6.

SERVICES

6.1 Introduction

The calendar year 2009 has ended on a positive note for services sector, with the sub
segments reporting signs of buoyancy especially during last couple of months. This can be
gauged looking at the performances of various service sector indicators (Table 6.1) during the
fiscal year so far. Tourism operations geared up mainly due to on-going peak season which saw
increased tourist inflow as also the foreign exchange earnings, thanks to economic rebound in the
domestic as well as foreign markets. While passenger and cargo movements at domestic
terminals posted drastic improvements, those at international terminals saw decelerating trend.
However, most of the airlines experienced enhanced occupancy levels and yields.

Table 6.1: Select Indicators of Services Sector Activities

(Growth rates in %)
Latest Period^ Full Financial Year
Major Sectors
2009-10 2008-09 2008-09 2007-08 2006-07
1 Tourism (April-December)
Tourist arrivals (numbers) 1.2 3.0 -2.5 12.8 13.8
Foreign exchange earnings (US $) 10.9 1.0 -9.6 27.9 16.2
2 Transport
Automobiles (April-December)
Commercial vehicles production (numbers) 15.1 -16.0 -24.0 5.6 33.0
Passenger vehicles production (numbers) 24.6 4.9 3.4 15.0 18.0
Commercial vehicles domestic sales (numbers) 22.3 -15.5 -21.7 4.9 33.3
Passenger vehicles domestic sales (numbers) 23.8 -0.5 0.1 12.3 20.7
Railways (April-November)
Railway revenue earning freight traffic (tonnes) 7.4 6.5 4.9 9.0 9.2
Shipping (April-November)
Cargo handled at major ports (tonnes) 4.1 4.5 2.1 12.0 9.5
Civil Aviation (April-October)
Aircraft Movement at international airports 4.6 12.3 8.8 15.3 12.9
Aircraft Movement at domestic airports -1.1 2.2 -2.2 22.9 33.1
Cargo handled at international terminals (tonnes) 0.7 5.9 0.2 12.3 11.0
Cargo handled at domestic terminals (tonnes) 15.0 0.7 -3.6 7.3 9.5
Passengers handled at international terminals (numbers) 6.6 9.8 5.9 15.7 15.2
Passengers handled at domestic terminals (numbers) 9.5 -7.7 -11.2 23.3 38.5
3 Communication (April-October)
New cell phone connections (numbers) 52.4 24.2 36.1 44.7 58.6
4 Banking and Finance*
Aggregate deposits (Rs crore) 11.2 13.4 19.9 22.4 23.8
Non-food credit (Rs crore) 9.0 12.1 17.8 23.0 28.5
5 Public Administration (April-October)
Central government expenditure (Rs crore) 25.8 20.1 23.7 P 15.5 17.5
Notes: ^: latest available period specified against each indicator, P: Provisional
* Refers to scheduled commercial banks and the figures are as on January 01, 2010.
Sources: Data are taken from respective ministries or other government authorities and CMIE

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 While, production and domestic sales of the commercial vehicles as well as passenger
vehicles recorded double-digit growth each due to rising demand from upper-middle class
populace. Growing demand from rural and semi-urban regions coupled with declining tariff and
prices of hand-sets triggered acceleration in new cell phone connections.

The following sections provide an analytical review of the performance of important sub-
segments of the services sector.

6.2 Tourism

Tourism sector has been one of Table 6.2: Trend in Tourism Sector Growth
the pivotal segments of the services Foreign Tourist Arrivals Foreign Exchange Earnings
Year
(million) % Change (US $ million) % Change
sector. In the past ten years, India has 2000 2.65 (6.7) 3460 (15.0)
2001 2.54 (-4.2) 3198 (-7.6)
witnessed increasing number of inbound 2002 2.38 (-6.0) 3103 (-3.0)
2003 2.73 (14.3) 4463 (43.8)
tourists and swelling amounts of foreign 2004 3.46 (26.8) 6170 (38.2)
2005 3.92 (13.3) 7493 (21.4)
exchange earnings with compound annual
2006 4.45 (13.5) 8634 (15.2)
growth rates (CAGRs) 10.5% and 18.6%, 2007 5.08 (14.3) 10729 (24.3)
2008 5.28 (4.0) 11747 (9.5)
respectively, for the period between 2000 2009 5.11 (-3.3) 11394 (-3.0)
Source: Annual Report 2007-08, Ministry of Tourism
to 2009 (calendar years). A glance at y-o- and www.tourism.gov.in
y variations in growth of the above mentioned parameters (table 6.2) indicates that tourism
activities remained buoyant during 2003 to 2007 on the back of weak performance posted in the
preceding two years each. The year 2008 marked a slowdown in the overall tourism activities,
especially in the second half of the year, mainly due to cascading effects of recession prevailing
in global as well as domestic market. Mumbai terror attacks, towards the end of 2008, came as
another hit followed by travel advisories issued by the source markets (viz. U.S., U.K., and
Europe) against India. The situation got worsened with the outburst of the HINI virus and is
reflected during the first half of 2009 when y-o-y growth rates for inbound tourists as well as for
foreign exchange earned turned negative.

