Growing Importance of Services Sector in India

In India, the importance of services sector has been increasing continuously decade after decade. With the continuous expansion of services sector, both in terms of volume and diversity, the importance of services sector has been increasing at a high speed.

The following are some of the importance’s of services sector in Indian economy:

(i) Contribution of GDP:

The share of total services sector in India’s GDP (at constant prices), which is constituted by trade, hotels, transport, storage and communications, banking, insurance, real estate, community and personal services, but excluding construction increased from 28.5 per cent in 1950-51 to 31.8 per cent in 1970-71 and then finally to 51.3 per cent in 2013-14.

But the share of total services sector, excluding construction, to India’s GDP at factor cost (at current prices) increased rapidly from 30.5 per cent in 1950- 51 to 50.8 per cent in 2010-11 and then to 55.7 per cent in 2011-12.

If construction is also included, then the same share of services sector increased from 56.8 per cent in 2000-01 to 59.6 per cent in 2013-14. Among the major components of services sector, the share of transport, Communication and trade in India’s GDP (at constant prices) increased from 11.0 per cent in 1950-51 to 18.6 per cent in 2013-14.

The share of community and personal services to GDP (at constant prices) marginally increased from 8.5 per cent in 1950-51 to 12.9 per cent in 2013-14. The share of finance insurance, real estate and business services increased from 9.0 per cent in 1950-51 to 19.8 per cent in 2013-14.

Thus it has been observed that the contribution of services sector into GDP of India has been increasing at considerable proportion and thereby it has proved to be a major sector among all the three sectors of the economy.

(ii) Higher CAGR and Rapid Growth of Services Sector:

The importance of services sector to Indian economy can also be traced from its attainment of higher compound annual growth rate (CAGR). The CAGR of the services sector attained at 10.0 per cent for the period 2004-05 to 2011-12 has been found to be higher than the 8.6 per cent of CAGR of Gross Domestic Product (GDP) of India during the same period, which clearly indicates that the services sector has outgrown both the industry and agriculture sectors, showing its supremacy among all three sectors of the economy in recent years. Such rapid growth of the service sector has resulted considerable changes in the GDP of the country.

Moreover, the growth has been specifically marked in the public services, information technology and financial services. Of late, India has just become a service oriented economy. The country did not follow the traditional growth models and thereby skipped the manufacturing growth stage to directly jump from agricultural growth stage to services growth stage.

However, the growth in services sector will definitely support growth process in agriculture and industrial sector in reasonable proportion and thereby assist the economy in generating employment and raising overall productivity.

The ratcheting up of the overall growth rate (CAGR) of the Indian economy from 5.7 per cent in the 1990s to 8.6 per cent during the period 2004-05 to 2009-10 was to a large measure due to the acceleration of the growth rate (CAGR) in the services sector from 7.5 per cent in the 1990s to 10.3 per cent during the period 2004-05 to 2009-10.

The services sector growth was significantly faster than the 6.6 per cent for the combined agriculture and industry sectors annual output growth during the same period. Although, the agricultural sector has been a dominant player initially, but of late the share of services sector has also been increasing over the years, which has been challenging the dominance of primary sector or agriculture in the later stage of development.

(iii) Horizontally Higher Share of Services in GSDP:

The service sector has been contributing towards the gross state domestic product (GSDP) of different states and union territories (UTs) satisfactorily in recent years. A comparison of the shares of services in the GSDP of different states and union territories in 2011- 12 shows that the services sector is the dominant sector in most states of India.

States and UTs such as Tripura, Nagaland, West Bengal, Mizoram, Maharashtra, Bihar, Tamil Nadu, Kerala, Delhi and Chandigarh have recorded a higher share of services sector to its GSDP which are again higher than all India shares (55.7 per cent) of its services sector.

Chandigarh with an 85 per cent share and Delhi with 81.8 per cent share top the list. This has resulted a horizontal spread of higher share of services sector in GSDP of a number of states.

(iv) Employment Generation of Services Sector:

The important of services sector can also be realised from its contribution towards generation of employment in India. Although the primary sector (mainly agriculture) is the dominant employer followed by the services sector, the share of services sector has been increasing over the years and that of the primary sector has been decreasing.

Between 1993-94 to 2009-10, there has been a sharp fall in the share of primary sector in employment from 64.75 per cent in 1993-94 to 53.2 per cent in 2009-10.

But the consequent rise in share of employment of the other two sectors was almost equally divided between secondary and tertiary sectors. However, while agriculture continues to be the primary employment providing sector, the services sector (including construction) is in the second place.

During the same period, the share of services and construction sectors in employment increased from 19.70 per cent to 25.30 per cent and 3.12 per cent to 9.60 per cent respectively.

As per National Sample Survey Organisation (NSSO) report on Employment and Unemployment Situation in India in 2009-10, on the basic usually working persons in the principal and subsidiary statuses, for every 1000 people employed in rural India, 679 people are employed in the agriculture sector, 241 in the services sector (including construction) and 80 persons in the industrial sector.

