Service Sector Growth in India: A View from Households

This paper studies the phenomenon of service-led growth in India over the past two decades from the perspective of household expenditure. We use consumption expenditure data from four recent “thick” rounds of the National Sample Survey in 1993-94, 2004-05, 2009-10 and 2011-12, and study aggregate services as well as 5 individual categories – education, healthcare, transportation, entertainment, and personal services – for both rural India. We begin by showing that expenditures of non-rich sections of the population are, and continue to remain, a significant source of the demand that has supported growth of the service sector over the past two decades. In particular, we show that the bottom 75 percent of households in terms of monthly per capita expenditure (MPCE) have been the source of between 31 and 54 percent of total expenditure on services, the larger numbers referring to urban India. Next, we show that expenditure on services, as a share of total expenditure, has increased across the expenditure distribution, even when we control for expenditure growth over time. For a poor country like India with widespread under-nutrition, this presents an unusual trend. We highlight the perverse nature of this trend in two ways. First, we estimate bivariate Lowess curves for the share of services in monthly expenditure against real MPCE, for rural and urban India separately, and show that it has been pivoting in a clockwise direction since 2004-05. Second, we confirm this finding by estimating quadratic Engel curves with an instrumental variable strategy. The clockwise pivoting of Lowess and Engel curves, especially true for urban India since 2004-05, mean that spending patterns of poor households – as captured by the share of monthly expenditure devoted to services – increasingly resemble those of the rich, even as income differentials persist. This suggests that poorer households are possibly getting constrained into spending more on services, even when they have inadequate consumption of food, due to larger structural changes beyond their control. JEL Codes: L80; N35; O53