India has seen service sector-led growth in recent years. High growth in the total factor productivity (TFP) has been the dominant source of growth in this sector. I use micro-data on the service sector companies to test the hypothesis if better factor reallocation has led to TFP gains in the service sector. I find that post reforms, the extent of resource misallocation has reduced in the service sector, thereby accelerating the pace of the TFP growth. Due to improved resource allocation, the information-technology industry operated at 84 per cent of its efficient TFP level in 2005. The communication industry and community services industry registered the fastest growth in terms of moving towards their efficient TFP levels.

JEL Classification: 014, 040