| Economic liberalization in 1991 marked a significant turning point for India since its independence in 1947. After decades of slow growth, the economy suddenly took off at a steady and fast pace after 1991. We investigate the factors that propelled India's long-term economic growth and short-run economic cycles pre and post 1991. Using a multi-sector dynamic general equilibrium model specifically tailored for transition economies, we find that service sector productivity, coupled with a structural shift in the economy, have been the drivers of the recent spate of growth in India. In the period 1960-1980, productivity fluctuations in the agricultural sector were the dominant source of cycles. Since then, productivity fluctuations in the manufacturing and service sectors have been important. In the quest for the source of increasing service productivity, we use a monopolistic competition model with heterogenous firms and find that improved factor allocation across service firms have helped accelerate productivity in this sector. Since reforms in 1991 were heavily leaned towards the service sector, we also investigate the impact of liberalization and labor regulations on service firms' economic performance. Using an unbalanced panel dataset for service sector firms, we find mixed evidence of the impacts of liberalization. Firms which were technologically superior prior to reforms, outperformed their technologically backward counterparts after liberalization. No strong evidence between firm performance and state-specific labor regulations are found in the context of service sector firms in India. |
