Service Sector in

India

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s

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Contents
1 Introduction ............................................................................................................................................3
2 Services Sector: Concept & Meaning .....................................................................................................3
2.1 Composition of GDP ........................................................................................................................4
2.2 Composition of Services Sector in India..........................................................................................4
3 Performance of Service Sector in India ..................................................................................................4
3.1 Sectoral Composition of GDP Growth.............................................................................................4
3.2 Employment Contribution of the Service Sector ............................................................................5
3.3 Causes of Rapid Increase in Tertiary Sector ....................................................................................5
3.4 Prospects & Opportunities ..............................................................................................................6
3.4.1 Domestic Factors .....................................................................................................................6
3.4.2 International Factors ...............................................................................................................6
4 The Need for Reforms ............................................................................................................................7
5 Outlining Future .....................................................................................................................................7

1 Introduction
We have come a long way from the days of physiocrats and mercantilists when agriculture and trade in
goods respectively were the engines of growth of economies. Production and trade in services have
come to the forefront. In modern economies, service sector performs many important roles.

• First, it represents a major share of the developed economies and is increasingly integrated in the
overall production system.
• Second, it plays an active role in market integration and globalisation.
• Third, the creation of employment, value added, income and exports are increasingly related to
the good performance of the services.

In India, the service sector has evolved continually over the past thirty years, modifying the structure of
employment and the composition of value added. It constitutes a large part of the Indian economy
both in terms of employment potential and its contribution to national income. The sector covers a
wide range of activities from the most sophisticated in the field of Information and Communication
Technology to simple services pursued by the informal sector workers, for example, vegetable sellers,
hawkers, rickshaw pullers, etc. Currently, this sector accounts for around 66% share in India's GDP.
However, despite its growing weight, the share of the working-age population employed in services
remains low.

2 Services Sector: Concept & Meaning

The economy has basically three sectors viz, the primary sector comprising of agriculture, fishing, and
extraction such as mining, the secondary sector comprising of manufacturing and the tertiary sector
also referred to as service sector.

The basic characteristic of service sector is the production of services rather than end-products.
Services are intangible goods which include attention, advice, experience, and discussion. These are
used to enhance productivity, performance, potential and sustainability. The production of

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information is also regarded as a service. However, some economists like to classify services relating to
the information service in a fourth sector, now known as the quaternary sector i.e., the sector that
comes after the third and just before the fifth in position.

The tertiary sector involves the provision of services to other businesses. Services may involve the
transport, distribution and sale of goods from producer to a consumer, pest control, entertainment or
hotel industry. The goods are transformed in the process of providing the service. However, the focus is
on people interacting with people and serving the customer rather than transforming physical goods.

The composition of GDP of an economy explains the relative significance of the different producing
sectors. When a country is in a state of underdevelopment, primary sector makes the largest
contribution to the national income. As the country grows and gets developed, the contribution of the
industrial and service sectors gradually increases.

2.1 Composition of GDP

For the past few decades, there has been a considerable shift from the primary and secondary sectors
to the tertiary sector in the Indian Economy. The tertiary sector is now the largest sector of the
economy and is also the fastest-growing sector. Examples of service sector employment include:
Government, hospitals, public health, waste disposal, education, banking, insurance, financial services,
legal services, consulting, news media, hospitality industry (e.g., restaurants, hotels, casinos), tourism,
retail sales, franchising, real estate, and sales.

2.2 Composition of Services Sector in India

In the National Income Accounting in India, service sector includes the Trade, Hotels and Restaurants,
Transport, Storage and Communication, Financing, Insurance, Real Estate and Business Services,
Community, Social and Personal Services.

3 Performance of Service Sector in India

3.1 Sectoral Composition of GDP Growth
It would be seen that over the period, the primary sector’s share has fallen by 40 per cent, while those
of the secondary and tertiary sectors have increased. This trend is projected to go further in wake of
liberalization of the economy. This may happen primarily because of the following factors:

• reduced restrictions on private sector involvement in areas like software development and
information services
• technological advances
• lower fixed capital requirements.

Presently, about two-thirds of the incremental growth in the Indian economy can be attributed to the
tertiary sector.

This pattern of structural change in Indian economy has deviated from the development pattern of
Western and South East Asian economies. Those economies experienced first a shift from primary to
secondary sector and only in their advanced stage did they experience a significant shift in favour of
tertiary sector. That pattern of development enabled them to transfer growing labour force from
primary to secondary sector.

In India, this has not been possible because secondary sector has not expanded fast enough to absorb
growing labour force. The unskilled and uneducated rural masses have continued to struggle in the
primary sector and those who have been forced out by economic, social and political factors have joined
the urban slum sector. Moreover, the sharp increase in the share of tertiary sector in GDP in India has
occurred at a much lower level of per capita income than that in the developed countries when they

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experienced a similar expansion. This pattern of growth underlines the link between the growing
poverty and unemployment and the inadequate growth of manufacturing and building activity in the
country

3.2 Employment Contribution of the Service Sector

The sectoral distribution of workforce in India during the period 1983 to 2009-10 reveals that the
structural changes in terms of employment have been slow in India as the primary sector continued to
absorb 54.9 per cent of the total workforce even in 2009-10, followed by tertiary and industrial sectors
(25.5 per cent and 19.6 per cent) respectively.

