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.
Facts:
- Share of Services Sector to India's GDP: 55%
- Share of Services sector to Employment: 30%
- Share of Services in overall Exports: 40%
- Share of Services in overall FDI: 66%
Significance of Services 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 credit, 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 Services 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.
- Liberalisation of FDI norms by the Government in the field of E-commerce, Insurance, Telecommunication, Aviation, Real Estate etc. has led to entry of foreign firms and enhanced competition in services sector.
- Increase in income levels and rapid urbanisation has led to increased demand for services such as Education, Health, Banking, Insurance etc.
- Proactive Government policies such as Services Export from India Scheme, Digital India Program, PMJDY, Ayushman Bharat, PM Kaushal Vikas Yojana, UPI, Open Network for Digital Commerce etc.
Concerns and Challenges associate with Service Sector
- Low Employment Elasticity: The phenomenal growth in the service sector has not been accompanied by growth in employment. The reasons for such a phenomenon can be attributed to:
- High Labour Productivity: Increase in contribution of services sector has been due to increase in labour productivity rather than increase in employment. The higher labour productivity in the services sector is due to highly skilled work force, greater adoption of technology and increased use of capital.
- Decrease in employment elasticity in sectors that are faster growing sectors such as Financial Services, Professional services, Trade etc.
- Slow growth of employment generating sectors such as Tourism, Hotels and Restaurants, Transportation etc.
- 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.
Way forward
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.