Multiple Structural Breaks in India s GDP: Evidence from India s Service Sector

Transcription

1 Muliple Srucural Breas in India s GP: Evidence from India s Service Secor Purba Roy Choudhury Absrac: This paper aes a comprehensive invesigaion ino India s service secor, he main growh engine for Indian economy over pas wo decades. Firs, he paper deals wih he endogenous muliple srucural brea developed by Bai Perron (998, 003). Here boh he models of pure and parial srucural breas propounded by Bai and Perron are considered. Second, using he Boyce mehod (986) of esimaing ined exponenial models for growh rae, he growh raes in differen regimes are calculaed. Third, he sequenial raio esimaion mehod due o Banerjee, Lumsdaine and Soc (99), Zivo Andrews (99) and exended by Lumsdaine and Pappel(997) is used. This paper exends he Lumsdaine and Pappel(997) mehodology furher o he consideraion of hree possible breas in he series. In his paper, he daa used is he componens of subsecor of services GP and GP a consan prices (a prices) a facor cos. The source is based solely from CSO s Naional Accouns Saisics(NAS), NAS base year bac series, beween he enire period from o Using he Bai Perron mehodology, here is very lile difference in he esimaion of he brea daes in he pure and he parial brea ess. Using he Boyce mehod, he growh raes are highes mainly he hird and fourh regime a he secoral level and a he aggregae level. Using he mehodology used by Banerjee Lumsdaine and Soc (99) and he exended Lumsdaine Papell es (997), he presence of uni roo in he daa, irrespecive of he presence of srucural brea, canno be negaed. The paper concludes wih broad four regimes of growh of India s GP and he corresponding growh of subsecors of services in is process. Keywords: Endogenous srucural breas, Uni Roo, Service secor Growh, Indian economy, JEL Classificaions: C, C Assisan Professor, eparmen of Economics, The Bhawanipur Educaion Sociey College, 5, Lala Lajpa Rai Sarani, Kolaa purbarc@gmail.com

2 Inroducion India s growh performance has been diverse ye fascinaing. From a slow growing naion in he 950s unil 980s, India moved o a high growh pah in erms of real GP following he iniiaion of he economic reforms in 99. espie serious downurn in recen years due o he onse of global recession, India in recen years has become he second fases growing naion in he world, second only o China, and his has been coninuing sysemaically over he years. The growh processes in he Indian economy and is change over ime, boh secorally and spaially, are major issues of economiss and policy maers. India was designaed as an agriculural counry wih a highes share of agriculural oupu iniially jus afer independence. In her bid o accelerae economic growh, India inroduced in her second five year plan a sraegy of heavy-indusry led growh, popularly nown as he Nehruvian-Mahalanobis sraegy. However, a discourse subsequenly exiss on he phenomenon of services raher han indusry accouning for an exraordinary large share of he expansion of non-agriculural oupu in India. Service secor growh piced up in he 980s, acceleraed in he 990s, and furher acceleraed afer 000-0, when i averaged 8.8% per annum. Ineresingly, since , i has been growing a he rae of 9.8% per annum, hough in 00, i deceleraed negligibly due o he onse of global recession. The emergence of services as he mos dynamic secor in he Indian economy has in many ways been phenomenal. This paper aes a comprehensive invesigaion ino India s service secor, he main growh engine for Indian economy over pas wo decades. This paper is divided ino five secions. Secion I considers a selecive survey of lieraure regarding India s service secor growh. Secion II discusses he overall macro perspecive of India s Service Secor Experience. Secion III discusses he daa used and he mehod of muliple srucural brea used by Bai-Perron (998,003) and he corresponding uni roo ess used by he sequenial raio esimaion by Banerjee, Lumsdaine and Soc (99) and Zivo and Andrews (99) exended by he Lumsdaine and Papell (997). Secion IV gives a deailed inerpreaion of he resuls of he ess

3 on srucural change in India s service secor growh. Secion V summarises he conclusion of he sudy. Secion I: A Selecive Lieraure Survey on Service Secor Growh in India The sandard forma of change during economic developmen, as suggesed by developmen heoriss, has been movemens from he primary o secondary o eriary secor aciviies. In common parlance, he aciviies of he primary and secondary secors is described respecively as exracive and ransformaive in naure. All remaining diverse residual aciviies are grouped ogeher under eriary secor. Since he mos common feaure of his secor is, ha hey do no resul in any maerial produc, hey are defined as services. As economy develops, he share of agriculural secor reduces and manufacuring increases, and a a laer sage, he share of service aciviies expands. In he process of economic growh, Kaldor (967) suggesed ha manufacuring secor is he engine of growh, as he poenial for produciviy growh is highes in his secor. He provided he heoreical raionale for he paerns of srucural change ha Kuznes (955) had observed in he case of advanced counries during he process of heir economic developmen. Kuznes (966) also suggesed on he basis of he empirical evidences from developed counries ha eriary secor expands in relaive erms only afer he secondary secor has already acquired dominance boh in erms of value-added and wor-force in he process of rapid indusrializaion. When he relaive size of indusry predominae he oher secors, he eriary secor hen acquires significance in value-added and wor-force composiion. As he consumpion demand for commodiies ges sauraed, afer a considerable rise in per capia income originaing from he commodiy-producing secor, he demand for services increases. Bu in conex of developing counries, he phenomenon of a relaively large eriary secor could be eviden much before he secondary secor could acquire a reasonable size of a leas one-hird in erms of value added or wor force. I is comparaively easy o analyse he shif in favour of he eriary secor in conex of developed counries as a sandard ransiion of developmen heory (following he rapid progress in indusrializaion, he demand for several services grows faser, which in urn reduces he share of he secondary secor in he oal produc of he economy). Bu in case of developing counries, 3