Again in urban part of India, 75 persons are employed in the agriculture, 683 persons in the services sector (including construction) and 242 persons in the industrial sector. Moreover, construction, trade, hotels and restaurants and public administration, education and community services are the three important employment providing service sectors.

Studies further reveals that the tertiary employment share have strong upward slopes in all the income quintiles covered both in urban and rural areas with higher income quintiles having higher share in each successive NSSO round. Thus tertiary employment growth is steadying moving from being an absorber of low income of labour to providers of high income jobs.

State-wise, there are wide differences in the share in employment of different sectors in rural India. It is found that some work-eastern states like Sikkim, Tripura and Manipur have a high share of employment in the services sector and again some city states like Chandigarh and Delhi also have very high shares of employment in services like 826 and 879 respectively out of 1000 employed people.

Moreover, among the major states, Kerala has a high share of employment in the rural services sector at 511 persons out of 1000 persons. Construction; trade, hotels and restaurant; and public administration, education and community services are the three major employment providing services sectors in all these different states.

In urban India the shares of employment in services in most of the states varied like 833 in Assam, 877 in Meghalaya, 732 in Bihar, 787 in Jharkhand, 711 in Kerala, 716 in Maharashtra, 743 in Rajasthan, 653 in Uttar Pradesh, 641 in Gujarat, 586 in Tamil Nadu and 683 in West Bengal out of 1000 employed people.

(v) Contribution to India’s Services Trade:

The services sector is also playing an important role sector in raising the volume of exports in the country. Thus India is moving towards a services-led export growth in recent years. During 2004-05 to 2008-09 as per the Balance of Payment (BoP) data, merchandise and services exports grew by 22.2 and 25.3 per cent respectively.

Again India’s share of services exports in the world export of services, which increased from 0.6 per cent in 1990 to 1.0 per cent in 2000 and further to 3.3 per cent in 2011, has been increasing faster than the share of merchandise exports in world exports. Services growth slowed in 2009-10 as a result of the global recession, but the decline was less pronounced than the slowdown in merchandise export growth and has recovered rapidly in 2010-11.

As per BoP data of the RBI, India’s services exports grew at a CAGR of 20.6 per cent during the period 2004-05 to 2010-11, compared to the 19.7 per cent CAGR of merchandise exports during the same period. If we enter into the details of services sector, CAGRs of financial services (29.2 per cent) were at higher level while that of software at 21 per cent was at lower level.

In terms of size, software is a major services export category, accounting for 41.7 per cent of total services exports in 2010-11. The CAGR for import of services was 20.2 per cent compared to the CAGR of merchandise imports, at 21.4 per cent. Among the various items of services imports, non-software services (22.6 per cent) and transportation (20.5 per cent had high CAGRs.

Moreover, the overall openness of the economy reflected by total trade including services as a percentage of GDP showed a higher degree of openness at 55.0 per cent in 2011-12 compared to 25.4 per cent in 1997-98 and 38.1 per cent in 2004-05.

(vi) Contribution towards Human Development:

Services sector has a lot of contribution towards human development in our country. Accordingly, services sector has been rendering some valuable services, viz., health services, educational facilities, IT and IT enabled services (ITes), skill development, health tourism, sports, cultural services etc. which are largely responsible for human empowerment and improvement of quality of life of the people in general.

(vii) Services Sector Growth and FDI Inflows:

Modest growth of services sector has made ample scope for the smooth inflow of FDI into the country. FDI also plays a major role in the dynamic growth of the services sector. On the positive side, at global level, medium term prospects for services are generally better than those manufacturing sector with international investment in the services sector expected to grow relatively faster.

Moreover, many transnational companies, which some years ago were mainly focused on their home markets, are now pursuing their internationalization strategies involving ambitious investments abroad. Developing and transition economies particularly in Asia are considered as most attractive destinations. Accordingly, India has been largely considered as favoured destination for increasing flow of FDI.

Although flow of foreign direct investment (FDI) into services sector of the country is maintaining a positive trend but the ambiguity in classifying various activities under the services sector poses differently in the measurement of flow of FDI into this sector.

However, the combined FDI share of financial and non- financial services, computer hardware and software, telecommunications and housing and real estate can be broadly taken as rough estimates of FDI share of services.

Such FDI share of services was 40.5 per cent of cumulative FDI equity in flows during the period April 2000 to December 2012. Including the construction sector (6.5 per cent), the share of services in FDI inflows increases to 47.0 per cent.

If the shares of some other services like hotels and tourism, trading, information and broadcasting, consultancy services, ports, agriculture services, hospital and diagnostic centres, education, air transport including air freights and retail trading are included then the total share of cumulative FDI inflows to the services sector would be around 58.4 per cent.

However, in terms of cumulative FDI equity inflows during April 2000 to December 2011, the financial and non-financial services are found to be the largest recipients with 20.1 per cent, ($ 31.7 billion), which is again followed by telecommunications with 7.9 per cent ($ 12.5 billion), computer hardware and software with 6.9 per cent ($ 10.9 billion), housing and real estates with 6.9 per cent ($ 10.9 billion), and construction activities 6.5 per cent ($ 10.2 billion) share.