There has been disproportionate growth of tertiary sector, as its share in employment has been far
less when compared to its contribution to GDP. It is important to understand that, within the services
sector employment growth rate is highest in finance, insurance, and business services, followed by
trade, hotels and restaurants, and transport etc. The community, social and personal services occupy
the last rank in growth rates of employment. Further, there was a sharp drop in labour absorptive
capacity of growth in the economy (employment elasticity of growth) from 0.40 to 0.15 during post-
reform period (1993-94 to 1999-2000) initially, reflecting the phenomenon of jobless growth. However,
during 1999-2000 to 2009-10 period the employment elasticity of growth registered an increase from
0.15 to 0.51. With the exception of one subsector of tertiary sector i.e., transport, storage,
communication all other sub-sectors of services sector exhibited an increasing trend in employment
elasticities and thereby overall elasticity of employment increased from 0.15 to 0.51. Services sector
contributes over 28% of total employment in the economy.

3.3 Causes of Rapid Increase in Tertiary Sector

The tertiary, i.e., the non-commodity sector, has been growing at a much faster rate than the
commodity sector. This in essence means that income generated in the process of circulation grew at a
much faster pace than that in the directly productive process, and thereby resulting in an increase in
the share of the non-commodity sector. This trend can be attributed to a number of factors, among
which, the more important are as follows:

• A very important factor has been the advent of information technology and the knowledge
economy. This has enhanced the growth of the high productivity segment of the services sector as
well as a variety of service activities involving low productivity activities catering to a large mass of
people.
• A large part of the service sector consists of infrastructure such as banking, insurance, finance,
transport and communication and social and community services such as educational and medical
facilities. An urgent requirement of development is the proper expansion of infrastructure to cater
to the needs of other sectors of the economy and the expansion of the social and community
services for the well-being of the people.
• Public services grow more rapidly where national Governments have significant role in planning
and production in the economy as a whole. In fact, the ‘visible hands’ of the modern governments
as reflected in the government policies and in the expansion patterns of the national and
international authorities during the last few decades are directed towards the creation of fast
economic and social infrastructures.
• Operation of the demonstration effect as a consequence of the growing mobility due to expanding
foreign trade, tourism and cultural and educational tours is another important factor.
• Increasing urbanisation may be regarded as another cause of expansion of the service sector in
the economy. In fact, urbanisation is closely associated with a rise in demands for infrastructure
services such as communications, public utilities and distribution services. A substantial change in
the private consumption pattern of the economy is observed with increasing urbanisation. Many
new goods and services enter into the consumption basket.

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• Tourism is becoming more and more international as knowledge is being spread through television
and Internet, and modern technology has made air transport and hotel accommodations quite
comfortable. Tourism, in turn, has promoted all types of services.
• With the increasing complexities of modern industrial organisation, manufacturing industries
have become service oriented. This has been reflected in the increasing functions of accounting,
finance, legal services, advertisement, marketing, public relations etc. Because of the prevalent
labour laws, these services are being increasingly outsourced, so that growth in industry is actually
being counted as growth in services.

3.4 Prospects & Opportunities

Both domestic and international factors augur well for the growth of services sector in India.

3.4.1 Domestic Factors

Some of the important factors can be briefly stated as follows:

• As real per capita GDP grows, demand for services increases more than proportionately and this, in
turn, reinforces GDP growth itself.
• Within the services sector, demand for producer and government services, which constitute mainly
intermediate consumption, have strong multipliers effects on real GDP.
• The growth of such dynamic service activities, which are intensive users of communication and
information technology, will generate employment opportunities on a rising scale.
• The process of economic growth has itself led to the emergence and expansion of new series such
as advertising, publicity, marketing, etc. These sub-sectors provide essential service inputs to
other sectors in the economy, thereby developing strong linkages with the rest of the economy.
• Efficient delivery of services increases the productivity of both labour and capital in the economy
as a whole. In general, services sector appears to be highly growth inducing with positive
externalities for other services making service a catalytic agent of growth.

3.4.2 International Factors

Some of the recent global developments which provide opportunities for substantial growth are as
follows:

• The fastest growing segment of services is the rapid expansion of knowledge-based services, such
as, professional and technical services. India has a tremendous advantage in the supply of such
services because of a developed structure of technological and educational institutions and lower
labour costs.
• Progress in IT is making it increasingly possible to unbundle the production and consumption of
information-intensive service activities. These activities – research and development, computing,
inventory management, quality control, accounting, personnel administration, secretarial,
marketing, advertising distribution and legal services — are performed in all economic sectors.
• Unlike most other prices, world prices of transport and communication services have fallen
dramatically. The cost of communication is becoming independent of distance. India’s geographical
distance from several important industrial markets is no longer an important element in the cost-
structure of skill-based activities.
• India does not necessarily have a low-cost producer of certain types of goods (e.g., computers or
discs) before it can become an efficient supplier of services embodied in them (e.g., software or
music). It is possible now to provide value added services without waiting to ‘catch up’ in
technology for production of sophisticated equipment or products.
• The decline in the share of manufacturing in the output of rich countries implies a relative decline in
their demand for industrial raw materials and fuels. It means that growth in exports of developing
countries in the future will depend less on natural resources endowments and more on efficiency
in providing services and service-intensive goods.

