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Is the Tiger Misled?

Un-sustainability of service-sector led growth in


India


Rhea Khosla (khoslarhea@gmail.com)
Richa Verma (richa.verma8792@gmail.com)

Department of Economics 2013
Lady Shri Ram College for Women, New Delhi






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Contents
Abstract.............................................................................................................................................. 3
1. Hypothesis....................................................................................................................................... 5
1.1 What are we looking at? .. 5
2. Trends in Services (India)............................................................................... 6
2.1 Categorisation of Services... 6
2.2 Backward & Forward Linkages 8
3. Non Sustainablilty of Service Sector in India.................................................................. 9
3.1 Biased Foreign Direct Investment. 9
3.2 Unequal Employment... 9
3.3 Low Research & Development 10
4. Research & Development and Emigration .......................... 11
4.1 Trends in Research & Development in India 11
4.2 A Basic- Informal Model.. 13
4.3 Emigration: Factors influencing it!................................................................................................. 13
5. Country Analysis.. 15
5.1Development of High Skilled Workers: The Curious Case of North America 15
5.1.1 The Case.... 15
5.1.2 United States: Striking the right balance.. 16
5.2 South African Analogy: A developing nations story 16
5.2.1 Trends in South Africa......... 17
6. Innovation Gap: An Unsolved Case..................................................................................................... 19
6.1 A model......................................................................................... ................ 19
6.2 How to calculate potential innovation?.......................................................................................... 20
6.3 Data and Methodology ................. 20
7. Conclusions and Suggestions............................................................................. 21
7.1 Conclusion 21
7.2 Suggestions. 21
7.3 Major Policy Recommendations.. 21
8.References ........................................................................................................................................ 22
9. APPENDIX A ........................................................................................................................................ 23
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ABSTRACT

With time, the Indian tiger has extended its domain from not only being a national animal but also being the
emblem of the almost animalistic rampant growth that India (as one of the fastest growing economies in
the world) is experiencing. The Tigers vigour to grow comes from the Indian service sector, feeding off the
soaring GDP contribution that it makes. But with the Tigers appetite burgeoning and Research &
Developments inability to maintain pace, services might not be a long run feast for the Tiger.
This paper attempts to establish a correlation between the low sustenance of service sector led growth
in India and the lack of R&D in India, claiming relatively high international emigration rate of the
economy to be the main instigator for lacking R&D. Its approach constitutes of a sound usage of ex-ante
information and association with diverse economies such as USA and South Africa.

The paper aims to weigh international emigration as a factor of reducing the sustainability of growth fostered
by the service sector in India.
Initially, the analysis of un-sustainability of service sector is undertaken using theoretical literature and
empirical evidence such as observing trends in service-administered GDP for the past 10 years. Then, an
analysis of changing trends in R&D is made, followed by formulating a Classic Linear Regression model
(with dummy variable) to test the significance of the relationship between innovation gap (difference
between existing and ideal R&D levels) and service sector growth. The analysis is extended to probing into
the R&D levels of prominent tertiary sector segments i.e. traditional services, hybrid services and modern
services. Division of the said services is based on factors such as degree of GDP contributed, FDI attracted
as well as employment generated.

The paper then establishes persisting emigration as the foundation for the innovation gap experienced in
India. In doing so, it formulates an econometric model to corroborate the direct relationship observed
between innovation gap and emigration.

Furthermore, it draws analogies with South Africa and US in order to evaluate the gravity of un-
sustainability persisting in Indias service sector. The two opposite ends on the service sector balance that
both countries represent forms the rationale behind their selection. While, South Africa characterized with
relatively similar GDP composition and migration status experiences a stagnant knowledge base, US
characterized eminent high-skilled immigration level experiences a flourishing R&D -stimulated knowledge
base. In performing the cross-country analysis, the paper postulates theoretical verification for high
emigration being an eminent roadblock to fostering high R&D levels and hence sustainability in the service
sector.


Through examining the bifurcation of GDP contribution, it is observed that Indias service sectors torch-
bearer i.e. Information Communication & Technology majorly comprises of relatively low-skilled labour
outsourced for basic menial jobs. The lack of research institutions and infrastructure forces the high-skilled
working populace to migrate to developed nations to make a more efficient use of their knowledge, in turn
dwindling the overall growth of the economy and draining the Indian Tigers mighty wits. It is then noted
that such emigration prevents India from reaping optimum benefit from its demographic dividend and
stimulates a highly skewed skill distribution in the economy.


