Service Sector in India

Service Sector in India today accounts for more than half of India's GDP. According to data for the financial year
2006-2007, the share of services, industry, and agriculture in India's GDP is 55.1 per cent, 26.4 per cent, and 18.5
per cent respectively. The fact that the service sector now accounts for more than half the GDP marks a watershed in
the evolution of the Indian economy and takes it closer to the fundamentals of a developed economy. 

Services or the "tertiary sector" of the economy covers a wide gamut of activities like trading, banking & finance,
infotainment, real estate, transportation, security, management & technical consultancy among several others. The
various sectors that combine together to constitute service industry in India are:

 Trade
 Hotels and Restaurants
 Railways
 Other Transport & Storage
 Communication (Post, Telecom)
 Banking
 Insurance
 Dwellings, Real Estate
 Business Services
 Public Administration; Defence
 Personal Services
 Community Services
 Other Services

There was marked acceleration in services sector growth in the eighties and nineties, especially in the nineties. While
the share of services in India's GDP increased by 21 per cent points in the 50 years between 1950 and 2000, nearly
40 per cent of that increase was concentrated in the nineties. While almost all service sectors participated in this
boom, growth was fastest in communications, banking, hotels and restaurants, community services, trade and
business services. One of the reasons for the sudden growth in the services sector in India in the nineties was the
liberalisation in the regulatory framework that gave rise to innovation and higher exports from the services sector. 

The boom in the services sector has been relatively "jobless". The rise in services share in GDP has not
accompanied by proportionate increase in the sector's share of national employment. Some economists have also
cautioned that service sector growth must be supported by proportionate growth of the industrial sector, otherwise the
service sector grown will not be sustainable. In the current economic scenario it looks that the boom in the services
sector is here to stay as India is fast emerging as global services hub.
Service Sector of Indian Economy contributes to around 55 percent of India's GDP during 2006-07. This sector
plays a leading role in the economy of India, and contributes to around 68.6 percent of the overall average growth in
GDP between 2002-03 and 2006-07. 

There has been a 9.4 percent growth in the Indian economy during 2006-07 as against a rise of 9 percent in the
same during 2006-06. During this growth in Indian economy, the service sector witnessed a rise of 11 percent in the
year 2006-07 against the 9.8 percent growth in 2005-06. The service sectors of Indian economy that have grown
faster than the economy are as follows: 

 Information Technology (the most leading service sectors in Indian economy)

 IT-enabled services (ITeS)
 Telecommunications
 Financial Services
 Community Services
 Hotels and Restaurants

There has been a 13 percent hike in the service sectors of trade, hotels, transport and communication in India's
economy as compared to the 10.4 percent rise in the previous year. The financial services that comprise of banks,
real estate, insurance, and business services witnessed a rise of 11.1 percent during 2006-07 against the 10.9
percent growth in the previous year. Service sectors including community, social, and personal services experienced
a growth of 7.8 percent during 2006-07 as against 7.7 percent growth in the previous year. 

The service sector of India has also witnessed a remarkable rise in the global market apart from the Indian market. It
has experienced a rise of 2.7 percent in 2006 from that of 2 percent in 2004. The broad-based services in the trade
sector has undergone a large-scale rise. A statistics concerning the growth of India's service sectors are listed below:

 The software services in Indian economy increased by 33 percent which registered a revenue of USD
31.4 billion
 Business services grew by 82.4 percent
 Engineering services and products exports grew by 23 percent and earned a revenue of USD 4.9 billion
 Services concerning personal, cultural, and recreational had a growth of 96 percent
 Financial services had a rise of 88.5 percent
 Travel, transport, and insurance grew by 23 percent

The software services in Indian economy along with the export of products is growing at a massive pace and thereby
witnessed an alarming rise of 35.5 percent and reached a lumpsome amount of USD 18 billion. The IteS and BPO
sectors grew by 33.5 percent and earned a revenue of USD 8.4 billion. The service sector of Indian economy has
been the most high-powered sector in India's economy. It has also been focusing in various investments of late. As
Indian economy is looking forward for more liberalization, sectors like banking are on its way to loom large and
occupy a more significant position in India's economy.