4 he dominance of eriary secor before he secondary secor s relaive size could ouweigh ha of oher secors, gives rise o several concerns. Though i is relaively easy o build a heory of developmen, i becomes exremely difficul o caegorise services because of is diverse and heerogeneous naure. According o radiional developmen heory, share of services in GP is supposedly lined wih developmen of he counry. From an analyical poin of view, he conribuion of eriary secor o he overall economic growh has been criicized by numerous economiss. However, here were several ohers who emphasize is imporance, paricularly observing he recen rend in he eriary secor s growh and he expansion, especially in he pos globalizaion period in India. In India, some paradoxical developmens are observed due o a rapid ransiion from agriculure o services wih indusry lagging behind. Many sudies have engaged o explain his paradox. A recen sudy done by he World Ban by Gordon and Gupa (004) suggesed ha in he las 0 years, he growh of GP has been largely subsaniaed by he growh of he service secor. The sudies were pursued in he Indian conex sared wih Bhaacharya and Mira, (989), (990), (99) and (997), aa, (989) and Mira, (989). Some of he subsecors wihin he eriary secor, which are crucial for he growh of indusry and he res of he economy, lie ranspor, sorage and communicaion, and financial and business services, have been expanding during his period. Hence, he quesion arises wheher services can play he engine of growh? Bhaacharya and Mira (989) saed ha higher he discrepancy beween he indusry and agriculure growh, he higher is he growh of services across Indian saes, implying ha higher levels of per capia income originaing from indusrialisaion leads o higher demand for services. In a laer wor Bhaacharya and Mira (990) argued ha a wide dispariy arising beween he growh of income from services and commodiy producing secor ends o resul in inflaion. This is paricularly so if he eriary secor value added expands because of rising income of hose who are already employed and no due o income accruing o he new addiions o he eriary secor wor force. In oher words, if expansion in value added and employmen generaion boh ae place simulaneously wihin he eriary secor, here will be a commensurae increase in demand for food and oher essenial goods produced in he manufacuring secor. However, if he expansion of he eriary secor resuls only from he rise 4

5 in income of hose who are already employed in his secor, he addiional income would creae demand for luxury goods and oher impored goods since he demand for food and oher essenial iems has already been me (Bhaacharya and Mira, 989, 990). Using daa on a cross secion of developed and developing economies over he period from , Eichengreen and Gupa (009) idenified wo waves of service secor growh: firs wave as a counry moves from low o middle income saus, and second wave as i moves from middle o high income saus. According o hem, he firs wave primarily consiss of radiional services, whils he second wave comprises modern services. The greaer imporance of he second wave from middle income o higher income counries is observed o be more eviden in economies which are relaively open o rade. Moreover, in he lieraure on srucural brea in India s GP, several sudies lie Nagraj (990), (99), holaia (994), Panagaria (004), Wallac (004) Nagraj (006), Nayyar (006), Balarishnan & Permeshwaran (007, 007a), holaia (007), holaia & Sapre (0) aemped o examine he quesion of srucural breas in he long-erm rend growh of he Indian economy a an aggregae and secoral level. The idenificaion of srucural breas in he growh pah is essenial for analysing he changes and for evaluaing he impac of shifs in policy regimes in he economy. The resuls of hese sudies have esablished on some specific brea daes and hence here has been a disagreemen abou he impac of he shifs in policy regime in he counry. In recen imes, here has been much discussion abou he rend brea in India's growh rae of GP (elong, 003; Wallac, 004; Rodric and Subramanian, 004; Virmani, 004; Sinha and Tejani, 004). elong (003) argued ha he growh rae acceleraed from he radiional 'Hindu' growh rae during he rule of he Rajiv Gandhi-led Congress governmen in he mid- 980s. This, he associaed wih he economic reforms ha oo place during Rajiv Gandhi's enure. Wallac (004) maes an aemp o economerically deermine he daes on which shifs in he growh rae could have aen place. As far as GP growh is concerned, she finds ha 980 was he mos significan dae for he brea, whereas he brea in GNP growh oo place in 987. She finds a significan brea in he rade, ranspor, sorage and communicaion growh 5

6 rae in 99, bu fails o find saisically significan brea daes for he primary and secondary secors as well as public adminisraion, defence and oher services. Pangariya (004), counering elong, argues ha he growh in he 980s was fragile and unsusainable. On he oher hand, he more sysemaic and sysemic reforms of he 990s gave rise o more susainable and sable growh. Sinha and Tejani (004) argue ha he period around mared he brea in growh in India's GP. They argue ha he major facor behind he growh in he 980s was improvemens in labour produciviy, propelled by impors of higher qualiy machinery and capial goods. All he above papers implicily conain an evaluaion of economic policy from independence o he onse of economic reforms a some dae, even hough auhors differ abou he specific daes. Some, lie Pangariya, would lie o place he beginning of reforms in he 990s, while ohers lie Sinha and Tejani would exend i bacwards o he early 980s. The general evaluaion of economic policy beween 95 and he auhor-specific rend brea dae is overall pessimisic, wih he possible excepion of elong (003). As saed earlier, macroeconomiss in India have generally no aen ino accoun srucural breas in various ime series including all aggregae macro variables. However, for some imporan series lie growh in real GP, here has been a discussion regarding he iming of he srucural brea. One conenion is ha here was a srucural brea in in he case of India s aggregae real GP. There are sudies ha have daed he brea daes differenly. elong (003) argues ha he growh rae acceleraed from he radiional Hindu growh rae during he mid-980s. Wallac (004) finds ha for GP growh, 980 was he mos significan dae for he brea. A significan brea in he rade, ranspor, sorage and communicaion growh rae happened in 99, bu no brea for he primary and secondary secors. Rodric and Subramanian (004) compued, using he procedure described in Bai and Perron (998, 003), he opimal one, wo, and hree brea poins for he growh rae of four series: per capia GP compued a consan dollars and a PPP prices, GP per worer, and oal facor produciviy. In all four cases, hey find ha he single brea occurs in 979. Panagariya (004) has found ha he reforms of he 990s gave rise o more susainable and sable growh. He poins o he large annual flucuaions in growh raes in he 980s compared o smaller flucuaions in he 990s, as evidence in suppor of his unsusainabiliy argumen. Balarishnan and Parmeswaran (007) idenify as he single brea dae for GP. For differen secors individually also brea 6