The paper culminates with the conclusion that the misbalanced growth of the service sector caused by
emigration reduces the sustainability of service sector led growth in India. Firstly, it is concluded that the
growth of the service sector is highly misbalanced. Subsequent to the evaluation of international
emigrations impact on the growth trajectory of the service sector, the paper proposes both short-term and
long-term solutions that will reduce emigration and in effect trigger greater Research & Development,
thereby aiding the lack of stability in the service sector. It suggests that India should adopt better domestic
and foreign policy to change the focus towards an integrated growth of the service sector while involving a
great deal of employment-stimulating R&D. The proposed implementations fall in line with US economic
policies which serve as benchmark in reducing skilful labour emigration. The paper attempts to propose
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policies that should aid Indias sustainability by making the domestic economy more stable and pronounced
globally. The policies proposed within the paper aim to facilitate inclusive growth comprising of both
backward and forward linkages, to promote expansion of knowledge base of the country, to revert the Tiger
back on track and to prepare an indeed sumptuous buffet for it.



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HYPOTHESIS
This paper aims at two things. One, we try to establish a correlation between emigration and research &
development in a country. Two, we give a model to establish a link between research & development (or
innovation) and growth in service sector in India.
1.1 What are we looking at?
In our attempt to study the problem of un-sustainability of growth in India, we are trying to analyse research
& development and emigration as an important factor bringing about the un-sustainability. Our argument
hinges upon the assumption that innovation will help develop labour productivity of particular industries in
the services that we are considering, thus avoiding high-skilled labour from moving out of the country to
look for suitable research options. Information & Technology (IT), the current key-driver of the growth of
service sector in India (Banga, 2005), has seen high labour productivity due to increase in innovation as we
see later under the section, Trends of Research and Development in India. But a dilemma that persists is
regarding the feasibility of continuation of the current trend. Will IT be the torch-bearer forever or is there a
need to have more services that involve high skilled labour to contribute to the growth of service sector.
A qualification of our claim is in order. According to standard microeconomic theory, a rise in labour
productivity results into a compensating fall in employment. Since India already is tackling the problem of
considerably high unemployment, how reasonable is it for India to work towards high-skilled labour
capturing services as suggested by our paper? To determine the answer to this question, lets break the
services as follows:

Services that require high skilled labour will generate less employment compared to the services that employ
low skilled labourers. However, empirical evidence suggests that services that employ high skilled workers
will contribute higher to the growth of service sector as against services that employ low skilled workers.
Therefore, there is a need of both kinds of services to strike the right balance for employment generation and
its contribution to the growth of service sector.
This paper will primarily focus on growth of high skilled services in achieving the viability of the service-led
growth in India while at the same time not ignoring the need of growth in low-skilled services in India.
The paper attempts to answer the following questions:
1. Why there is a link between services, emigration and innovation?
2. What are the trends in research and development in India?
3. How are other countries benefitting from immigration?
4. What are the areas within the service sector that we need to work on?
5. What future do services hold in India?
1. Trends in Services (India)
Services
High
Skilled
Low
Skilled
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While the service sector in India has seen a growth in share of contribution in the total GDP of India, as
depicted by the following figure (Poonam Gupta, 2011), the share of employment has not been picked up by
services in a commensurate manner.

2.1 Categorisation of Services
Service sector can be categorised into three groups (Poonam Gupta, 2011):
Group I: Traditional services
Services such as: trade (retail and wholesale), transportation, public administration and defence comprise the
group I. These services tend to grow slowly as their share has fallen in the developed nations. But
developing nations like India should also concentrate on them so as to provide employment to the nation and
to tap its human capital to the maximum.. The following figure shows the growth trail of various
components of traditional services:
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Group II: Hybrid Services
This group shows a mix of both traditional and modern services such as education, health and social work,
personal and social services. These services are majorly consumed by household. Indias immense
population calls for more of such services. Innovation in such services would improve the quality of these
services. The following figure shows the growth trajectory of various such services:




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Group III: Modern Services
These services are the most labour productive services. This group includes services such as financial
intermediation, business services, information technology, communication and legal and technical services.
These services have the highest stake in the share of GDP but they are less employment friendly. The growth
path of such services is depicted by the following figure:













After analysing the growth of the components of the services, we must analyse the employment contribution
of such services so as to measure the sustainable component of the growth. Highly productive services do
not produce the levels of employment as shown low productive services. But the development of such
services does make path for various other services. (Poonam Gupta, 2011)
2.2 Forward and backward linkages:
Highly productive services do have forward and backward linkages of their growth. Backward linkages
entail growth of manufacturing and industries by provision of services such as financial services and
outsourcing services (KPOs and BPOs). These outsourcing services lower downs the burden of a firm so as
the firm can concentrate on its main competency. Forward linkages necessitate the demand for auxiliary
services such as transportation, hotels and infrastructure.
The next section tries to chart out the main reasons for lack of sustainability in the growth of service sector.


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SUSTAINABILITY OF SERVICES
Before we begin to analyse the various proposition as to how growth of service sector can be made more
sustainable, let us first try to look at the various problems that cause the un-sustainability.
3.1 Biased Foreign Direct Investment
The data from 1991-2002 (Banga, 2005) shows that there is great deal of FDI in certain sectors while others
have a bare minimum. The following graph depicts the percentage of FDI in various sub-sectors:


As we can figure out from the above figure, telecommunication attracted an exceptional surge of FDI as
compared to other sectors.
3.2 Unequal Employment Generation
Gordon and Gupta (2004) talks about the un-sustainability of growth of service sector by arguing that India
faces disequilibrium between income generation and employment generation. Hence, though India sees
growth but the growth is jobless preventing India from being an outlier. (Banga, 2005)









The above graph clearly shows the low growth of employment in the growth-oriented sectors such as
Transport, storage & communication, financial services, construction etc. Hence, we need to look into the
factors which help in the growth of services such that there is employment generation.
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3.3 Low Research & Development
Research & Development depicted by the global innovation index 2012 ranks India 64
th
in the world which
shows that considering the level of growth in the country there is low level of innovation which will hamper
the sustainability prospects of the country. The fact that India has already moved towards various modern
services suggests a greater need for R&D.
In the following sections, we will analyse the impact of Research & Development on the growth of services
in much greater depths.



























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R&D AND MIGRATION
4.1 Trends in Research and Development in India (Bibliometric study of India's Scientifi Publications
Output 2000-10, 2012)
Research and Development sector in India was thriving prior to 1980s among the developing and the Third
World countries. The next two decades saw erosion in terms of Indian competency in the field of research
and development in respect to global panorama.
Analysis of Changing Trends in Indian Scientific Research outputs
The Department of Science and Technology, Government of India, in its capacity as a policy and funding
body has undertaken a study to analyse the data and trends reported by Thomson Reuters in Evidence
report. The Evidence report takes a just account of how research and development has increased. This
analysis is to help Indian funding agencies in decision making regarding research and development.

Global Volume Share of Scientific publications from India
Evidence report Thomson Reuters has presented data on Global Share of India with respect to scientific
publications as captured by SCI data bases. The report has also presented relative comparisons of India with
respect to developed and some leading emerging economies of the world. The period of study is 1981 to
2010.

According to the report, the following figures demonstrate the trend of research publications in the field of
science and technology.



Trends have changed after 2000, research and development has grown over the years the result being an
increase in research and development and currently India is ranked 9
th
in the world in terms of science and
technology publications in SCI journals.

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Source: Evidence report of Thomsons Reuters December 2011

India currently has a global share of SCI publications as meagre 3.5% vis--vis various developed
economies. But the current trends show that in the next two decades the share of developed nations in such
publications will fall and developing nations have better prospects in research and development in the
coming times.

The reason that we cite for such an increase is the tremendous growth in the number of institutions for higher
learning in the field of science and technology. But such growth is not seen in all the fields of study reducing
the pace and the dimensions of such a growth.

Providing better higher learning institutions have tried to change the trend of emigration but there is a need
of an extensive pool of high skilled people dedicated to innovation. This leads us to the basic question of the
need of developing high skilled workers.

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4.2 A Basic-Informal Model
There is a negative relationship between emigration and research & development in a country. The following
equation shows the relationship between them i.e. high research opportunities will result into a lower
emigration.

