Growing Like India: The Unequal Effects of Service-Led Growth
In many developing countries, structural transformation in recent years takes the form of a rapid rise of services with limited industrialization. Many such services are of a local nature and serve consumers (retail, restaurants, residential real estate, etc.). In this paper, we estimate the welfare effects of this pattern of development across the income ladder. We construct a spatial equilibrium model in which, over time, the expansion of consumer services is both a consequence (income effects) and a cause (productivity growth) of the development process. We estimate the model using Indian household data on sectoral employment and consumption expenditure. We find that productivity growth in non-tradable consumer services was an important driver of rising living standards, accounting for one-third of aggregate welfare gains. However, these gains were heavily skewed toward high-income households living in urban districts.
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