7 daes have been specified. Srivasava e al., (009) idenified srucural breas in mos macroeconomic series in India. holaia and Sapre (0) argues ha use of differen sample periods and differen values of h can lead o differen brea daes and endogenous deerminaion of brea daes using he Bai-Perron mehodology may no necessarily lead o unique answers. 978 was he only common brea dae wih differen values of h. These are he highlighs of he survey on lieraure on srucural brea of economic growh in India. Secion II: India s Service Secor Experience: Overall Macro Perspecive A sriing feaure of India s growh performance over he pas decade has been he srengh of he service secor. The preponderance of services over indusry is no a recen phenomenon for he Indian economy bu has been in place since he beginning of he 950s. A debae subsequenly exiss on he phenomenon of services raher han indusry accouning for an exraordinary large share of he expansion of non-agriculural oupu in India. However, broadly hree major urning poins of growh raes has been referred o and quesioned by various economiss over ime. The firs one is associaed wih independence and he ransiion from he colonial era o he Hindu rae of growh. The slow Indian growh rae is beer aribued o he Governmen of India's rigid inervenionis policies and i is from his modern economic growh in India is described. The second urning poin is around 980, afer which he Indian economy appears o have moved o a higher rend growh of 5.5-6% per annum. However, he early 990s brough wih i he hird urning poin wih growh raes ranging from 8-9%. In his paper he focus is on hese urning poins of growh, suggesing ha hese growh paerns were differen resuling from he paern of srucural change in oupu in hese periods. As discussed in he preceding secion, when he role of services in Indian growh became quie huge, i was described as disproporionaliy or excess growh of services (Bhaacharya & Mira, 989, 990, 99). Laer, he erm coined was services revoluion (Gordon & Gupa, 004). The phenomenon provoed a lo of debae regarding he deerminans explaining i and is long-erm susainabiliy (Papola, 006; Banga,005; Joshi, 004). All hese resuled o he quesion: Is India revoluionising a new paern of growh where services can play he role engine of growh, jus lie he same role played by indusry for oher counries in he pas? 7

8 Wih all hese conroversies and differen poins of view, here is very lile doub ha his ousanding growh of services maes he srucural change in India differen and special similar o few oher developing naions of he world. The mos imporan feaure is he premaure naure of he ransiion o a services dominaed economy a an excepionally low level of per capia income before aaining a higher level of indusrialisaion. This secion aes ino consideraion he secoral shares and growh of differen componens of GP. The daa sources used is based solely from Cenral Saisical Organisaion s Naional Accouns Saisics (NAS), base year series, NAS0, NAS 008 and 009 and he NAS base year bac series, beween he enire period from o The analysis of srucural change in oupu is based on he division of economy in o agriculureindusry-services. The demarcaion of he indusrial secor from he services secor, has again led o cerain debaes. Thus, while Kuznes (957) included ranspor and communicaion in indusry, Clar (940)pu even consrucion in services. The general pracice, however, is o include consrucion in indusry, along wih mining and quarrying, and manufacuring, and all oher non-agriculural aciviies including ranspor and communicaion in services. The choice of classificaion scheme is imporan because i can affec he conclusions one draws abou he paern of srucural changes accompanying growh. However, wihou going ino much of debae, he usual definiion drawn by he Cenral Saisical Organisaion (CSO) is used as a sandard pracice. An overall macroeconomic view of India s GP a he broad level reveals ha he share of he service secor in GP has shown a considerable and persisen increase in India since independence. The analysis of he secoral composiion of GP for he period brings ou he fac ha here has aen place eriarisaion of he srucure of producion in India. uring he process of growh over he years o , he Indian economy has experienced a change in producion srucure wih a shif away from agriculure owards indusry and service secor. Figure gives a clear represenaion of he percenage share of he conribuion of agriculure, indusry and services as a proporion o real GP a Agriculure has declined drasically over he years (around 55% in o 5% in 009-0); indusry has risen bu no subsanially (from around 5% in o 7% in 009-0), while 8

9 Percenage Share services conribued enormously during his period (9% in around 58% in 009-0). uring he 950 s i was he primary secor which was he dominan secor of he economy and accouned for he larges share in GP. However he whole scenario changed subsequenly, and especially in he 980 s, he service secor emerged as he major secor in he economy in erms of producion share in he 990s and hereafer. Figure : Secoral shares as a proporion of GP (%) Agriculure Indusry Services 0 Year Source: Handboo of Saisics on Indian Economy, Reserve Ban of India Naional Accouns Saisics, Cenral Saisical Organisaion Noe:The conribuion of secoral shares as a percenage of GP is aen a facor coswih as base year. When he annual growh rae of GP a facor cos a prices and ha of services are calculaed, i is eviden ha boh he services secor growh and GP growh has more or less increased over ime. I is definiely observed ha he service secor growh has oupaced aggregae GP growh in almos all successive years from o (Table 3.).Thus he growh of he services secor in India may be considered o have shown an enormous rise since he mid-980s and subsequenly increased by leaps and bounds hereafer in he pos globalisaion era. The service secor emerged as he major secor of he economy boh in erms of growh raes as well as is share in GP in 990s. Going bac o he growh performance of Indian economy since independence, he agriculural secor showed an acceleraion during he iniial years afer independence and coninued ill he 980s, bu hen deceleraed, while he indusrial secor 9