However, signs of economic recovery started rolling up since July 2009 followed by the
onset of peak tourist season in the country, which boosted tourism activities during rest of the
period (Chart 6A). Overall, the calendar year 2009 witnessed 5.11 million foreign tourist visiting

36
 Chart 6A: Performance of Tourism Sector in 2009 India showed a decline of 3.3% y-o-
Tourist Arriva l Forex Ea rned y. The corresponding growth rate for
45.0

35.0 the previous year was 4% with

25.0 number of tourists arrived in the
Growth in %

15.0 country standing at 5.28 million. The

5.0 growth rate of foreign exchange
-5.0 earned in USD terms during 2009 has
-15.0 declined by 3.0% to US $11.39
-25.0 billion as compared to an increase in
-35.0 earnings (9.5%) seen in 2008.
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
However, in rupee terms, earnings
observed a positive growth of about 8% to touch Rs 54960 crore during 2009.

The noticeable fact was that the foreign tourist arrivals in December 2009 increased by 21% (to
6.46 lakh), the highest positive growth registered in any month of 2009. Similarly, during
December 2009, the earnings have also been higher at US $1510 million as compared to US
$1046 million in December 2008.

Hospitality

Videocon group is making a foray into the hospitality business. The group plans to set up
a hotel at its upcoming Rs 900 crore IT Park at Salt Lake in West Bengal, that will primarily
cater to the IT and ITeS sector. Following the same wave, Kishore Biyani-led Future Group is
also planning its entry into hotel business and may set up its first hotel at Raipur in the next six
months providing its customers with indigenous food.

6.3 Aviation

Aviation sector exhibited signs of recovery at the end of the calendar year 2009 driven by
improved yields or net revenue per seat and load factors in the last three months.

The sector suffered a massive turbulence since past two years when passenger traffic
dipped, operating cost shot up due to higher oil prices and fares slipped to very low levels on
sagging demand and competition. What have been peculiar for the year 2009 are strikes, losses

37
and crashes. To survive through the recessionary spiral, the airlines resorted to cost cutting
measures and sacked their employees, which gave rise to rounds of employees’ protest and
strikes at the beginning of the year. Two of the country's biggest airlines—Jet Airways and Air
India— were literally grounded when their pilots went on strike in 2009 and suffered big losses,
bringing forth the issue of manpower management in an industry.

Another fall out of the cost cutting measures is almost 25% fall in the aircraft capacity, as
many of them shifted to an all economy model. Jet Airways launched Jet Konnect while
Kingfisher increased the number of economy seats in its airline. Ultimately almost 70% of the
capacity in the sector was in the economy segment.

Barring only two carriers -- IndiGo and Paramount -- all scheduled airlines continued to
post huge losses. Air India's financial troubles saw the government coming to its aid and
allocating Rs 800 crore (Rs 8 billion) as the first tranche of equity infusion in the national carrier.
It also approved a Jet Airways proposal to raise $400 million from foreign institutional investors.

Modernisation work at metro and non-metro airports continued, but imposition of

development charges and hiking of airport charges by private airport developers at some major
airports came under criticism. The pace of work on upgrading and modernisation of 35 non-
metro airports slowed down due to a decline in air traffic, with only nine expected to be
completed by March. Work on another five airports is likely to be completed by 2010-end and
the remaining 26 by 2012.

With the economy rebounding, cash-stripped airlines got some relief, following pick-up
in passenger growth, increased flight occupancy, airfares. The calendar year 2009 ended with air
passenger traffic registering an increase of 7.9% over the previous year’s decline of 5%.
Passenger traffic rose to 445 lakh in 2009 from 412 lakh in 2008. The month of December saw a
whopping 33% increase with 44.8 lakh people flying within India against 33.7 lakh in December
2008.

Kingfisher, which has reduced capacity dramatically, last year, lost the market leader slot
to Jet Airways. Jet airways combined with Jet Lite ended 2009 with a 25.4% market share,
followed by Vijay Mallya's Kingfisher at 23.9%. Air India-domestic finished third with 17.5%
share. Budget carriers's position remained unchanged with IndiGo leading the pack with 13.9%
share, followed by SpiceJet at 12.4% and JetLite at 7.5%.

