SERVICE SECTOR IN FDI AND THE GROWTH FOR INDIA:

A TIME SERIES ANALYSIS

Dhivya.S
M.Phil Research scholar, Post Graduate & Research Department of Economics,
Ethiraj College for Women, Chennai-600 008.

Abstract:
The last two decades have observed an extraordinary growth of the Indian service sector.
This study have four analyzes, first to check whether causual relationship between Service
sector FDI Inflow and GDP in india, secondly, service sector and FDI inflow , third, GDP and
FDI Inflow, and (Trade,Hotel,Transport,Communications) sector to GDP. This study reveals
that growth in FDI has any significant impact on the service sector growth and also
investigates whether a growth in this sector FDI Inflow causes the GDP to grow. The results
suggest that there has been a significant positive impact of the FDI on services sector and this
service sector FDI Inflow growth has in turn a significant effect on the GDP. The study also
looks into the sub-sectoral dynamics and indicates towards the fact that the
(Trade,Hotel,Transport,Communications) sub-sector contributes the most in the growth of
Indian service sector. Therefore FDI can be truly be used as a propagator of economic
growth.
Keywords: service sector; FDI; economic growth (GDP)
Introduction:
Services in India are emerging as a prominent sector in terms of contribution to national and
states incomes, trade flows, FDI inflows, and employment. Services constitute a major
portion of Indias GDP with a 57 per cent share in GDP at factor cost (at current prices) in
2013-14. In 2013-14 the growth rate of the services sector at 6.8 per cent is marginally lower
than in 2012-13. This is due to deceleration in the growth rate of the combined category of
trade, hotels, and restaurants and transport, storage, and communications to 3.0 per cent from
5.1 per cent in 2012-13. The growth of the services sector is closely linked to FDI inflows
into this sector

Table1: Figure1: Comparison of Growth of Services, Agricultural and Industry

40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0

AGRICULTURE
INDUSTRY
SERVICE

Table2: Figure2: Sectoral growth of GDP (Rupees Billion)

16
12
8
4
0
-4
-8
-12

AGRICULTURE
INDUSTRY
SERVICE

The services sector has been the best performing among the three major sectors in Indian
economy (service, agriculture and industry). The growth in services sector has always been
much higher than the growth rate of the agricultural sector and even the industrial sector.
Figure 1 plots the growth curve for all three sectors. Not only services sector grew at a
superfast rate, it is the only sector which in the last four decades has never experienced a
negative growth rate. Figure 2 shows the growth rates of the three sectors of the economy. As
the figure suggests, while agriculture and industry experience negative growth rates at regular
intervals, during this period services sector does not have a single year with negative growth
rate. The strong performance of the services sector is reflected by its share in GDP.

Objective of the study:

i.
ii.
iii.
iv.

To analyze casual relationship between service sector inflow and GDP in India.
To study the casual relationship between service sector and FDI inflow in India
To check causality between FDI Inflow and GDP in Indian economy
And to find service sectors sub-sector (Trade, Hotel, Transport, Communications)
and GDP.

RESEARCH METHODOLOGY:
The data is collected from various sources-FDI INFLOW SIA DIPP , GDP - RESERVE
BANK OF INDIA, (Trade,Hotel,Transport,Communication) SECTOR - RESERVE BANK
OF INDIA,
Methodology: which was based on this study has made an attempt to examine the direction
of causality among them, to analyze casual relationship between service sector inflow and
GDP for India. Secondly, to study the casual relationship between service sector and FDI
inflow in India. Third To check causality between FDI Inflow and GDP in Indian economy
And at last to find service sectors sub-sector (Trade,Hotel,Transport,Communications) and
GDP. Going to deal with econometric applications - Unit root test, Co-integration to analysis
for the period 2000 to 2012 these were done in order to check the causal relationship in short
run between the variables

AUGMENTED DICKEY-FULLER TEST (ADF):

the Augmented Dickey-fuller test (ADF) to check for the stationary at integrated difference
level for the variable used in this study thus the test ADF is statistically significant and
stationary at different level and which can be proceeded for further, to test for casual
relationship between them
EXPLANATORY VARIABLS

t-Statistic

Coefficient

FDI_INFLOW:D(DFDI)

