In sharp contrast to the experience of all countries in their earlier stages of economic development, GDP growth in India since the mid-1990s has been driven primarily by services. The present paper examines (a) the demand and supply side factors behind India's “Services Revolution”; and (b) the relative role of agriculture and industry vis-à-vis that of services inIndia's growth process in the foreseeable future, and the nature of policies required to quicken the process and promote the basic developmental objectives. Apart from the increase in services intensity due to splintering or outsourcing of various types of services by industrial and agricultural enterprises, the other demand side factors contributing to services GDP are found to be government final consumption expenditure, export of services and a significant shift towards consumption of services by households due to increasing inequality of income. The most important factor on the supply side has been the increase in total factor productivity, reflected in a sharp fall in ICOR as well as in labour intensity—something which helped growth of India's services exports far exceed that of world export of services. However, the revealed comparative advantage of services does not imply that industry and agriculture should play a minor role in the development process or that the government should adopt a hands-off policy in respect of sectoral allocation of resources. Despite high growth, labour absorption in services has been abysmally small. What is much more important to recognise, hangover from the pre-reforms production structure, disruptions in the credit delivery system and severe infrastructural bottlenecks, have seriously undermined the relative performance of agriculture and industry. More generally, the basic problem in this regard lies in efficient allocation of resources across sectors for the most cost effective way of meeting the optimal menu of domestic absorptions. From this viewpoint enhancing productivity of primary and secondary sectors through efficient disbursement of credit and adequate provisioning of infrastructural services have to be the most important role of the tertiary sector over the intermediate run.