.. (I)

: The difference between ideal innovation (

) and the current innovation (

).
: The responsiveness of emigration on the change in innovation.
: Current net level of total emigration of high-skilled labour.
: Minimum innovation gap that remains because of factors other than emigration.
This equation is for a particular point of time.

4.3 Emigration: Factors influencing it!
Emigration abroad occurs for many reasons that can be broadly categorized intro: family-sponsored and
employment-based. The scope of this paper is limited to the analysis of employment-based emigration to
understand the impact of emigration to the quality of labour available for exploitation for the Indian service
sector.
The paper charts out two trends in emigration to prove that India experiences an increasing outflow of
highlyskilled labour force. Firstly, the total numbers of employment-based Indian immigrants jumped up to
4.3% in 2000.
Combining the trends corroborates the claim that the majority of Indian men and women emigrating appear
to be attracted by growing opportunities in white-collar occupations which require a refined mix of higher
educational qualifications, and professional and skilled/technical occupation credentials (Findlay). The same
claim is verified by the fact that India has consistently been in the top10 source countries for emigration to
USA, Canada and UK.
1

The economic impact of such intensive migration is multi-layered. The endogenous growth theory, also
states that economic growth rate is jeopardized in case of high-skilled emigration. High skilled labour is
critical to productivity and hence such emigration undermines the productive capacity of the economy.
Additionally, loss of human capital reduces the potential output level of a country. Therefore, emigration
can be viewed as a significant hurdle in India's stride to magnify its potential output hence growth in the long
run.
It is noteworthy that attached with emigration is an array of benefits as well. These include feedback effects
in the monetary form of return, remittances, Diasporas and technology transfer as well as in the human
resource form of return migrants who enhance productivity by bringing back their skills and work
experience from abroad. Hence, India is in need of a "beneficial brain drain" such that emigration is
adequate to factor in capital and labour gains while low enough to prevent depletion of the stock of skilled
workers faster than it can be regenerated. (Wei Li)

1
USA, Canada and UK were selected on the rationale for being the highest GDP per capita countries in the West for the past 10
years.
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A significant reason for India being a top source country for high skilled emigration is the recent rise in
proficiency in English of the Indian cohorts. The establishment of USA: The 1990 Immigration Act and
Canada: The 2002 IRPA emphasized the importance of language in its selection criteria giving English-
language speakers easier access to the countries, thereby sharply reducing the supply of acceptable
applicants from China which had been the top source country since 1997 (Shi, 2003), and resulting in an
increasing number of skilled immigrants from India. Attracted by overall good economic outcomes in terms
of retaining jobs and earning prevalent income that Indian emigrants experience abroad, English became a
popular agenda for the Indian educated class.
Hereafter, we conduct a country analysis of both developed and developing nations to know about the
importance of the relationship between emigration and innovation as well as to gather theoretical evidence to
the above proposed equation.



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COUNTRY ANALYSIS
5.1Development of High Skilled Workers: The Curious Case of North America
5.1.1 The Case
India currently sees a great dearth of a pool of high skilled workers and the same has been attributed to the
lack of focus on developing high skilled workers.
We have seen by far how important it is for a nation to develop highly productive labour which will actually
attract more Foreign Direct Investment in terms of establishing better high-end services other than
Information Technology.
A case of North America sufficiently depicts the necessity of asserting high skilled workers as indicated by
the OECD report, Developing High Skilled Workers: Review of Canada (2004). Canada has a relatively
good deal of human capital as compared to other OECD nations but has enormous gaps in terms of labour
productivity, innovation (research & development) and comparative returns to the high skilled labourers
resulting into a severe competition that it faces from its southern brother. Even though Canada has an
expansive stock of high skilled workers, workers in US receive better salaries and confront better job
prospects.
The OECD report (OECD report on development of high skilled workers: Review of Canada , 2008)
suggests measures for developing Canadian high-skilled worker pool by providing better economic
environment more conducive to innovation and research. Factors like the structure of business industries,
lower rates of graduation in technical courses, lower level of worker training, etc. The Indian case is very
similar to the Canadian case in terms of the structural lacking that the country faces. Table 1 (presented
below) from the report recommend policies for high skilled people in Canada.
Canada: Progress and Recommendation