-4.039632

-2.906296

GDP:D(DGDP,2)

-7.747504

-4.570929

SERVICE SECTOR INFLOW

-4.077082

-1.473121

-5.478423

-3.830291

(DSERVICE-2nd LEVEL)
D(Trade_Hotel_Transport_Communications,3)

H0: Null hypothesis: variable has a unit root

H1: Alternative hypothesis: variable does not have unit root
FDI_INFLOW:
Test statistic (-4.039632)

> Coefficient value at 5% (-2.906296),

GDP:
Test statistic (-7.747504) > Coefficient value at 5% (-4.570929),
SERVICE SECTOR INFLOW (DSERVICE-2nd LEVEL):
Test statistic (-4.077082) > Coefficient value at 5% (-1.473121),
D (Trade, Hotel, Transport, Communications, 3):
Test statistic (-5.478423)

> Coefficient value at 5% (-3.830291),

So, reject null hypothesis, all variables does not have unit root that FDI INFLOW, GDP,
SERVICE SECTOR INFLOW, (Trade,Hotel,Transport,Communications) is stationary. So
can proceed for further, to test for casual relationship between them

PAIRWISE GRANGER CAUSALITY TEST:

Analysed the pair wise granger causality test which is done to check for the casual
relationship between the variables, in previous augmented dickey-fuller test (ADF) checked
the stationary level.
H0: Null hypothesis: there is no granger cause relationship between the economic variables
H1: Alternative hypothesis: there is granger cause relationship between the economic
Pair wise Granger Causality Tests
Null Hypothesis:
GDP does not Granger Cause FDI_INFLOW
FDI_INFLOW does not Granger Cause GDP
Null Hypothesis:
GDP does not Granger Cause TRADE
TRADE does not Granger Cause GDP

Null Hypothesis:
SERVICE INFLOW does not Granger Cause GDP
GDP does not Granger Cause SERVICE INFLOW

Null Hypothesis:
SERVICE does not Granger Cause FDI
FDI does not Granger Cause SERVICE

Observation
11
Observation
11

Observation
11

Observation
11

F-Statistic

Prob.

1.7488
5.19286

0.2226
0.0522

F-Statistic
10.3489
2.52682

F-Statistic
3.84832
2.79195

F-Statistic
5.81808
2.08385

Prob.
0.0114
0.1599

Prob.
0.0841
0.1390

Prob.
0.0394
0.2055

The results of pairwise granger causality test help to determine the casual relationship among
the variables. This table examines that there is casual relationship between FDI, GDP, and
SERVICE SECTOR and SERVICE INFLOW.

.
FINDINGS OF THE STUDY:

The result in general specifies that FDI INFLOW cause the growth of Indian economy.

In the growth of Indian economy, the domination of exogenous variable in producing the
endogenous variable i.e. the growth of economy
The FDI and GDP has a Uni-directional relationship two variables,
GDP and TRADE also has a Uni-directional casual relationship between two
variables,
SERVICE INFLOW and GDP has no casual relationship between two variables,
SERVICE and FDI has a Uni-directional casual relationship between two variables,
Conclusion:
Based on these results, it can be inferred that the services sector in India, boost by inflows of
FDI help the economy grow. Not only that, the trade, hotels, transport, and communications
sector is most important behind the extraordinary growth of the services sector. There is no
doubt about the performance of Indian services sector and its role in the countrys economic
growth.
Reference:

Bosworth, B., Collins, S.M., Virmani, A., Sources of Growth in the Indian

Economy, NBER Working Paper No. 12901, 2007

Chenery, H.B., (1960), Patterns of Industrial Growth, American Economic Review,

Vol. 57,pp. 415-26

Clark, C. (1940). The Conditions of Economic Progress, London: Macmillan
Eichengreen, B., Gupta, P., The Two Waves of Service Sector, NBER Working