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 An industry expert opined that the average load factor of airlines is ranging between 76-
78% in the quarter ending December 2009 compared with 70% in the quarter ending September
2009, while yields are higher by 15-20% over the same period.

The Centre for Asia Pacific Aviation in its report has asserted that 2010 should be a more
positive year for Indian aviation, provided that the airlines can remain disciplined on costs. The
report expects private carriers such as Jet Airways, SpiceJet, Kingfisher Airlines Ltd. and Indigo
Airlines to post a total profit of 250 million dollars to 300 million dollars in the next fiscal year
starting in April 2010, while Air India would continue to be in red.

6.4 Retail

The calendar year 2009 remained a challenging one for the domestic retail sector, as
consumers held back big spending, forcing some companies to restructure finances and some
companies to postpone their expansion plans. The year started with Chennai-based retailer
Subhiksha Trading Services Ltd going bankrupt, downing the shutters of all its 1,600 odd stores
across the country due to severe liquidity crunch with over 5,000 employees lost their jobs and
finally it sought a corporate debt restructuring (CDR) exercise. With debt mounting to Rs 730-
crore, Delhi-based supermarket chain Vishal Retail also went in for a CDR in November 2009. It
has been reported that the country's largest retailer, Kishore Biyani-promoted Future Group, was
forced to downsize and restructure of its operations and merged them under six verticals. So was
the case with Reliance Retail. Overall, the sector was in a state of despair for most of the months
in 2009, though last quarter saw confidence in the business returning with the general recovery in
the economic activities.

A MasterCard Worldwide Index of Consumer Confidence survey has revealed that 21 of

the 24 markets polled across Asia Pacific, West Asia and Africa reflected positive consumer
sentiment for the next six months, as the global economy is expected to recover (Table 6.3). The
index is based on a survey which measures consumer confidence on prevailing expectations in
the market for the next six months based on five economic indicators: Economy, Employment,
Stock Market, Regular Income and Quality of Life. The Index score is calculated with zero as the
most pessimistic, 100 as most optimistic and 50 as neutral. The latest survey was conducted from
1 October to 9 November 2009 and involved 10,623 consumers from 24 markets.

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 Table 6.3: MasterCard Worldwide Index of Consumer Confidence
H2 H1 H2 H1 H2 H1 H2 H1
Markets 2009 2009 2008 2008 Markets 2009 2009 2008 2008
Asia/Pacific 66.3 38.7 47.4 56 Vietnam 90 60.9 88.1 86.2
Total
Australia 69.5 24.1 49 42.8 74.5 53.9 74 68.2
Middle East
China 85.3 60.8 76.6 82.7 Egypt 59.5 32.3 55.6 32.3
Hong Kong 60 24.7 41.8 83.1 Kuwait 70.9 49.5 96.6 89.4
India 68.8 68 63.9 82.1 Lebanon 55.4 64.4 69.1 32
Indonesia 67 49.2 38.5 36.7 Qatar 89.2 71.4 76.2 88.6
Japan 24.4 21.5 17.2 29 Saudi Arabia 83.2 67.1 72.4 80.1
South Korea 59.8 28.8 31.4 27.7 U.A.E. 86.1 29.6 75.4 85.4
Malaysia 66.3 27.8 35.9 36.9 Total Africa 66.4 NA NA NA
New Zealand 69.7 21.5 33.7 37.1 Kenya 47.9 NA NA NA
Philippines 49.7 40.5 40 43.2 Morocco 66.1 NA NA NA
Singapore 79.4 31.2 62.3 87.3 Nigeria 89.4 NA NA NA
Taiwan 56.5 39.4 32.1 71.3 South Africa 59.8 67.3 78.7 74.3
All 24
Thailand 55.3 23 26.2 23.7 69.1 44.1 56.9 67.2
Markets
NA: Not Available
Source: www.masterintelligence.com

Chart 6B: Mastercard Worldwide Consumer

The Asia/Pacific region saw an
Confidence Index
Optimistic
increase in its consumer confidence index 100.0
India Asia- Pacific Region
90.0
score from six months ago (66.3 up from
80.0
38.7) (Chart 6B). Vietnam (90.0), China 70.0
60.0
(85.3) and Singapore (79.4) reflected Neutral 50.0
significantly higher consumer confidence 40.0

compared to other markets in the region. 30.0

20.0
Most markets showed increased confidence 10.0
in their Employment outlook, particularly 0.0
Pessimistic 2007 2007 2008 2008 2009 2009
Vietnam and Singapore, which topped the H1 H2 H1 H2 H1 H2

region for confidence in this indicator.

