Service-led Catch-Up in the Indian Economy: Alternative Hypotheses on Tertiarization and the Leapfrogging Thesis

Abstract

The experience of India in economic catch-up is unique when compared to other countries. First, the catch-up process of India was not only service-led, but also accompanied by a decoupling between manufacturing and services. Second, productivity performance in the service sector was higher than in the manufacturing sector in terms of the level as well as growth rate. Finally, exports in IT services led the tertiarization of the Indian economy. From this perspective, the trajectory of the Indian catch-up can be characterized as path-creating. Existing hypotheses on tertiarization do not fully account for such aspects of the uniqueness of the Indian experience.

The leapfrogging argument in Neo-Schumpeterian economics provides a more plausible explanation of the Indian experience. The ICT revolution and the shift from hardware systems to client-server systems have created new markets for the global services trade. This paradigm shift lowered the costs of entry, including fixed investments, for Indian IT service firms and helped close the experience and skill gaps quickly. The industry-specific characteristics of the IT services industry and the country-specific advantages of India further lowered the costs of entry. With steady strategic and organizational innovations, Indian IT service firms succeeded in securing competitive advantages in the global market.