The accelerated economic growth of both India and China in recent years has been a focus of significant policy
discussion and analysis. On one hand, this growth is led by the IT industry in India, and on the other, it is the
manufacturing industry based in China. However,service sector has played a very different role in both the
countries. The share of service sector in India’s GDP is 54% while its share in China’s GDP is 40.7%. Since the
1990s, China and India have witnessed spectacular average annual growth rates of 10.2% and 6.2% respectively
(for the period 1992-2005). In India, service sector has become a dominant contributor, such that the success in this
regard has been called as ‘India’s services revolution’. However, in China, the service sector has lagged behind the
manufacturing sector.
During the 1950s and 1960s, research by Kuznets and Chenery suggested that development would be associated
with a sharp decline in proportion of GDP generated by the primary sector, counterbalanced by a significant increase
in industry and a modest increase in the service sector. Kongsamut (2001) conducted a study on 123 countries and
showed that the sector share given up by agriculture as the economy matures goes more to the service sector and
less to the industry. Furthermore, the modern view also suggests that the share of agriculture declines as the
economy grows with an increase in the service sector, and the share of industry first increases and then stabilizes or
declines. India’s growth trajectory fits in this pattern, quite perfectly. In the four decade period 1950-1990,
agriculture’s share in GDP declined by 25 % while industry and services, both gained equally. The share of industry
has stabilized since 1990 and the entire subsequent decline in agriculture has been picked up by the service sector.
However, we see that despite a considerable decline in the share of agriculture in GDP, there has been no significant
decline in the share of agriculture in employment. On the other hand, the share of services in GDP has risen but with
no increase in the share in employment. As a matter of fact, there has been a decline of 1%. As a corollary, the
employment share of service sector in China has increased steadily since 1978. As a result, China’s service sector
has absorbed relatively much larger labour force than India. In India, the decline in employment has happened due to
an increase in labour productivity over a period of time. This increase has been not due to the increase in relative
capital intensity but due to the concentration of growth of services in sub-sectors which are more dependent on
skilled labour.
The Indian information and technology industry has been the source of much discussion on the successful growth of
a knowledge industry in a largely poor and developing country. IT in India is spread across four key sectors- IT
services, IT enabled services (ITES), software, and e-business. These sectors combine for a 2008 annual revenue
forecast of $87B (NASSCOM) with numerous analysts suggesting higher revenue. Highlighting the rapid growth of IT
in India, software was a small $150MM industry in 1991, but grew to $5.7B in 2000, which is an annual growth rate of
50% (NASSCOM). The public and private sector factors that have contributed to this hyper growth of IT provide
lessons for possible replication in China and other developing countries. One important policy lesson can be that high
tech areas, driven by the market, can pull in global capital even if domestic opportunities are limited. India’s IT sector
growth also provides a fine example of how foreign-born or out of country immigrants provide linkages to capital,
technology and culture to emerging entrepreneurs in the native country.
Software is one of China’s fastest growing service industries. The Chinese software industry is inherently different
than India’s and will likely take different paths. The majority of Chinese software services producers are domestic
companies with domestic consumers. Since software development creates more efficient manufacturing processes,
China’s software industry is in high demand. In addition, more and more Chinese are acquiring personal computers
and mobile phones that require software advances.
Similar to its support of the manufacturing sector, the Chinese government has providedenormous support to the
software industry through tax breaks and high tech development zones. There are currently approximately 53 State-
level, new and high-tech development zones in China, the majority of which are heavily subsidized by the
government. In addition, the government has established 15 national software industrial parks to encourage more
R&D that will contribute to the growth of this sector. These development zones provide infrastructure and facilities for
new companies and hence reduce the overhead costs of these start ups. The majority of the companies that develop
in these zones belong to the service industry. More than half of the approximately 1000 foreign start ups in Shanghai
in 2002 were in the service sector. Perhaps the government’s most important role comes through its support of
national R&D centers in the several dozen research institutes of the Chinese Academy of Sciences (CAS). Many of
the leading software industries have arisen as spin offs from CAS. This is vastly different from India, where the
service sector has succeeded despite the limited interaction of the government. Infact, this can be taken as an
important lesson drawn from the growth of service sector in India; that government role of minimal intervention and/or
reducing the complexity of new business formation is especially important in knowledge industries.
Another major difference between the Chinese and Indian software sector is the fact that the latter is more export
oriented whereas the former serves primarily domestic demand. A mere 5.6% of China’s software industry was
exported in 2000 versus approximately about 70% in India in 1998. Therefore, many of the software companies
currently emerging and contributing to China’s fast growth are not looking outside their borders to continue growing.
Despite China’s vast size, the software industry will be forced to look beyond the borders to continue its growth. Since
software is a global industry, the future and success of the Chinese software industry will in all likeliness depend on
its ability to sell its products in other countries.
One of the drawbacks of the Chinese service sector growth is the constant threat of intellectual property rights
violation. There is rampant piracy which is constantly contributing to the smaller and weaker size of China’s software
firms. Despite the differences in the Indian and Chinese service sectors, most of India’s lessons can be applied to
ensure the success of the Chinese service sector. Both India and China have earmarked two different development
paths. Each has leveraged its strengths to develop its own industries. While India has been hugely successful in its
service sector, it has fallen short of the manufacturing sector. As a result, China looks towards India for lessons
learned and vice versa. To develop its manufacturing sector, India would need to improve its infrastructure, continue
its development of human capital and provide some preferential treatment to increase FDI and foster specific industry
development.