10 displayed an early expansion followed by a sagnaion during he mid-960s and did no jus speed up over he years. I is o be noed here ha while agriculure and manufacuring secors have experienced phases of deceleraion, sagnaion and growh, he service secor has shown a uniform increasing growh rend during he period o Table : Share of agriculure, indusry, services in GP and decadal growh raes Year Share in GP Share in GP (Average ecadal Growh) Share in GP (Average ecadal Growh) 44.3 (.5).0 (6.47) (4.84) Share in GP (Average ecadal Growh) 37.9 (.6) 4.04 (3.64) (4.44) Share in GP (Average ecadal Growh) 3.37 (4.4) 5.9 (5.97) 4.7 (6.53) Share in GP (Average ecadal Growh) 3.89 (3.4) 5.80 (5.64) Share in GP (Average ecadal Growh) 5.68 (.4) 6.78 (7.85) Agriculure (.55) Indusry (5.5) Services (3.7) (7.8) (8.80) GP (3.30) (4.00) (.9) (5.6) (5.68) (7.) Source: Handboo of Saisics on Indian Economy, Reserve Ban of India Naional Accouns Saisics, Cenral Saisical Organisaion Noe: The conribuion of secoral shares as a percenage of GP is aen a facor cos wih as base year. India s service secor growh has been sable enough and coninuously above overall GP growh, pulling up he laer since According o he Economic Survey, 00-0, he racheing up of he overall growh rae (compound annual growh rae [CAGR]) of he Indian economy from 5.7 per cen in he 990s o 8.6 per cen during he period o was o a large exen due o he acceleraion of he growh rae (CAGR) in he services secor from 7.5 per cen in he 990s o 0.3 per cen in o The services secor growh was significanly faser han he 6.6 per cen for he combined agriculure and indusry secors annual oupu growh during he same period. To analyse wha are he reasons behind he enormous increases in he amoun of services, i becomes necessary o idenify he performance of each individual subsecor of service and heir conribuion owards his service revoluion. Some services have been paricularly imporan for his improving performance in India. Sofware is one secor in which India has achieved a remarable global brand ideniy. Tourism and ravel relaed services and ranspor services are also major iems in India s services. Besides hese, he poenial and growing services include many professional services, infrasrucure relaed services, and financial services. 0

11 Percenage Share The emergence of services as he mos dynamic secor in he Indian economy has in many ways been a revoluion. The various subsecors ha comprises of he services secor, heir respecive share in services GP, heir average annual growh raes gives us an illusraion of which of he subsecor of services is growing fas and which isn. In India, he naional income classificaion given by Cenral Saisical Organisaion is followed. In he Naional Income Accouning in India, service secor includes he following: () Trade, hoels and resaurans (THR) () Transpor, sorage and communicaion (3) Financing, Insurance, Real Esae and Business Services (4) Communiy, Social and Personal services I is observed from Figure ha almos all broad sub secors have grown over ime, bu he picup was high in financing, insurance, real-esae and business services followed by rade, hoels and resaurans. There has been an increase in he ranspor, sorage and communicaion bu he communiy, social and personal services have remained sagnan. Figure : Share of subsecor of services as a proporion of aggregae services TRAE, HOTELS & RESTAURANTS Year TRANSPORT, ST ORAGE & COMMUNICATI ON FINANCING, INS URANCE, REAL ESTATE & BUSINESS SERVICES Source: Handboo of Saisics on Indian Economy, Reserve Ban of India Naional Accouns Saisics, Cenral Saisical Organisaion. Noe: The secoral share of sub-services as a proporion o services is aen a facor cos wih as base year.

12 A clearer view is observed when we consider he share of he subsecors of services in services GP a facor cos a prices. Figure shows ha he share of subsecors lie rade hoel and resaurans have remained more or less consisen over he period from o The share of ranspor, sorage and communicaion has increased many fold i.e from 8.88% in o 7.73% in The share of financing, real esae have increased over he period under consideraion wih a decrease somewhere in beween, bu i has capured almos 30% share of he service secor over he years. The share of communiy, social and personal services, however, has shown a considerable decrease over he concerned period. I has somewha decreased from 35% from o 3% in This secor which happened o be he main foundaion of service secor mainly growh of services during he 950s happened o have los is imporance in erms of produciviy especially during he pos-globalisaion era. The share of subsecors in aggregae GP lie ranspor, sorage and communicaion and baning, insurance and business services have increased subsanially. These wo broad subsecors are considered as he modern dynamic componens of India s service secor. The oher wo secors lie rade, hoel and resaurans and communiy, social and personal services have shown in decrease in is share in aggregae GP. These wo subsecors are generally defined as he radiional componens of services. The dyanamic componens are primarily insrumenal in he growh of India s service secor, while hese radiional componens somewha dono influence much o he growh of India s service secor. Table : Share of Subsecor of services in India's services GP and aggregae GP Secor Share in Services GP (Share in GP) {Average Annual ecadal Growh Rae} Trade, Hoel, Resaurans Transpor, Sorage, Communicaion Baning, Insurance and Business Services 3.84 (0.5) {5.8}.08 (3.6) {5.83}.9 (7.4) {3.} Share in Services GP (Share in GP) {Average Annual ecadal Growh Rae} 3.4 (.89) {4.3} 3. (4.93) {5.84}.6 (8.) {4.3} Share in Services GP (Share in GP) {Average Annual ecadal Growh Rae} 9.9 (.4) {5.93}.7 (5.8) {6.04} 6.79 (.4) {8.67} 00-0 Share in Services GP (Share in GP) {Average Annual ecadal Growh Rae} 9.9 (4.55) {7.48} 3.3 (6.64) {7.49} 8. (4.0) {8.05} Share in Services GP (Share in GP) {Average Annual ecadal Growh Rae} 8.60 (6.39) {8.} 7.73 (0.6) {3.7} 9.97 (7.7) {9.3}