Source: OECD report on development of high skilled workers: Review of Canada (2008)
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5.1.2 United States: Striking the right balance
It is interesting to note how US has used innovation to grow its high skilled services. United States see an
increase in the patents by immigrants by 9-18 % over the period of 1950-2000 while at the same time there
is just one percent point increase in the number of college graduates (Hunt & Gauthier-Loiselle, 2009).
There are a few interesting results found in some of the previous studies, and they are listed as follows:
1. Compared to a foreign -born population of 12% in 2000, 26% of U.S. -based Nobel Prize recipients
from 1990-2000 were immigrants (Peri 2007), as were 25% of founders of public venture backed
U.S. companies in 1990-2005 (Anderson and Platzer 2006), and founders of 25% of new high-tech
companies with more than one million dollars in sales in 2006 (Wadhwa et al. 2007).
2. Immigrants are over-represented among members of the National Academy of Sciences and the
National Academy of Engineering, among authors of highly cited science and engineering journal
articles, and among founders of bio-tech companies undergoing IPOs (Stephan and Levin 2001).
3. Kerr (2007) brings forth the surge in the share of U.S. patents awarded to U.S.-based inventors with
Chinese and Indian names to 12% of the total by 2004, and Wadhwa et al. (2007) and that non-U.S.
citizens account for 24% of international patent applications from the United States which shows the
disparity in the research inclinations of immigrants more than that of natives.
The above facts indicate the important role immigrants in US play to foster their growth through research
and development which is represented the statistics on patents.
Even though people are from various countries their research and development actually contribute to the
growth that is witnessed by the US economy.
US has been efficient enough to provide the institutional framework needed to develop a good research base
in the country, thus attracting the research-oriented academicians from across the globe to research and
therefore, add to the US Economy.
The facts also show the high fraction of Indian researchers in US who have got their patent rights for their
original work in myriad fields. The lesson to be learnt for Indians is to harness the potential of their natives
and not let them have spill over effects on other economies.
These research capabilities of the Indians will help develop high-end services thus making the contribution
of employment more useful in terms of including more educated people as a part of service sector employed
pool. The dream of Innovation decade (2010-2020) doesnt seem far-fetched, but we need more institutions
and opportunities to research and innovate so as to strikingly reverse the trend of the rates of emigration to
developed nations.


5.2 South African Analogy: A developing nations story
South Africa being a developing country faces the problem of brain drain similar to India and will be
appropriate to analyse the link. South Africans are concerned about the high emigration of skilled labour
while labour market projections claim that there will be growing demand of skilled labour in the coming
times to substantiate the growth of an economy and consequently service sector. (Haroon Bhorat)
Why South Africa?
South Africa has recently seen the demise of apartheid and is in a transformation period where efforts are
being made to tackle the problem of emigration to develop the indigenous human capital. Hence, South
Africa is an important case to study.


There are several reasons, similar to that of India, which are cited as to why there is high emigration in South
Africa. Some of these are listed below:
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Push Factors
Factors such as low standard for living, less advanced institutions of higher studies and lower opportunities
for high skilled workers act as a push factor that induce emigration in a country.
Pull Factors
The rampant growth in the service sector of developed nations acts as an important pull factor for
emigrations from developing nations. The demand hike of high skilled labourers seen in the growth of
services like Information & Technology, Communications, Business & Financial services have attracted
high-skilled people globally.
Table: Growth in Service Sector of Developed Nations
S. No. Country Share in 1980 (%) Share in 1994 (%)
1. United States 58.1 67.5
2. United Kingdom 63.6 70

The other pull factor that works for the developing countries is the demographic dynamics. Developed
countries have moved in the phase III of the demographic transition and there is a larger bracket of older
population while in developing countries there is high proportion of young workforce.
Other Pull factors include existence of large number of the same community members in the host country.
Better judicial and legal system in developed nations also helps in attracting more immigrants.
5.2.1 Trends in South Africa
Sectoral changes
Alike India, South Africa has also seen the shift from primary sectors to tertiary sector with growth of high-
skilled populace. Agriculture has seen a decline of 3% and mining has reduced by 4% over the period 1970-
1995. While services have seen a compensating increases of 6% over the same period. The move towards
achieving a greater labour productivity with capital intensive techniques is a reason for such a shift.

Employment Structure
This calls for a valuation of the changes in the employment patterns in South Africa. The following figures
demonstrate the changes in employment over the same 25 year period (Haroon Bhorat).