Services account for more than 60 per cent of world GDP and trade in services has grown. As an economy grows,
the proportion of income spent on services increases more than proportionately when compared to income spent on
manufactured items, which, in turn, accounts for a higher proportion of income spent on them as compared to
agricultural items. The demand for services increases as income increases. On the supply side, the share of services
in output also goes up. As the economy grows, firms restructure to use a supply intensive mode of production. This
"splintering" refers to the activity where firms start focusing on core functions and sub-contract non-core functions to
the services sector.

Services are categorized into four different Modes. Mode 1 refers to services supplied from one country to another,
such as international telephone calls and business process outsourcing. Mode 2 relates to consumption abroad
where consumers or firms of one country make use of services in another country. Examples in this category include
medical care, education, and tourism. Mode 3 refers to commercial presence, where foreign companies set up
subsidiaries or branches to provide services in another country. Examples include banking, financial and
telecommunication services. Lastly, Mode 4 refers to movement of natural persons. Examples include IT
professionals, scientists and other professionals, traveling from their own country to provide services in another
country.

The Modes of service delivery and respective share in world trade in services
International trade in services has recorded rapid growth in the recent past. Global exports in commercial services
grew by 10 % and amounted to USD 2145 billion in 2005. It is expected that by 2050 world trade in services will
exceed world trade in manufactured items. Trade in services within Asia went up 14 % for the same year.
Technological developments, demographics, growing globalisation of production processes, and economic
liberalization are the driving forces behind the increasing trade in services. While developed countries still dominate
trade in services, developing countries are catching up fast. Among the top twenty exporters of commercial services
in 2005, five are developing countries with India in the 11th position. In addition, in terms of the share of services
export in total exports, India ranks 1st for the year 2005. India's share in world exports of services has grown from 0.6
% in 1995 to 2.3 % in 2005.

India's negotiating position on services has changed since the Uruguay Round (UR). During the UR, India had
defensive stance on services. The country was one of the prime opponents of the inclusion of services in the ambit of
the multilateral trade negotiations. It was apprehended that any concessions gained in traditional sectors like
agriculture or textiles would be offset by the opening up of the government dominated services such as, banking,
insurance, and telecommunications. However, since the beginning of the GATS 2000 Negotiations and particularly
after the Doha Ministerial in 2001, India has emerged as a leading proponent of the services trade liberalisations at
the multilateral arena.