13 Communiy, Social and Personal services (.56) {5.4} 33.8 (.73) {4.3} 3.73 (3.5) {5.90} 9.35 (4.63) {6.46} 3.68 (3.56) {6.77} Source: Handboo of Saisics on Indian Economy, Reserve Ban of India Naional Accouns Saisics, Cenral Saisical Organisaion. Noe: The share and growh of subsecor of services in services and GP is calculaed wih as base year. The service secor has been in he driver's sea of he engine of growh regisering CAGR of 8% in he las seveneen years, which has been mainly conribued by he financing, insurance, real esae and baning services (FIRB) and ranspor, sorage and communicaion secors (TSC).Bu he rae of growh of various subsecors expecedly reveal ha financial services shows he fases rae of growh, followed raher closely by rade, hoels and resaurans. The rae of growh in ranspor, sorage and communicaion secor, hough no very high shows a major hie onwards. Communiy and personal services (CSP) shows he lowes rae of growh among he subsecors of services. The growh of hese segmens has been he resul of opening of rade, liberalisaion policies of he governmen, and increased disposable income in he hands of he people and changing consumer aiude and lifesyle. However, hese broad macroeconomic daa hough provides for more han a somewha cursory supposiion of he forces a wor and cerainly do no mae a definiive saemen on he naure of services growh. Therefore, a deailed analyical research is required o examine he forces involved in such a high growh in he service secor in India especially in he pos liberalisaion era. Secion III: Mehodology of deerminaion of Muliple Srucural Breas I is now a sandard pracice o verify he saionary propery of ime series daa before analysis. Therefore i is appropriae o examine wheher he series is saionary or no wih he help of uni roo es. There are a number of mehods of uni roo ess, namely icey-fuller es, Augmened icey Fuller es, Phillips Perron es, ec. all of which have become very popular and imporan. Bu i needs o be menioned a his poin ha here has been increasing rend in improving he mehodology of uni roo es as well. For insance, Perron (989) shows ha he es of uni roos ha do no follow a srucural brea, if here is insead srucural brea(s), are 3

14 biased in favour of non-saionariy. Therefore i is necessary o examine wheher any srucural brea is presen in he series. The hree seps involved in he whole exercise of esimaing he ime rend of services. Firs, he srucural brea es has been esed for he daa series on services following he mehodology suggesed by Bai and Perron (998). Then he presence of uni roo wih srucural brea including he brea poin has been esed using he mehods suggesed by Banerjee, Lumsdaine and Papell (99) and Lumsdaine and Soc (997). Finally he rend growh rae of GP, services and sub-secoral services are esimaed using he Boyce (986) mehod in various subperiods. Tes for srucural Brea: Bai-Perron Tes Boh he saisics and economics lieraure conains a vas amoun of wor on he issues relaed o srucural change, mos of i specifically designed for he case of a single change. Bu mos macroeconomic ime series usually can conain more han one srucural brea. The economerics lieraure has winessed recenly an upsurge of ineres in exending procedure o various models wih unnown breapoin. Wih respec o he problem of esing for srucural change, recen conribuion include he reamen by Andrews (993a, 993b), Andrews, Lee, & Ploberger (994, 996) and Bai and Perron (998,003). In his secion, he Bai and Perron (998) mehod in order o examine if here are any srucural brea in he series. To ha effec, Bai and Perron (998) recenly provide a comprehensive analysis of several issues in he conex of muliple srucural change models and develop some ess which preclude he presence of rending regressors. This es is helpful in he changes presen and also i endogenously deermines he poins of brea wih no prior nowledge. The deails of he mehodology on srucural brea may be found in Bai and Perron (998). We consider he following linear regression wih m breas (m+ regime): ' ' y x z, T j, T j (j=,,m+, T 0 =0 and T m+ =T) 4

15 p q where y is he observed dependen variable, x and z are vecors of covariaes, β and δ j are he corresponding vecors of coefficiens wih δ i δ i+ ( i m ) and µ is he error erm a ime. The brea daes (T,.,T m ) are explicily regarded as unnown. I may be noed ha his is a parial srucural change model insofar as β doesn shif and is effecively esimaed over he enire sample. Then he purpose is o esimae he unnown regression coefficiens and he brea daes, ha is o say (β, δ, δ m+, T,.,T m ), when T observaions on (y,x, z ) are available. Noe ha his is a parial change model in he sense ha β is no subjec o shifs and is effecively esimaed using he enire sample. Bai and Perrron (998) buil a mehod of esimaion based on he leas square principle. For an m-pariion (T,.,T m ), denoed {T j }, he associaed leas square esimaor of δ i is obained by minimizing he sum of squared residuals m Ti i Ti [ y x ' j ' z ] under he consrain δ i δ i+ ( i m ). Le T }) be he resuling esimae. Subsiuing i in ({ j he objecive funcion and denoing he resuling sum of squared residuals as S T (T,.,T m ), he esimaed brea daes ( T,... T m) are such ha ( T,... T m) arg min S T ( T,... T... T m Tm ) where he minimisaion is aen over all pariions (T,.,T m ) such as T i T i- [εt]. The erm [εt] is inerpreed as he minimal number of observaions in each segmen. Thus he breapoin esimaors are global esimaors are global minimisers of he objecive funcion. Finally, he regression parameer esimaes are obained using he associae leas-squares esimaes a he { j esimaed m-pariion, T },. ({ ˆ j i e T }) The Tes Saisics Several ess for srucural change have been proposed in he economerics lieraure. These ess can be classified ino wo groups: a) ess for single srucural change; and b) ess for muliple srucural breas. Here he focus is on muliple srucural breas. In his conex, Bai and Perron 5

16 (998) consider esimaing muliple srucural changes in he linear model and developed hree ess. Tes of Srucural Sabiliy versus an Unnown Number of Breas Bai and Perron (998) also consider ess of no srucural change agains an unnown number of breas given some upper bound M for m. The following new class of ess is called double maximum ess and is defined for some fixed weighs {a a m } as max max m M F a T m ( M, q, a F T,... ( ˆ ˆ, M : q ) a M ) max m M a m Sup (,... m ) F T (,... M : q ) 3 The weighs {a...a m } reflec he imposiion of some priors on he lielihood of various numbers of srucural breas. Firsly, hey se all weighs equal o uniy, i.e. a m = and label his version of he es as UmaxF T (M,q). Then hey consider a se of weighs ha he marginal p- values are equal across values of m. The weighs are hen defined as a = and a m = c(q, α, )/c(q, α, m) for m>, where α is he significance level of he es and c(q, α, m) is he asympoic criical value of he es sup F T (,... n : q) F T (,... n : q). This version of he es is denoed as W maxf T (M, q). A Sequenial Tes The las es developed by Bai and Perron (998)is a sequenial es of l versus l+ srucural change: sup F where, T ( l / l ) { S T ( T 3.4 { ; T l ( T l T l ) T l ( T l T l ) }, i, n,... T l) min inf S ( T,...,, Ti, T l)} / ˆ T il i, S T ( T,..., Ti,, T T l) is he sum of squared residuals resuling from he leas squares i esimaion from each m-pariion (T,..T m ) and under he null hypohesis. 6 is a consisen esimaor of The asympoic disribuions of hese hree ess are derived inbai and Perron (998) and he asympoic criical values are abulaed in Bai and Perron (998, 993) for ε = 0.05 (M=9), 0.0 (M=8), 0.5(M =5), 0.0(M=3), and 0.5 (M=).

