consumption than manufactured goods. 1 Anju Kohli (2001), „Dynamics of Service Sector Growth in India, Income and Employment Trends‟, The Indian Economic Association’s 84th Conference, Vellore, pp. 490-498. 4 Service Led Growth in Economy In colonial India, the British were very much interested in spreading the service sector economy rather than the expansion of producing sector in industry and manufacturing and even the agricultural sector was primitive in the mode of production. India, being an agricultural dominance, the growth pattern was not at all agriculture-led growth although agricultural surplus was utilized not for the overall development of the economy but for the development especially for the maintenance of the kingdom.2 During the planning period, the agricultural sector and its resources were not properly utilized for the development of other sectors to speed up the growth rate of the Indian economy. Thus, the uneven growth patterns of the three sectors collapsed the main indicators of development and other key macro economic variables throughout the planning process. The investment was sharply falling in agriculture in subsequent plans; on the contrary, planning for industrialization was not so strong in the planning models except in import substitution till 90s, and hence, the economy was biased in favour of tertiary sector development. Besides, in Indian mixed economy, mode of development was neither socialistic nor capitalistic .Since the reform, it is neither pro-poor nor export-led growth, conversely the planning model favours the service led growth process. 2 Debesh Bhowmik (2008), „Service-Led Growth in India: An Analysis, (Artha Beekshan)‟, Journal of Bangiya Arthaniti Parishad (Bengal Economic Association), 17(2): 73-85. 5 Service sector has been growing too fast during long course of time in India than the other sectors and it became the chief source of the GDP growth rate. This situation may be called as structural transformation. lt is due to increase in domestic demand. The value addition in service sectors is skewed towards final consumption compared to other sectors of the economy and capital formation is the key driver of growth. There are some literature on the sectoral growth pattern in the theory of development in which Lewis (1955)3 and Preobrazhensky (1965)4 emphasised that industry is the engine of growth whereby transfer of resources takes from agriculture. Kuznets (1966)5 explained that a rise in productivity in agriculture is a precondition for economic growth where agriculture generates a surplus. The trade policies promote import substitution industries through favourable terms of trade for manufacturing. Low effective protection for agricultural share in GDP is the basis of structural transformation. Clerk (1940)6 and Fisher (1939)7 asserted that the demand for manufacturing and services are more elastic than that of agriculture and therefore a shift away from agriculture towards services and manufacturing 3 Levine, Ross (2004), „Finance and Growth: Theory and Evidence‟, NBER, WP No.10766, pp. 108-129. 4 Preobrazhensky, E. (1966), The New Economics, Oxford, Clarendon Press, pp. 4-7. 5 Kuznets, Simon, (1966), Modern Economic Growth: Rate, Structure and Spread, New Haven, Yale University Press, pp. 7-11. 6 Clerk, C. (1940), The Conditions of Economic Progress, Macmillan, pp. 2.4-2.19. 7 A. G. B. Fisher (1939), „Production in Primary, Secondary and Tertiary‟, Economic Record, 15: 37-43. 6 is expected in course of development. Park and Chan (1989)8 argued that there should be a positive and significant association between manufacturing and services at the advanced stages of industrialization. That is, during the course of development of manufacturing, the demand for services like trade, hotels, transport, banking, health, education, communication increases and raises productivity of industrial sector. Hence growth linkage between the two sectors is necessary. Johnston and Mellor (1961)9 and Krishna (1982)10 stressed that the two sectors-agriculture and industry are seen to be complementary to each other .But low industrial growth rate and rise in agricultural prices and subsequent rise in industrial prices failed the industry - agriculture relationship (Chakroborty, 1973; Mitro, 1977, Mundle, 1981). This diminishing growth linkage between the sectors was credited primarily to deficiency in demand for agricultural products, decline in share of agro-based industries coupled with slow employment growth (Rangarajan 1982; Bhattacharyya and Rao 1986; Chowdhury and Chowdhury 1995).But still controversies arise, whether an increasing trend of relative share of tertiary sector is desirable in India. In this issue Bhattacharyya and Mitra (1990) stated that while the share of 8 Park, Se-Hark and Kenneth S. Chan (1989), „A Cross country Input Output analysis of intersectoral relationship between manufacturing and services and their employment implications‟, World Development, 17(2): 199-212. 9 B. F. Johnston and J. W. Mellor. (1961), „The Role of Agriculture in Economic Development‟, AER, 78: 566-593. 10 Krishna, Raj. (1982), „Some Aspect of Agricultural Growh: Price Policy and Equity in Developing Countries‟. Food Research Institute Studies, 18(3): 84. 7 tertiary income has been increasing, its share in total employment has been much less. This mismatch along with a widening gap between growth rates of tertiary sector and commodity producing sectors would have negative repercussions on inflation, balance of payments and income distribution. In other words, a phenomenal growth in