The change in India's approach towards trade and investment liberalisation in services is clearly due to the growing
importance of the services sector in India's economy and its trade and investment flows in the recent years. India's
services sector recorded an average annual growth rate of 9 per cent in the 1990s, while India's GDP grew at an
average annual rate of 7.5 per cent during the same period. According to the latest RBI Annual Report, in 2005-06,
the services sector has recorded a growth rate of 10.3 per cent, contributing almost three-fourths of the overall real
GDP growth of India. From a mere 28 per cent in 1950-51, the share of services (excluding construction) in the
overall GDP of the economy went up to 53 per cent in 2004-05.

The impressive growth in the Information technology sector has been feasible because of low cost of operations, high
quality of product and services and readily available skilled manpower. The ITES-BPO industry has witnessed
significant growth in 2005-06, driven by increased offshoring by firms in America and Europe. Within ITES service
lines, customer care and finance have been the two fastest growing segments. Apart from these two, some other
important segments in the outsourcing industry include human resources, payment services administration and
content development. While presently customer care remains the largest service line, finance and administration
services are expected to grow significantly over the next few years.

The global ITES and BPO market is growing at around 9 per cent. With the industry structure undergoing change,
established software service companies have entered into ITES-BPO arena driven by factors such as cross selling
opportunities, critical mass and strong balance sheets, end-to-end service offerings. Even as Indian service providers
continue to strengthen their position as providers of Information Technology Outsourcing (ITO) and Business Process
Outsourcing (BPO) services to companies around the world, the possibility now exists for India to add new stream of
services export growth i.e., Engineering Services Outsourcing (ESO).

Most economies are getting increasingly skill-scarce in a relative cost-effective sense, and professionals in India
could meet this gap effectively. Each year, India's universities, technical colleges and other tertiary institutes produce
nearly 100,000 engineering and science graduates. India presently accounts for 28 per cent of IT and BPO talent
among 28 low-cost countries in the world. India has emerged as a major software exporting country with a level of US
$ 23.6 billion in 2005-06, growing at a steady rate of over 30 % in the recent past. While this cost advantage due to
cheap skilled labor and the fluency in English is a major strength for India, the pool is not big enough. Currently only
about 25 per cent of technical graduates and 10 to 15 per cent of general college graduates are suitable for
employment in the offshore IT and BPO industries, respectively. There is a shortfall of nearly 0.5 million qualified
employees in the IT and BPO sector. The potential shortage of skilled labors has already led to an increase in wage.
Wage costs are rising by around 17 - 20 per cent per year. India will need a 2.3 million IT and BPO workforce by
2010 to maintain its current market share.

About the Author:

A fellow at the India Development Foundation, Amir Ullah Khan studied Electronics Engineering at Osmania
University and did his PhD on Intellectual Property issues. After a brief stint with the Indian Civil Services, the
authorhas also worked with LARGE (Legal Adjustments and Reforms for Globalising the Economy) of the UNDP,
Indian School of Finance and Management, Encyclopaedia Britannica India and the PHDCCI.

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India Economy GDP

India's economy is the twelfth largest in the world in terms of market exchange rates. Since liberalization of the
economy in 1991, the economy has progressed towards a market-based system from a regulated and protected one.
The country became the second fastest growing economy in the world in 2008. India Economy GDP growth rate was
6.1% in 2009. 
Gross Domestic Product (GDP) is the measure of a country's economic performance. It is the market value of all the
goods and services produced in a year. GDP can be calculated in three ways namely through the product (or output)
approach, expenditure approach and income approach. The product approach is the most direct one which calculates
the total product output of each class. 

The expenditure approach calculates the total value of the products bought by an individual which should be equal to
the expenditure of the things bought. The expenditure approach calculates the sum of all the producers' incomes
where the incomes of the productive factors are equal to the value of their product. 