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Clearly, the high-skilled workers have gained substantialy over the period as compared to low skilled people.
This clearly shows a preference of high skilled labourers over low skilled labourers due to a sectoral shift
and also due to high capital-labour ratio.
After discussing the relationship between emigration and research & development in detail, we try and probe
into the association of innovation and the growth of the service sector by using an econometric model and
conducting an extensive cross-sectional analysis.

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INNOVATION GAP: An Unsolved Case
The major challenging facing a developed nation is to convert the pool of human capital to translate into
effective R&D and innovation. While the problem with developing nations like India is to sustain growth
experienced by various sectors by curbing the innovation gap between developing and developed nations
as well as to tap the human capabilities within the country and also from abroad to increase the GDP.
(Mariani, 2007)
Taking service sector into consideration, India requires a great deal of innovation and R&D in various
services such as Education, Health, etc. The push given to the Information Technology should be available
to all other services as well so we have not just high growth but diversified high growth in the service sector.
6.1 A Model
A simple equation shows the case of Innovation Gap that a country might face.



... (II)
The above equation takes into consideration a direct effect of innovation gap on the contribution of GDP by
service sector.

: Service sector growth

: Coefficient measuring the correlation between innovation gap and service sector growth.

: Ideal amount of innovation and R&D required in an economy

: Current amount of innovation and R&D required in an economy

: Coefficient of Dummy variable


D: Dummy measuring the significance of advanced and non-advanced countries
Dummy is defined as follows:
1 = Advanced Country 0 = Non-advanced country

The amount of potential growth in Service sector that a country experiences without R&D is represented by
.
This is a basic model explaining the impact of innovation on the growth of service sector. What is being
implied by this model is the importance of innovation and R&D in our country to substantiate our service-
sector led growth with sustainability by diversifying into more services which uses high-skilled labourers.
The model suggests that as the innovation gap reduces, the growth in services will be fostered. The empirical
evidence also suggests that there is a high responsiveness of growth in services to the reduction in innovation
gap. The model also clearly states that being an advanced economy also impacts the growth of the service
sector.



India should be a compelling proposition for multinational companies seeking an emerging market
R&D location. The country's large educated population, its low labour costs and its huge and rapidly
emerging middle class suggest the ideal environment for global R&D investment. And back in the
heady days of 2006, the country was certainly living up to that potential. FDI in R&D India was $3.8
billion, more than in China and Eastern Europe combined. -Indian Express (June 05, 2012)


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6.2 How do we measure the ideal innovation?
To measure the potential growth we study countries who are able to develop a balance between the
components of service sector through controlled international migration and therefore, tapping their human
capital judiciously for research and development.
We take data from the Global Innovation Index 2012 (gii/main/2012rankings) which is developed by
INSEAD and measures the level of innovation in a country. Corresponding to the data found for the growth
rate of service sector, we see that Singapore is the best country in terms of innovation with a GII of 63.5.
India on the other hand, has a very low level of innovation with a score of 35.7.
6.3 Data and Methodology
We compute the data for the growth of services from 2010 to 2011 using the World Bank statistics on the
GDP and the share of the service sector. To measure the rate of research & development, we use the Global
Innovation Index computed by INSEAD so as to measure the level of innovation.
2

We selected 40 countries across the world (Appendix A), ranging from the most advanced countries to the
least advanced and diverse in terms of their growth rates and their economic backgrounds.
3
We use a cross
sectional regression to check the dependence of the growth of service sector on the level of innovation. The
first regression we run, without using the specified dummy and while the results were consistent with the
model but they were not significant at 5% or 1% level of significance. (Table B, Appendix A)
Hence, to get better results, we once again run a regression over the model with introduction of a Dummy
(D) to distinguish between advanced and non-advanced countries and to factor in the significance of the
distinction. The results that we obtain with the introduction of dummy are also consistent with the proposed
model. The R-square also increased by the change and became significant. (Table C, Appendix A)
Since cross-sectional data might have a problem of heteroskedasticity, we test the residual plot against our
X-variable which is innovation gap and find that there is no evidence of heteroskedasticity.