Consumers in India continued to be optimistic. They are slightly more optimistic than six
months ago (68.0) and a year ago (63.9). Consumer sentiments have gone up on three economic
indicators. Consumers are more optimistic about employment, the stock market and regular
income. However, outlook on the other indicators like economy and quality of life has declined
from six months ago (Chart 6C). Both Mumbai (79.1 against 61.7) and Chennai (95.2 against

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61.3) have reported that the consumer have become more optimistic than they were six months
ago. New Delhi (49.4 against. 79.3) has experienced a dip in consumer confidence score. A new
market, Bangalore (47.2), is added to the list of markets surveyed in India.

Big retailers such as

Chart 6C: Mastercard Consumer Confidence
Index - India: Economic Indicators H1 Bharti-Wal-Mart, Carrefour and
H2 Reliance are going all-out to build
Employment 60.0 a high-quality supply chain. The
66.9

Economy 67.2 retailers are not only teaching

66.7
70.0 innovative farming methods but
Regular Income 70.5
also trying to find the best
Stock Market 68.3
70.0
suppliers among the lot. It has
Quality of life 74.5
69.8 been reported that Carrefour,
0.0 20.0 40.0 60.0 80.0 which is sourcing field-fresh
vegetables worth $170 million
from India, has trained 1500 number of farmers in northern India in the last six months alone.
Bharti Wal-Mart also has provided training on post-harvest technology and is aiming to help
farmers grow high-quality vegetables and fruits with assistance from the company at each stage
of cultivation. Reliance Retail, similarly, has trained farmers in the northern and western parts of
India. A Reliance spokesperson has informed that the company is currently working with nearly
one lakh farmer families across 4,000 villages in India.

Delhi has emerged as the top e- commerce hub in the country, according to a study by
eBay India, the Indian arm of the global online auction site eBay, followed by Mumbai, Chennai,
Jaipur and Bangalore. In the domestic transactions space, technology buying and selling was a
priority area accounting for 44% of the overall transactions that took place. Internationally,
shopping for lifestyle products from Indian markets accounted for 64% of sales. The study also
found that the country has 226 export hubs through which Indian entrepreneurs sell a variety of
products to millions of eBay customers in 172 countries across the globe. It found that south
India dominated with 41% of the total e- commerce deals, followed by western states. In the
urban domestic markets, buying BlackBerry and dual SIM phones were two dominant activities,
while Tier- II cities witnessed an upsurge in the sale of touch-screen handsets. Places such as
Jaipur and Ahmedabad emerged as significant entrepreneurial hubs. Internationally, buyers from

41
the US, UK, Spain, Germany and Canada, evinced keen interest in buying items such as horse
saddles, golf clubs and home-decor articles from India. Belly dancing dresses were bought in
large numbers from Delhi by e- buyers in Brazil. Globally, eBay transactions earned revenues
worth US $60 billion with the US contributing 45% of the overall sales.

6.5 Real Estate

The Brihanmumbai Municipal Corporation (BMC) has proposed a 135% increase in

charges levied for scrutinising all construction-related proposals in order to cover-up the losses
accrued due to recession induced slump in the property market, and also on account of hike in
salaries after the pay panel revision, in turn attaining its revenue targets. The hike will apply to
all categories, including proposals for constructing new buildings, those proposing addition,
alteration and change of use for the existing ones, and plans for revalidation of amended plans.
The scrutiny fee for residential properties will increase to Rs 330 per 10 sq. m. from Rs 140 per
10 sq. m, while for a commercial plan the amount is set to go up to Rs 660 per sq m from Rs 280
per 10 sq m. The BMC also plans to increase the annual charges levied on validation of any
project’s intimation of disapproval (IoD), commencement certificate (CC) and occupation
certificate (OC). The charges for residential buildings are Rs 1,400 at present, and they will be
doubled to Rs 2,800. The impact of the proposed hike will be magnified by a decision to include
areas that are free of floor space index (FSI) -- including balconies, staircases, common passages
and stilt parking -- while computing the scrutiny charges, since these FSI-free components
account for 25% of the built-up area as cited by Sunil Mantri, vice president, Mumbai Chamber
of Housing Industry (MCHI). Experts are apprehensive about present hike getting reflected in the
increased property rates holding up the construction activities that have started gearing up in the
recent past. Meanwhile, the civic body has justified the decision by claiming that the charges
were last hiked in 1995.
Table 6.4: Fall in Rentals of
The real estate consultants Cushman & Office Space in 2009 (in %)
Lower Parel 40
Wakefield India in its review report of the office Bandra, 31
space market in 2009 has observed 38% fall in Worli 29
Nariman Point 25
the absorption over the last year. Out of the total Delhi 3-26
Source: Cushman and Wakefield Report, Media