Paper No.w14968, 2009

Eichengreen, B., Gupta, P., The Service Sector as India's Road to Economic

year

Growth, NBER Working Paper No. w16757, 2011

Gordon, J., Gupta, P., Understanding India's
Agricultur
Industry
Service

1994-95

e
3799.59

3375.83

8276.79

1995-96

3762.43

3813.52

9069.51

1996-97

4153.77

4108.37

9688.7

1997-98

4030.3

4198.92

10571.63

1998-99

4317.19

4346.08

11421.86

1999-00

4421.13

4572.51

12662.3

2000-01

4394.32

4846.65

13353.55

2001-02

4678.15

4951.63

14227.32

2002-03

4297.52

5291.36

15239.95

2003-04

4763.24

5589.17

16545.05

2004-05

4766.34

6009.28

18051.1

2005-06

5029.96

6522.84

20063.02

2006-07

5237.45

7363.98

22087.76

2007-08

5569.56

8045

24370.56

2008-09

5554.42

8374.07

26655.8

2009-10

5577.15

9224.84

29326.01

2010-11

6109.05

9986.29

32020.88

2011-12

6435.43

10654.69

34282.29

2012-13

6494.24

10751.26

36424.75

2013-14

NA

10735.61

38676.81

Services Revolution, Paper presented at the

IMF-NCAER Conference A Tale of Two
Giants: Indias and Chinas Experience with
Reform, November 14-16, 2003, New Delhi

APPENDIX
TABLE1: Comparison of Growth of Services, Agricultural and Industry
TABLE 3: FDI INLOW

year
2000-01

fdi inflow to
India*
4029

2001-02

6130

2002-03

5035

2003-04

4322

2004-05

6051

2005-06

8961

2006-07

22826

2007-08

34843

2008-09

41873

2009-10

37745

2010-11

34847

2011-12

46556

Source: DIPP

SOURCE: RBI data (all data

constant prices)
Base Year: 2004-05 (Rupees

are GDP at factor cost (at

year

TABLE 2: Sectoral
year

Agriculture

1994-95

4.739996251

1995-96

-0.978000258

1996-97

10.40125663

1997-98

-2.972480421

1998-99

7.11832866

Fdi*

Gdp*

2000

10733

2554004

2001

18654

Service
inflow*

Trade(gdp)

Billion)
186

4760.88

2680280

820

5067.42

2002
12871
2785013
Industry
Service(GDP)
2003
10064
3006254
10.41180838
5.780568446
2004
14653
3242209
12.96540406
9.577626109
2005
24584
3543244
7.731701945
6.827160453
2006
56390
3871489
2.204037124
9.112987294
2007
98642
4250947
3.504710735
8.042562973
2008
142829
4416350
5.209982329
2009
123120 10.86022767
4780179

1543

5503.83

1390

5969.06

1999-00

2.407584563

2000-01

-0.606406055

2001-02

6.459019826

2002-03

-8.136335945

2003-04

10.83694782

5.628231683

8.56367639

2004-05

0.065081751

7.516500661

9.102722567

2005-06

5.530868549

8.546115342

11.14569195

2006-07

4.125082506

12.89530327

10.09190042

2007-08

6.341062922

9.24798818

10.33513584

2008-09

-0.271834759

4.090366687

9.377051656

2009-10

0.409223645

10.15953533

10.01735457

2010-11

9.537129179

8.254428051

9.189366939

2011-12

5.342565538

6.693132541

7.062297097

2012-13

0.913847249

0.906361424

6.249465832

2013-14

NA

-0.145564334

6.182774075

5.995394215
2010
97320 5.459118801
5236823
2.166032208
2011
165146 6.54335364
5595856
6.860973053
2012
121907 7.117503507
5105155

TABLE4:

1146

6634.32

2896

7277.2

17502

8154.07

21047

9100.84

26589

10095.2

28516

10851.25

20776

11978.91

15054

13440.24

24656

14022.61

growth in GDP
Source: compiled by author from
RBI data and DIPP
Note:*Amount in Crores
SOURCE: RBI data (all data are
GDP at factor cost (at constant
prices)
Base Year: 2004-05 (Rupees
Billion)