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• The aging of population in the developed world implies that the demand for services will continue
to grow.

As a result of the above developments, the sources of comparative advantage of nations are vastly
different now from what they were 50 or even 20 years ago. And, there are very few developing
countries which are as well placed as India to take advantage of the phenomenal changes that have
occurred in production technologies, international trade, capital movement and deployment of skilled
manpower. It is now possible for India to take advantage of a virtuous circle of higher growth, higher
capital inflows and higher domestic incomes and savings, which in sum can lead to further growth.

4 The Need for Reforms

Indian services sector has the potential to garner higher economic benefits to the country. But there are
many issues both general and sector specific including domestic regulations hinder the growth
prospects of the services sector. If these issues are addressed deftly the sector could lead to exponential
gains for the economy. There are some general issues related to the policy framework which hamper
the healthy growth and expansion of the services sector in the country. They are broadly related to the
following areas:

• Nodal agency and marketing: Despite having strong growth potential in various services sub-
sectors, there is no single nodal department or agency for services. An inter-ministerial committee
for services has been set up to look into this. But services activities cover issues beyond trade and a
more proactive approach and proper institutional mechanism is needed to weed out unwanted
regulations and tap the opportunities in the services sector in a coordinated way. There is also need
for promotional activities for service exports like, (i) setting up a portal for services, (ii) showcasing
India’s competence also in non-software services in trade exhibitions, (iii) engaging dedicated brand
ambassadors and experts.
• Disinvestment: There is plenty of scope for disinvestment in services PSUs under both central and
state governments. Speeding up disinvestment in some services-sector PSUs could not only provide
revenue for the government but also speed up the growth of these services.
• Credit related: The issues here include ‘collateral free’ soft loans to support the sector’s cash needs
and possibility of considering even export or business orders as collateral for credit-worthy service
firms.
• Tax and Trade Policy related: These include use of ‘net’ instead of ‘gross’ foreign exchange criteria
for export benefit schemes, the issue of retrospective amendments of tax laws like, (i) amendment
to the definition of royalty to include payment of any rights via any medium for use of computer
software, (ii) tax administrative measures to tackle delay in refunds, (iii) introducing VAT (value
added tax) refund for foreign tourists, and (iv) addressing the issue of bank guarantees based on
past performance to avail of export promotion benefits in services.

5 Outlining Future
With plenty of opportunities, the services sector is like an uncharted sea. As yet, its potential has not
been tapped fully by India. A targeted policy of removing bottlenecks in major and potential services can
result in large dividends in the form of higher services growth and services exports, which in turn can
help in pulling up the economy to higher growth levels. The future actions in the sector can be outlined
as given below:

• India’s services sector, which showed resilient growth after the recovery of the global economy
following the global financial crisis, has been showing subdued performance in recent times.
Despite the slowdown, the prospects continue to be bright for many segments of the sector.
• In future, government’s focus on the following is expected to provide impetus to logistics services—

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 ➢ infrastructure development
➢ favourable regulatory policies like liberalisation of FDI norms,
➢ increasing number of multimodal logistics service providers,
➢ growing trend of outsourcing logistics to third party service providers, and
➢ entry of global players.
• Though shipping services are at a low key at present, with increased imports of POL (petroleum, oil
and lubricants) for stocks build up to take advantage of low crude oil prices, containerisation of
export and import cargo and modernisation of ports with private sector participation, recovery of
the shipping and port services sector can be expected.
• The prospects for Indian aviation services have improved following—
➢ the fall in prices of aviation fuel, which accounts for nearly 40 per cent of the operating
expenses of airlines in India;
➢ liberalisation of FDI policies in civil aviation; and
➢ strong growth in passenger traffic – expected to continue in the near future.
• The outlook for the retail industry remains positive as India continues to remain an attractive long-
term retail destination despite the various challenges faced by the sector. Following initiatives are
expected to give a fillip to the sector—
➢ allocation of ₹1000 crore to technology and start-up sectors,
➢ promotion of cashless transactions via RuPay debit cards, and
➢ growth of e-commerce.
• Government’s focus on the tourism sector including easing visas and building tourism infrastructure
could help in the recovery of the tourism sector.
• Despite challenges in the global market, the Indian IT industry is expected to maintain double or
near-double- digit growth as India offers depth and breadth across different segments of this
industry, such as, IT services, BPM, ER&D, internet and mobility and software products.
• In the telecom sector, the introduction of 4G which could be a game changer and inclusion of fibre
optic connectivity which will tremendously increase the reach and bandwidth along with greater
use of mobiles in government’s social sector programmes could give a further boost to this fast-
growing sector.

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