42
supply of office space of 10.6 million sq ft at the beginning of the year (which was 12% increase
over 2008) only 5.3 million sq. ft was absorbed and that too comprised of pre-commitments
signed in the previous years and not the fresh one. The report has also pointed out declines in
rentals among all the micro-markets as shown in table 6.3. Most micro-markets across the
country witnessed 15-25% decline in rentals in 2009 over last year. The last quarter though has
seen rentals stabilising, except in few locations such as Mumbai’s Lower Parel which saw the
highest fall in rentals by 40% in the past year. The major cities across the country together, as per
the report, has seen 26.3 million sq.ft commercial space absorption in 2009, 29% drop from last
year’s 37 million sq.ft. This can be attributed to conservative leasing approach adopted by IT/
ITES sector (which accounts for majority of commercial office space taken up (60%) in the
country) during economic slowdown and also to the denotification orders received by some of
the SEZ developers.

According to a joint analysis by SundayET and PropEquity, a real estate data analytics
and research firm, out of 822 projects across 13 major cities around 41% or 333 projects
witnessed a price hike during the last six months. The prices remained unchanged for around 322
or 39% of the total projects, whereas, there was a decline in prices of remaining 167 projects.
The 13 cities include Ghaziabad, Gurgaon, Delhi, Noida, Faridabad, Greater Noida, Bangalore,
Pune, Thane, Navi Mumbai, Mumbai, Chennai and Hyderabad. The analysis was based on
available residential projects in the affordable housing segment i.e. under Rs 30 lakh price
category across these cities. The analysis compares city-wise change in project pricing over the
period March-April 2009 and September-October 2009 for affordable housing projects. In the
affordable segment, the maximum prices increase took place in Mumbai. The average price of
projects went up by around 23%. Out of 85 projects in this segment in Mumbai, prices of as
many as 53 projects increased. There are eight projects where there has been more than 15%
price rise during the last six months. Thane and Navi Mumbai follow closely at second and third
position respectively as far as highest price rise is concerned. In Thane, prices went up by around
14%, whereas, Navi Mumbai witnessed an increase of around 12%. While in Thane, 35 out of a
total of 47 projects witnessed a price rise, in Navi Mumbai 21 out of the 36 projects registered an
increase in prices. Gurgaon, Bengaluru, Faridabad and Pune saw prices going up in the range of
8-11 %. Hyderabad saw an increase of around 7% in this category while Chennai recorded a

43
price rise of approximately 4% in the affordable housing projects. Interestingly, there is no price
rise in projects based in Delhi, Noida and Greater.

According to World Bank report on Migration and Development Brief, India has seen the
highest amount of migrant remittance flow among 130 countries surveyed followed by China
and Mexico. An estimated 25 million NRIs living in 130 countries have remitted US $52 billion
in India so far this year. Global slowdown, job losses and unviable job offers are cited as the
major factors responsible for this trend. According to housing finance companies and banks
disbursing home loans to NRIs/PIOs in Dubai, there has been a sudden surge in demand for
residential property across Indian cities and particularly for tier II cities in the wake of the
economic slowdown in the emirate.

A study conducted by PricewaterhouseCoopers (PwC) and Urban Land Institute, based

on the opinions of over 270 international real estate professionals, including investors,
developers, property company representatives, lenders, brokers and consultants, has found that
India leads the pack of top real estate investment markets in Asia for 2010. Residential properties
are viewed as more promising than other sectors and Mumbai, Delhi and Bangalore are the top
three preferred choices in the hotel purchasing segment. The study has also reported that distress
sale in Asia had been relatively minimal, unlike those in the US and the Europe due to several
factors, including a relative abundance of liquidity; low loan-to-value ratios, leaving borrowers
less vulnerable to loan servicing problems when the prices declined.

It has been reported that the investigation department of the ministry of finance has found
that the real estate sector has been holding the highest quantum of unaccounted money, around
Rs 2,000 crore, during the last financial year. The total amount of black money unearthed has
been over Rs 4,500 crore during the last financial year.

6.6 Summing Up

Services sector activities have picked up the pace thanks to indirect impact of stimulus
packages and the rebound in domestic and foreign markets reviving consumer confidence and
demand in the domestic economy. The sector is likely to recover at a faster rate triggered by
manufacturing growth and pick up in export demand.

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