Context: Indian economy has experienced good growth over the last two decades primarily due to the contribution of service sector. The service exports are more than $300 billion forming around 40% of total exports. The service exports have evolved both in terms of their size and composition over the time. In this context, let us discuss how the service sector is contributing to India’s GDP and exports , its significance to the overall economy , the challenges faced by the sector and strategies to be adopted.
With a share of 55% to GDP and 30% to employment, Services sector remains major driver of Indian Economy. India’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, professional services, Tourism etc.
Significance of the service sector
- Major Driver of Indian Economy as it accounts for 55% of India’s GDP.
- Promotes development of Manufacturing sector by providing services such as logistics, banking, electricity, communication etc.
- Promotes development of Agricultural sector by providing extension services, marketing services etc.
- Enhances Total factor productivity of the economy by providing technological services and enhancing efficiency of workers.
- Promotes Ease of Living by providing services such as Education, Health, Banking, Insurance, Telecommunication, Transportation etc.
- Promotes Integration of Indian Economy with Global Economy: For example, India is among the Top 10 exporter of services with global share of 4%. Similarly, services account for 40% of exports.
Reasons for growth in service sector
- Structural Transformation: India has leap frogged from Agriculture to Services sector. Since 1991, the share of manufacturing sector has remained stagnant at 16- 17% of GDP. Hence, decline in share of agriculture sector is accompanied by commensurate increase in share of services sector.
- LPG Reforms offered more opportunities for the development of services sector particularly in the field of Banking, Insurance, Telecommunication, Aviation, Transportation etc. For example, sectors that were opened for private sector participation experienced faster growth.
- Technological Advancements led to rapid development of IT/ITeS, BPO, Financial services etc. Similarly, Industrial Revolution 4.0 is also based upon adoption of new- age technology such as AI, ML, Big Data etc.
- Structural changes in Agriculture and Manufacturing which has led to increased demand for services such as Transport, Storage, Warehousing, Trade, Banking, Insurance etc.
- Trade Integration has enabled India to become Top 10 exporter of Services with global share of 4%. Similarly, services account for 40% of exports.
- Proactive Government policies such as Services Export from India Scheme, Digital India Program, PMJDY, Ayushman Bharat, PM Kaushal Vikas , UPI, Open Network for Digital Commerce etc.
- Low employment potential of service sector: Despite being the major contributor towards overall economic growth of the country, service sector offers little to the employment. This is primarily because:
- Increasing service output is predominantly due to increased volume of trade, primarily due to high volume of Indian imports, which has low employment potential. E.g., Imports of goods and services to percentage of GDP in India increased from 13.9% in 2000 to 26.9% in 2022.
- Although tourism services offer prospects for job creation, the segment is plagued by infrastructural issues and its potential remains untapped.
- Growth of IT/ITeS is mainly due to increased labour productivity and technological revolution.
- Even the segments like Real-estate offer low-skilled, low-paid and seasonal employment.
- Uneven growth of different sub-sectors: Services sector is mainly dominated by IT- BPM and Financial services, while other sub-sectors such as Tourism, Transportation, Communication have registered lower growth.
- Market access barriers imposed by other countries in the form of lack of market access to India’s service exports, restrictions on free movement of Indian professionals, Visa restrictions, withdrawal of GSP benefits etc.
- Free Trade Agreements (FTAs)/CECAs: As highlighted by Surjit Bhalla Committee on FTAs, India has failed to capitalise on its strengths in services sector to boost exports to FTA partner countries.
Sector specific issues
- IT-BPM / Software Sector: Tightening of Visa regime, Global slowdown, Higher skill sets, Increased competition from Latin American countries etc.
- Banking: Dominance of PSBs; Political interference in working of PSBs; High NPAs etc.
- Real Estate services: Delay in approvals of permits; high land registration costs including stamp duty; rising debt levels and NPAs; lack of skilled workforce.
- Tourism: Poor Infrastructure and connectivity, Lack of basic amenities, Safety and security etc.
A ‘Services from India” initiative on the lines of ‘Make in India’ is needed to strengthen our services sector. There is also a need to make the Service Export Promotion Council (SEPC) more active.
This council should also network with the Indian missions abroad to boost exports. At the same, India’s FTAs need to be renegotiated to its advantage to provide fillip to services sector.