In 2007, the Indian economy GDP crossed over a trillion dollar which made it one of the twelve trillion dollar economy
countries in the world. There has been excellent progress in knowledge process services, information technology,
and high end services. But the economic growth has been sector and location specific. 

The trend for India's GDP growth rate are given below

1960-1980 - 3.5% 
1980-1990 - 5.4% 
1990-2000 - 4.4% 
2000-2009 - 6.4% 

Contribution of different sectors in GDP

Below are the contributions of different sectors in the India's GDP for 1990-1991 

Agriculture: - 32% 
Service Sector: - 41% 
Industry: - 27% 

Below are the contributions of different sectors in the India's GDP for 2005-2006

Agriculture: - 20% 
Service Sector: - 54%
Industry: - 26%

Below are the contributions of different sectors in the India's GDP for 2007-2008

Agriculture: - 17%
Service Sector: - 54%
Industry: - 29%

The service sector contributes more than half of India's GDP. Earlier agriculture was the main contributor to the GDP.
To improve the GDP and boost the economy, the government has taken various steps like implementation of FDI
policies, SEZ's and NRI investments.
The GDP growth rate slowed down to 6.1% in 2009. In 2006, the country's trade contributed to around 24% of the
GDP from 6% in 1985. According to Goldman Sachs, India's GDP in current prices may overtake France and Italy by
2020, Russia, Germany and UK by 2025 and Japan by 2035. It is also predicted that Indian economy will be the third
largest after US and China by 2035.

In 2007, agriculture contributed around 16.6% of the GDP. Even though its share has been declining, agriculture
plays a major role in the India's socio economic development. Industry contributes around 27.6% of the GDP (2007
est). The services sector contributed to 55% of the GDP in 2007. The IT industry contributed around 7% of the GDP
in 2008 which was 4.8% in 2005-06. Remittances from overseas Indian migrants were around $27 billion or around
3% of the GDP of India's economy in 2006.

Services Sector Growth Rate in India GDP 

Services Sector Growth Rate in India GDP has been very rapid in the last few years. The Services
Sector contributes the most to the Indian GDP. The Growth Rate of the Services Sector in India GDP has
risen due to several reasons and it has also given a major boost to the Indian economy.

Indian Economy
India gross domestic product (GDP) means the total value of all the services and goods that are
manufactured within the territory of the nation during the specified period of time. 

The Indian economy is the second fastest major growing economy in the whole world with the growing rate
of the GDP at 9.4% in 2006- 2007. The economy of India is the twelfth biggest in the world for it has the
GDP of US$ 1.09 trillion in 2007.

Services Sector in India

India ranks fifteenth in the services output and it provides employment to around 23% of the total
workforce in the country. The various sectors under the Services Sector in India are construction, trade,
hotels, transport, restaurant, communication and storage, social and personal services, community,
insurance, financing, business services, and real estate.

Services Sector contribution to the Indian Economy

The Services Sector contributes the most to the Indian GDP. The Sector of Services in India has the biggest
share in the country's GDP for it accounts for around 53.8% in 2005. The contribution of the Services Sector
in India GDP has increased a lot in the last few years. The Services Sector contributed only 15% to the
Indian GDP in 1950. Further the Indian Services Sector's share in the country's GDP has increased from
43.695 in 1990- 1991 to around 51.16% in 1998- 1999. This shows that the Services Sector in India
accounts for over half of the country's GDP.

The Reasons for the growth of the Services Sector contribution to the India GDP
The contribution of the Services Sector has increased very rapidly in the India GDP for many foreign
consumers have shown interest in the country's service exports. This is due to the fact that India has a large
pool of highly skilled, low cost, and educated workers in the country. This has made sure that the services
that are available in the country are of the best quality. The foreign companies seeing this have started
outsourcing their work to India specially in the area of business services which includes business process
outsourcing and information technology services. This has given a major boost to the Services Sector in
India, which in its turn has made the sector contribute more to the India GDP.