The shares of financial and non-financial services sector in total FDI inflows from these sourcing countries are Mauritius 20.1 per cent Singapore 30.6 per cent, U.K 29.5 per cent, USA 21.9 per cent and Japan 11.9 per cent.

(viii) Contribution towards Development of Infrastructure and Communication Services:

Services sector has also been playing an important role in developing expanding and management of infrastructure with a special emphasis on development of transportation and communication services. In a developing country like India the importance of development of infrastructural facilities is quite high.

The contribution of transport, storage and communication to the GDP at factor cost (at current prices) in India ranges from 8.2 per cent in 2006-07 to 7.1 per cent in 2011-12.

(ix) Contribution towards Growth of IT and ITeS:

The services sector has also paved the way for a continuous growth of its IT and IT enabled services (ITeS) sector and thereby helping the economy of the country to attain higher growth both in terms of GDP share, employment, exports etc. which has put India on the global map.

The IT and ITeS sector of the country has developed an image of a young and resilient global knowledge power and has earned a brand identity in this sector.

The IT and ITeS industry has four major sub-components : IT services, business process outsourcing (BPO), engineering services and research and development (R&D), and software products. This IT and ITeS sector has been generating considerable amount of revenues and employment in the economy.

As per NASSCOM estimates, India’s IT and BPM sector (excluding hardware) revenues were to the tune of US $ 95.2 billion in 2012-13 and has been able to generate direct employment for nearly 2.8 million persons and indirect employment of around 8.9 million persons in the country.

Moreover, as a proportion of national GDP, IT and ITeS sector revenues have grown considerably from 1.2 per cent in 1997-98 to an estimated 7.5 per cent in 2011-12.

Software exports from India in 2011-12 stands as US $ 69 billion as compared to US $ 59 billion in 2010-11. It is also observed that exports continue to dominate the IT and ITeS industry and constitute about 78.4 per cent of total industry revenue. Moreover, the CAGR of the domestic sector has also been remained at high level of 12.8 per cent as compared to the 14.2 per cent for exports during the Eleventh Plan period.

The growth rate of the domestic sector of IT-ITeS and exports sector in 2010-11 were 20.6 per cent and 18.8 per cent respectively as compared to that of 9.7 per cent and 16.4 per cent growth rate attained respectively in 2011-12. Consistent and growing demand from US is largely responsible for increasing its share in total exports of India’s IT and ITeS services from 61.5 per cent to 62.0 per cent in 2011-12.

Moreover, emerging markets of Asia Pacific and the rest of the world also contributed to overall growth of IT and ITeS sector of the country. Thus the Twelfth Plan aims to harness the potential of the software and services sector to contribute to country’s development and growth, particularly in terms of investments, exports employment generation and contributive to GDP and to retain India’s leadership position as a global IT-BPO destination.

(x) Contribution towards Development of Some Social Services:

Services sector is also playing an important role in the development and expansion of some social services like sports, cultural services etc. Sports promotes physical fitness and develops human personality which also played an important role in national identity, community bonding and international bonding.

Moreover, cultural activities, or services include recreation and entertainment and radio and TV broadcasting besides other related cultural services. To meet the objective of preserving and promoting all forms of art and culture, a variety of activities are being undertaken by the Government of India.

A total allocation of Rs 3,555 crore was made to this sector during the Eleventh Plan. However, cultural activities are becoming increasing by important in the modern post industrial knowledge based economy.

Throughout the world they have been recognized as an important component of growth and job creation as well as a vehicle of cultural identity. India exported US $ 4 billion worth of creative services in 2010 at a CAGR of 26 per cent.

As per the report of Ernst and young, the Indian media and entertainment industry is valued at US $ 16.3 billion in 2010 and is projected to grow at a CAGR of 12 per cent in the next four years (2011-14) to reach a value of US $ 26 billion.

Thus services sector has been playing an important role in promoting some valuable social services for overall enrichment of the society. Thus services sector has attained a considerable size and dimension in its forms of activities and has been playing an important role in a highly populous country like India.

However, the outlook and status of the services sector which had once fallen due to the global economic slow-down and financial crisis faced by US, but the same sector has turned its heads towards its revival and growth once again. The growing opportunities in this sector has been generating employment to many across the nation and are also attracting FDIs for attaining success in future.

However, the challenge faced by this sector will be to retain India’s competitiveness in those areas where the country has made a mark viz. telecommunications, IT and ITeS etc. Besides, India has to face another challenge to penetrate into some traditional areas such as tourism, shipping where other countries have already established its mark.

However, India’s potential for success in the sector is very high. Thus these challenges faced by India need to be addressed if the country wants to realize its pipe dream of attaining double digit growth and generating large number of employment opportunities for its growing population in the days to come.

Finally, in a country like India, having a large size of population and presently enjoying the merit of population dividend in the form of growing proportion of working age population, the prospect and potential of the services sector in generating income and employment for its people is quite bright.

Moreover, the growing volume of income and employment generated by services of sector has been working as booster or major force for the other two sectors, viz. industry and agriculture by creating new demand for its product which in turn help these two sectors to attain higher growth.

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