17 Selecion Procedure A preferred sraegy o deermine he number of breas in a se of daa is o firs loo a he UmaxF T (M,q) es o see if a leas a srucural brea exiss. The number of breas can hen be decided based upon an examinaion of he supf T (l+/l) saisics consruced using he brea dae esimaes obained from a global minimisaion of he sum of squared residuals (i.e. m breas are seleced such ha he ess supf T (l+/l) are non-significan for any l>m). Bai and Perron (003) conclude ha his mehod leads o he bes resuls and is recommended for empirical applicaions. Furher if he esimaion allows for a change in all he parameers i.e. he inercep and he slope i is said o be a pure srucural brea model. Kined Exponenial Models for Growh Rae Esimaion Nex, afer having deermined he breapoins by he Bai and Perron (998) es, he calculaions of he sub-period growh raes are examined using he ined semi-logarihmic rend equaion used by Boyce (986). The usual echnique for esimaing growh raes in he sub-periods of a ime series is o fi separae exponenial rend lines by ordinary leas squares o each segmen of he series. These rend lines are liely o be disconinuous, which can resul in anomalies such as sub-period growh raes which can exceed, or are less han, he esimaed growh rae for he period as a whole. isconinuiies beween segmens of a piece-wise regression can be eliminaed via he imposiion of linear resricions. In he case of log-linear models, such an approach yields ined exponenial funcions which provide a beer basis han convenional esimaes for ineremporal and cross-secional growh rae comparisons. Kined exponenial models wih one, wo and muliple in poins are derived. These can be easily esimaed wih sandard OLS regression pacages by using composie independen variables. For he generalized ined exponenial model for m sub-periods and m - ins. Le he in poins be denoed as,..., m-, and he sub-period dummy variables as,..., m. The unresriced model for join esimaion of he sub-period growh raes, wih no coninuiy requiremen imposed, is given by, ln y a a... am m (... m m) u. 5 Appling he appropriae m- linear resricions, a i ii a i i i. 7

18 8 for all,,..., m i 6 we obain he generalized ined exponenial model:. 3 ) (... ) ( )... ( ) ( ln m m m m m i j m i j i j i j i i m j m j m j j j j u a y 7 The number of sub-periods ino which a given ime series can be meaningfully pariioned will vary from case o case, depending upon such consideraions as he amoun of insabiliy, he presence of cyclical flucuaions and he a priori grounds for expecing growh raes o change. The single-in and wo-in models can be readily derived as special cases. For wo breas double in semi-logarihmic rend equaion is given by, ) ( ) ( ) ( ln u a y 8 where i for all i =,,3 is a dummy aing a value in he i h subperiod and 0 oherwise, K and K are he ime poins respecively a which he srucural breas have supposedly occurred. For 3 breas, he riple in semi-logarihmic rend equaion is given by, ) ( ) ( ) ( ln u a y 9 where i for all i =,,3,4 is a dummy aing a value in he i h sub-period and 0 oherwise, K, K and K 3 are he ime poins respecively a which he srucural breas have supposedly occurred. Based on his mehod, he sub period growh raes of services and subsecor of services are calculaed. The novely of his approach of calculaing growh raes is ha i no only uses he brea poins years bu also uses he ime poins where he srucural breas have occurred. Uni Roo Tes

19 Uni roo ess are based on he implici assumpion ha he deerminisic rend is correcly specified. Uni roo ess, namely F es, AF es, PP es, ec are imporan bu here has been increasing rend in improving he mehodology of uni roo es as well. Nelson and Plosser (98) found evidence ha in favour of uni roo hypohesis for 3 ou of 4 long-erm annual macro series. Perron(989) suggesed ha he observed uni roo behaviour have been a failure o accoun for any srucural brea in he daa. Perron(989) argued ha if here is a brea in he deerminisic rend, he uni roo es s resuls are misleading, i.e., under he brea he uni roo ess can rea rend saionary process as a difference saionary process. Perron(989) develops a mehod of es of uni roos in he presence of srucural brea. The analysis was done wih an exogenous brea. Accordingly, he challenged he findings of Nelson and Plosser (98) and he reversed he Nelson and Plosser conclusions of 0 f he series. Perron s paper sared a conroversy abou he effec of rend breas on uni roo ess and again his sudy was criicized on he ground ha he assumed he brea poin o be nown. The presence of a uni roo in each of he macroeconomic series is esed using he Augmened icy and Fuller (979) es. The AF es consrucs a parameric correcion for higher-order correlaion by assuming ha he series follows an AR() process and adding lagged difference erms of he dependen variable o he righ-hand side of he es regression: y c y d jy j 0 j y c y j j j d y Equaion (0) ess for he null of a uni roo agains a mean-saionary alernaive in y where y refers o he ime series examined and Equaion () ess he null of a uni roo agains a rendsaionary alernaive. The erm Δy j is inroduced as lagged firs differences o accommodae serial correlaion in he errors. The lag lengh hrough he sig approach as shown by Ng and Perron (995) are used which produces es saisics which have beer properies in erms of size and power han when he lag lengh is seleced wih some informaion-based crieria. 9