2
Why we take innovation instead of R&D is because innovation is a broader prospect of R&D which also measurers the factor
affecting R&D such as growth of education, investment, growth of patents, etc.
3
This differentiation is done on the basis of IMFs categorisation of advanced economics.
(http://en.wikipedia.org/wiki/Developed_country)
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CONCLUSIONS AND SUGGESTIONS
7.1 Conclusion:
1. There is a positive relationship between net emigration and innovation gap as we assert using our
model 1 under section Emigration and R&D which we back using existing examples. We cover both
advanced and non-advanced countries by taking the example of United States, Canada, South Africa
and India.
2. There is also a negative relationship between innovation gap and the growth of the service sector
which we prove using our model 2. We prove this by backing our proposition with cross-sectional
empirical evidence using the tools of econometrics.
3. There is insufficient research and development in our country which can prove to be a hurdle in the
growth of service sector. One must contain the emigration of high-skilled labour in order to bring
about growth in the service sector as postulated earlier.
4. Though there should be growth of low-skilled services, concentration should be on high-skilled
services because they in return also foster the growth of low skilled services through backward
linkages.
7.2 Suggestions:
1. There should be a higher level of Foreign Direct Investment and private investment in the country in
major services such as education & health, which is needed to foster growth.
2. The disproportionate growth of sub-sectors of service sector should also be taken care of so that the
growth is employment-friendly.
3. There should be a provision of more opportunities for research & development or broadly innovation
which prevents the outflow of skilled human capital and as a result adds to the GDP of our country.
7.3 The major policy recommendations that apply to the Indian case are as follows:
1. Proper monitoring of demand and supply of high skilled people.
2. State policies that help in additional investment in training of high skilled workers by firms.
3. Greater international worker mobility should be restricted in terms of providing ample opportunities
within the country aiding GDP growth while at the same time attracting more foreign workers.
4. Policies should be implemented to foster a gender-balanced growth in the number of high-skilled
workers.
5. Conferring more opportunities for innovation and research & development by providing the
necessary infrastructure.

Though the Tiger will prove to be a fast runner in the coming future, to maintain the stamina the tiger needs
a dose of innovation. As we can infer from our findings, the tiger is not misled as of now, but if there is lack
of innovation, the tiger might lose its track of growth and prosperity.





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REFERENCES

Banga, R. (2005). CRITICAL ISSUES IN INDIAS SERVICE-LED GROWTH . ICRIER Working Papers .
Findlay, B. L. MIGRATION OF HIGHLY SKILLED PERSONS FROM DEVELOPING COUNTRIES:
IMPACT AND POLICY RESPONSES. International Labour Organisation.
gii/main/2012rankings. (n.d.). Retrieved February 5, 2013, from globalinnovationindex:
http://www.globalinnovationindex.org/gii/main/2012rankings.html
Haroon Bhorat, J. B. Skilled Labour Migration from Developing Countries : Study on South and Southern
Africa. International Labour Organisation.
Hunt, J., & Gauthier-Loiselle, M. (2009). How much does immigration boost innovation? Institute for the
Study of Labor (IZA).
Mariani, F. (2007). Brain drain, R&D-cost differentials and the innovation gap. UNIVERSIT PARIS 1
PANTHON-SORBONNE.
(2008). OECD report on development of high skilled workers: Review of Canada . OECD.
Poonam Gupta, B. E. (2011). The Service Sector As India's Road To Economic Growth.
Technology, T. D. (2012). Bibliometric study of India's Scientifi Publications Output 2000-10. Government
of India.
Wei Li, L. L. Highly-skilled Indian Migrations in Canada and the US: The Tale of Two Immigration
Systems.


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Appendix: Model Data and Interpretation
TABLE A: CALCULATION OF DATA FOR MODEL (II)