The Services Sector in India must be given boost

Services Sector Growth Rate in India GDP registered a significant growth over the past few years. The
Indian government must take steps in order to ensure that Services Sector Growth Rate in India GDP
continues to rise. For this will ensure the growth and prosperity of the country's economy. 

The services sector has been at the forefront of the rapid growth of the Indian economy.

As per the Central Statistical Organisation (CSO), Ministry of Statistics and Programme Implementation:

 Trade, hotels, transport and communication grew 12.4 per cent in Jan-March 2010 over the corresponding
quarter from a year earlier
 Similiarly, financing, insurance, real estate and business services grew at 7.9 per cent in the fourth-quarter
of 2009-10
 Community, social & personal services grew by 1.6 per cent in the fourth quarter

Indicators

Lead indicators suggest that the pace of expansion in the services sector activity is likely to be sustained.

 Foreign tourist arrivals (FTAs) during January to April 2010 were 19.18 lakh, an increase of 10.6 per cent,
over 17.35 FTAs over the corresponding quarter in 2009
 According to the Telecom Regulatory Authority of India (TRAI), the number of telephone subscribers in the
country reached 621.28 million as on March 31, 2010, an increase of 3.38 per cent from 600.98 million in
February 2010. With this the overall tele-density (telephones per 100 people), touched 52.74
 Cargo handled at major ports during April–March 2010 has been 560.96 million tonnes as against 530.53
million tonnes during April-March 2009
 According to the Central Statistical Organisation, the key indicators of railways, namely, the net tonne
kilometres and passenger kilometres have shown growth rates of 12.5 per cent and 6.7 per cent,
respectively in the third-quarter of 2009-10
 Production of commercial vehicles has projected an immense growth rate of 195 per cent whereas cargo
handled by civil aviation has grown by 19.6 per cent and passengers handled by civil aviation has grown by
22.2 per cent in the third-quarter of 2009-10

According to an HSBC survey, HSBC Markit Business Activity Index, based on a survey of 400 firms, rose to 62.1 in April
2010.The services index has expanded robustly for the twelfth month in April 2010.

Exports

According to World Trade Organisation's (WTO) "International Trade Statistics 2009" released in November 2009, India ranks
ninth in commercial service exports.

According to the Economic Survey 2009-10, services exports reached US$ 102 billion in 2008-09 registering a growth of 12.5
per cent over 2007-08. The miscellaneous services category share has increased by 16.1 percentage points to 76.4 per cent in
2008-09 as compared to 2000-01. While the share of software services increased by 6.5 percentage points to 45.5 per cent, the
share of non-software services increased by 9.6 percentage points to 30.9 per cent in 2008-09.
According to the Department of Information Technology, the share of information technology enabled services (ITeS) and
business process outsourcing (BPO) exports has expanded. The total ITeS-BPO exports is estimated to have risen from US$ 1.5
billion in 2001-02 to US$ 12.7 billion in 2008-09, a CAGR of about 39.2 per cent. BPO now accounts for about 27 per cent of
total exports.

Investments

According to data released by the Department of Industrial Policy and Promotion, the services sector (financial and non-
financial) attracted foreign direct investments (FDI) worth US$ 4.4 billion between April and March 2009-10 while the
cumulative FDI between April 2000 and March 2010 has been US$ 23.6 billion, accounting for 21 per cent of the total FDI
inflow.

Some of the investments in the service sector include:

 Tata Consultancy Services (TCS), the country's largest software exporter by revenue, was awarded a
contract in March 2010 to administer the UK's National Employee Savings Trust (NEST) scheme's
administered services under a 10-year deal, worth around US$ 906 million.
 Aditya Birla Minacs, the information technology business solutions firm, has acquired UK-based Compass
BPO, a finance and accounting (F&A) services provider
 India's largest back office firm, Genpact, has acquired US-based analytics and data management services
provider, Symphony Marketing Solutions (SMS)