20 Furher, Zivo and Andrews (99) and Banerjee, Lumsdaine and Soc (99) esed for uni roo incorporaed an endogenous brea poin ino he model specificaion and hey showed Perron s conclusions are reversed. Zivo and Andrews(99) use a sequenial es, derive he asympoic disribuion, hey fail o rejec he uni roo hypohesis for four of en series for which Perron rejeced he uni roo null. Banerjee, Lumsdaine and Soc (99) (BLS, henceforh) apply a variey of recursive, rolling and sequenial ess endogenising he brea poin o differen inernaional daa. For he presen sudy his BLS es for uni roo is used. Here i can be menioned his es canno be used o find he brea poin, or wheher here is any brea in he series a all. This es can be used o es he uni roo hypohesis independen of srucural brea. The power and size consideraion of his BLS es has been given in heir paper. The BLS es is srucured as: Model I: y 0 y B ( L) y e ;,,..., T whereb(l) is a polynomial of order p, wih he roos of -B(L)L ouside he uni circle. Under he null hypohesis, α= and μ =0. When he model is esimaed by OLS wihou resriced onμ 0,μ or α, he saisic esingα=is he sandard icey Fuller (979) es for a uni roo agains a rend saionary alernaive. Model II: y 0 ( ) y B ( L) y x ( ) e ;,,..., T 3 Unlie Model I, his model allows for an addiional m vecor of regressors, x ( ), which are assumed o be saionary wih a consan zero mean. The deerminisic regressor, ( ) capures he possibiliy of shif or jump in he rend a period. Following Perron (989), consider wo cases: Case A(shif in rend): ( ) ( )( ) and Case B (shif in mean): ( ) ( ) where (.) is he indicaor funcion. For Case A he changing growh model he saisic esing μ =0 provides he informaion abou wheher here has been a shif (or change in slope) in he rend. For Case B, (Perron s crash model), his saisic provides informaion abou wheher here has been a jump or brea in he rend. 0

21 Based on differen ess used, hree es saisics are examined under recursive ess. These are max he maximum icey- Fuller saisic, ˆ max ˆ ( ) F 0 T F ; and he minimal icey Fuller T min Saisic ˆ min ˆ ( ) F 0 T F ; and T ˆ diff F max min ˆ ˆ F F. For hese, ˆ F ( ), ha is he full T sample icey Fuller saisic is compued as he saisic esing α=in he regression esimaed over,,...,.given he presence of breapoins confirmed by Bai-Perron es and he presence of uni roos confirmed by he BLS es, he presence of uni roo in he presence of srucural brea is ascerained by an exension of he Zivo and Andrews (99), i.e. he Lumsdaine and Papell (997) es, where brea daes are no deermined exogenously. Lumsdaine and Papell (997) (LP hereafer) exended he Zivo and Andrews mehodology of wo breas. The mehodology can be exended o hree or more breas. As illusraed by he above equaions, a consan and a linear ime rend in AF es regression is seleced o be included. Phillips and Perron (988) propose an alernaive (nonparameric) mehod of conrolling for serial correlaion when esing for a uni roo. The PP mehod esimaes he non-augmened F es equaion [Equaion (0) and () wihou j d jy j erm on RHS], and modifies he -raio of he α coefficien so ha serial correlaion does no affec he asympoic disribuion of he es saisic. For comparison purposes, we also perform he PP ess and repor heir resuls in addiion o he generally favoured AF es. A problem common wih he convenional uni roo ess such as he AF, F-GLS and PP ess, is ha hey do no allow for he possibiliy of a srucural brea. Assuming he ime of he brea as an exogenous phenomenon, Perron showed ha he power o rejec a uni roo decreases when he saionary alernaive is rue and a srucural brea is ignored. Zivo and Andrews (99) proposed a variaion of Perron s original es in which hey assume ha he exac ime of he brea-poin is unnown. Insead a daa dependen algorihm is used o proxy Perron s subjecive procedure o deermine he brea poins. Following Perron s characerisaion of he form of srucural brea, Zivo and Andrews proceeded wih hree models

22 o es for a uni roo: (i) model A, which permis a one-ime change in he level of he series; (ii) model B, which allows for a one-ime change in he slope of he rend funcion, and (iii) model C, which combines one-ime changes in he level and he slope of he rend funcion of he series. Hence, o es for a uni roo agains he alernaive of a one-ime srucural brea, Zivo and Andrews use he following regression equaions corresponding o he above hree models. y c y U j j 4 j d y y c y T j d jy j 5 y c y U T j j 6 j d y where U is an indicaor dummy variable for a mean shif occurring a each possible brea-dae (TB) while T is corresponding rend shif variable. Formally, U = T =.. if > TB 0 oherwise TB.. if > TB 0 oherwise The null hypohesis in all he hree models is α=0, which implies ha he series {y } conains a uni roo wih a drif ha excludes any srucural brea, while he alernaive hypohesis α<0 implies ha he series is a rend-saionary process wih a one-ime brea occurring a an unnown poin in ime. The Zivo and Andrews (99) mehod regards every poin as a poenial brea-dae (TB) and runs a regression for every possible brea-dae sequenially. From amongs all possible brea-poins (TB), he procedure selecs as is choice of brea-dae (TB) he dae which minimizes he one-sided -saisic for esing αˆ (=α ) =. According o Zivo and Andrews (99), he presence of he end poins cause he asympoic disribuion of he saisics o diverges owards infiniy. Therefore, some region mus be chosen such ha he end poins of he sample are no included. Zivo and Andrews (99) sugges he rimming region be specified as (0.5T, 0.85T), which is followed here.

