Beyond size: The rise in power of the transaction sector in India post-liberalization

The macro literature on transaction costs has hitherto focused only on the input side while assessing the importance of the transaction sector. This ignores the nature of services provided by the sector to facilitate exchange in the economy. We use the tools of Social Network Analysis as well as Indian Input-Output tables to examine the magnitude, direction (both input as well as output), and network structure of the pattern of resource exchanges between the transaction sector and the rest of the Indian economy in the post-liberalization era. We find that although resource use by the transaction sector is increasing over time, the sector is relatively isolated from the rest of the economy on the input side, indicating a lack of importance from a network perspective. In contrast, the transaction sector is highly integrated with the rest of the economy on the output side. Further, there is a high level of dependence of other sectors on the transaction sector to conduct resource exchanges. Increasing network density is accompanied by a simultaneous decentralization of the economy, supported by the rise in importance of the transaction sector on the output side.