Country Ys I' I(0) I'-I(0) D I'-I(0)*D
Singapore 14.51 63.5 63.5 0 1 0
United Kingdom 2.30 63.5 61.2 2.3 1 2.3
United States 3.90 63.5 57.7 5.8 1 5.8
Luxemburg 12.70 63.5 57.7 5.8 1 5.8
Canada 2.20 63.5 56.9 6.6 1 6.6
Argentina 19.01 63.5 34.4 29.1 0 0
Armenia 3.79 63.5 34.5 29 0 0
Bangladesh 12.65 63.5 26.1 37.4 0 0
Belarus -2.72 63.5 32.9 30.6 0 0
Botswana 14.40 63.5 31.4 32.1 0 0
Brazil 16.23 63.5 36.6 26.9 0 0
Bulgaria 8.02 63.5 40.7 22.8 0 0
Chile 15.08 63.5 42.7 20.8 0 0
China 23.86 63.5 58.7 4.8 0 0
Colombia 11.64 63.5 35.5 28 0 0
Costa Rica 15.23 63.5 36.3 27.2 0 0
Cote d'Ivoire -4.65 63.5 22.6 40.9 0 0
Croatia 5.36 63.5 41 22.5 0 0
Dominican
Republic
6.45 63.5 30.9 32.6 0 0
Egypt 6.70 63.5 27.9 35.6 0 0
El Salvador 7.04 63.5 29.5 34 0 0
Gambia, The 8.73 63.5 23.3 40.2 0 0
Guatemala -29.30 63.5 28.4 35.1 0 0
Guyana 11.56 63.5 33.7 29.8 0 0
India 12.60 63.5 35.7 27.8 0 0
Kenya 0.01 63.5 28.9 34.6 0 0
Jamaica 6.38 63.5 30.2 33.3 0 0
Lebanon 11.58 63.5 36.2 27.3 0 0
Malaysia 15.06 63.5 45.9 17.6 0 0
Mexico 8.31 63.5 32.9 30.6 0 0
Morocco 10.56 63.5 30.7 32.8 0 0
Namibia 10.81 63.5 34.1 29.4 0 0
Nicaragua 5.70 63.5 26.7 36.8 0 0
Russian Federation 21.13 63.5 37.9 25.6 0 0
Senegal 12.47 63.5 28.8 34.7 0 0
South Africa 12.83 63.5 37.4 26.1 0 0
Sudan 0.06 63.5 16.8 46.7 0 0
Tanzania 4.28 63.5 23.9 39.6 0 0
Uganda -0.59 63.5 25.6 37.9 0 0
Turkey 5.29 63.5 34.1 29.4 0 0
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REGRESSION ANALYSIS WITHOUT DUMMY FOR ADVANCED & NON-ADVANCED COUNTRIES
TABLE B
Model 1: OLS, using observations 1-40
Dependent variable: Ys

Coefficient Std. Error t-ratio p-value
const 14.3088 3.53241 4.0507 0.00024 ***
I__I_0_ -0.230419 0.119848 -1.9226 0.06205 *
Mean dependent var 8.029275 S.D. dependent var 8.798413
Sum squared resid 2751.431 S.E. of regression 8.509176
R-squared 0.088650 Adjusted R-squared 0.064667
F(1, 38) 3.696370 P-value(F) 0.062050
Log-likelihood -141.3775 Akaike criterion 286.7550
Schwarz criterion 290.1327 Hannan-Quinn 287.9763









-30
-20
-10
0
10
20
30
0 5 10 15 20 25 30 35 40 45
Y
s
I__I_0_
Ys versus I__I_0_ (with least squares fit)
Y = 14.3 - 0.230X
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REGRESSION ANALYSIS WITH DUMMY FOR ADVANCED AND NON-ADVANCED COUNTRIES
TABLE C
Model 2: OLS, using observations 1-40
Dependent variable: Ys

Coefficient Std. Error t-ratio p-value
const 27.96 5.43666 5.1429 <0.00001 ***
I__I_0_ -0.647943 0.172751 -3.7507 0.00060 ***
D -18.1815 5.86394 -3.1006 0.00368 ***
Mean dependent var 8.029275 S.D. dependent var 8.798413
Sum squared resid 2183.984 S.E. of regression 7.682876
R-squared 0.276604 Adjusted R-squared 0.237501
F(2, 37) 7.073818 P-value(F) 0.002503
Log-likelihood -136.7581 Akaike criterion 279.5161
Schwarz criterion 284.5828 Hannan-Quinn 281.3481




-40
-30
-20
-10
0
10
20
-25 -20 -15 -10 -5 0 5 10 15
a
d
j
u
s
t
e
d

Y
s
adjusted I__I_0_
adjusted Ys versus adjusted I__I_0_ (with least squares fit)
Y = 3.27e-015 - 0.648X
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TEST FOR HETROSKEDASTICITY:

-35
-30
-25
-20
-15
-10
-5
0
5
10
0 5 10 15 20 25 30 35 40 45
r
e
s
i
d
u
a
l
I__I_0_
Regression residuals (= observed - fitted Ys)