23 Lumsdaine and Papell (997) es considers he behaviour of sequences of he icey-fuller (979) ess for a uni roo. I is similar o he spiri o he sequenial ess for changing in he coefficiens of BLS (99), in case here is only one srucural brea. LP compued a saisic using he full sample allowing wo shifs in he deerminisic rend a disinc unnown daes. The model considered here is he exension of he Zivo Andrews model (Model C), using he following equaion: y U T U T y i ciy i 7 where,,..., T and c(l) is he lag polynomial of unnown order and -c(l)l has all is uni roos ouside he uni circle, he null hypohesis of non-saionariy is examined agains he alernaive of saionary wih wo brea. Here, U and U are he indicaor dummies for a mean shif occurring a imes TB and TB respecively and T and T are he corresponding rend shif variables. Tha is, U ( TB ), U ( TB ) T ( TB )( TB ), and T ( TB )( TB ) and is he lag lengh decided on he basis of he AIC or SBC crieria. The es is exended o hree srucural breas, in his chaper. Secion IV: Resuls and Inerpreaion In his secion, he breapoins in specialised services, services and GP are esimaed using his mehodology. For each individual variable, he model is characerized as: Pure Srucural brea model: Parial Srucural brea model: y cj j jy u, T j, T 8 y cj j y u, T j, T 9 Therefore, he wo srucural breas model differ in he way ha in he generalized case, he brea is aen ino consideraion wih a variable deerminisic rend coefficien β and auoregressive parameer ρ. The parial srucural brea model is resriced in he sense ha i assumes he auoregressive parameer, ρ, o be consan. In order o deec for he srucural breas, he seps suggesed by Bai and Perron saed above are followed. Firs, he UMAX and WMAX saisics, which are double maximum ess, where he null hypohesis of no srucural breas is ess agains he alernaive of an unnown number 3

24 of breas, are calculaed. As saed above, he ess are used o deermine if a leas one srucural brea is presen. Subsequenly, he sup F T (0 l) which is a series of Wald ess for hypohesis of 0 breas vs. l breas are calculaed. In he implemenaion of he procedure, a maximum up o 4 breas is allowed and a rimming ε=0.05 which corresponds o each segmen having a leas observaions. If hese ess show evidence of a leas one srucural brea, hen he number of breas can be deermined by he SupF(l+/l). If he es is significan a he 5 per cen level, l+ breas are chosen. This able provides he resuls following his procedure for specialised services and GP. I may be observed ha he SupF(0 l), he UMAX and WMAX ess are all significan indicaing ha each series conains a leas one brea in is srucure. Consequenly, he number of breas can be deermined using he sequenial es sup F T (l+/l). The resuls show ha he value of he sup F(0 l) es is saisically significan a he 5% level of significance for all l. The sequenial Sup F(l+/l) is saisically significan up o l=3 for log value of specialised services and GP. The brea daes of each series are provided in he Tables 3 and 4. The resuls of he pure srucural change model by Bai and Perron (998, 003) is presened in Table 3. Table 3: Resuls of he Bai Perron Pure Srucural Brea Model (998, 003) Trade, hoel and Resaurans Transpor, Sorage and Communicaion Baning Insurance and Financial Services 4 Communiy Social and Personal Services Toal Services Udmax 36.80* 7.74* 45.75* 0.53* 4.93* 44.* Wdmax 56.85* 4.3* 70.67* 3.7* 50.06* 5.43* SupF T (0 ) 0.9* 0.36* 6.9* * 6.79* SupF T (0 ) 0.65* 7.74*.04* 8.65* 4.94* 44.* SupF T (0 3) 5.0* 8.75* 8.58* 8.49* 33.50* 33.9* SupFT(0 4) 36.80* 6.75* 45.75* 0.53* 3.39* 9.09* SupF T ( ) 3.88* 3.6* 3.54* 4.59* 46.83* 5.5* SupF T (3 ).06* * 6.78* * SupF T (4 3) * 5.37* 0.4* 34.9* 0.* Sequenial Esimaed brea daes wih m=4 (964-65, , ) (963-64, ) (965-66, 980-8, , ) No brea (964-65, ) GP (98-83, 990-9, 00-0) Noes: The number of breas (in our case, four) has been deermined according o he sequenial procedure by Bai and Perron(998), a he 5% size for he sequenial es Sup F T (l+/l). SupF saisics esimaed using Bai and Perron(998,003) mehods, wih Gauss mode available by Bai and Perron. *: significan a he 5% level.

25 The resuls of he pure brea model reveal ha he firs brea in India s GP occurred a The nex wo breas as eviden from economic policy change in India are a and However, he firs brea in he subsecor of services and aggregae services as a whole comes wihin he period , wih he communiy, social and personal services secor exhibiing no such brea. This confirms he fac ha he brea in services GP came long before he brea in GP. I also poins ou ha he service secor in India is no necessarily led by economic reforms of 99. The second brea in services occurred a he beginning of he new millennium, almos afer a decade of he iniiaion of he reforms. However, i needs o be menioned ha an aggregaion of hese services acually does no give a lucid picure because of he diverse naure and he significance of he differen subsecor of services in he developmen of he counry. I is beer o consider each of he sub-secors of services individually and see heir growh paern. The parial form of he srucural brea model as proposed by Bai and Perron (998, 003) is summarised in Table 4. Table 4: Resuls of he Parial Srucural Brea Model by Bai Perron (998, 003) Trade, hoel and Resaurans Transpor, Sorage and Communicaion Baning Insurance and Financial Services Communiy Social and Personal Services Toal Services GP Udmax 9.66*.80*.07* 6.70* 3.84* 3.8* Wdmax 30.63* 6.5* 33.30* 4.* 46.88* 8.0* SupF T (0 ) 8.33* 9.65* 5.4* 3.0* 3.84* 6.5* SupF T (0 ) 9.66*.80*.07* 6.6* 4.78* 3.8* SupF T (0 3) 9.39* 5.83* 5.6* 6.70* 8.78* 8.39* SupF T (0 4) 9.0* 6.6* 0.87* 5.83* 9.38* 7.5* SupF T ( ).57* 3.9*.76* 0.89* 8.04* 7.59* SupF T (3 ) * 6.9* 6.05* * SupF T (4 3) * * 3.86* Sequenial Esimaed brea daes wih m=4 (964-65, ) (963-64, , 99-9) (980-8, , ) (97-7, 990-9, ) (964-65, ) (978-79, 990-9, 00-0) Noes: The number of breas (in our case, four) has been deermined according o he sequenial procedure by Bai andperron (998), a he 5% size for he sequenial es Sup F T (l+/l). SupF saisics esimaed using Bai and Perron (998, 003) mehods, wih Gauss mode available by Bai and Perron. *: significan a he 5% level. 5