Unit 3.

6: India’s Services Sector

Q. The services sector has outperformed other sectors of the Indian economy and it has
contributed significantly to India's integration into the global economy and trade surplus.
Discuss. Mention the recent trends in FDI in services and services related trade agreements in
recent times.

INTRODUCTION

The services sector is the dominant sector in India’s GDP which accounts for over 50 percent
share currently. It has attracted significant foreign investment, has contributed significantly to
export, and has provided large-scale employment. After the worst financial BOP crisis of 1991,
the Indian economy went through major reforms both on the macroeconomic and structural
end with the liberalization of trade, FDI, and Industrial Policies. Structural reform took place
with a devaluation of the rupee in two stages, on 1 July and 3 July 1991. This was accompanied
by a major liberalization of trade policy. Having the most restrictive import policy in the world,
the import of consumer goods was not completely liberalised under the new policy, however,
almost all intermediate and capital goods did. The liberalization of the economy proved to be
the key factor in putting India on a higher growth trajectory, with the compound annual growth
rate rising from 5.7 percent in the 1990-2004 period to 7.5 percent in the 2005-16 period and
making India one of the fastest-growing economies in the past two decades. The external sector
performance was remarkable since post-liberalization, with the increase in world trade and FDI
share of the Indian economy.

Traditionally, services sectors have been subject to heavy government intervention. Public
sector presence has been clearly visible in the key sectors of insurance, banking, and
telecommunications. Nevertheless, considerable progress has been made toward opening the
door wider to private-sector participation, including foreign investors. The Indian service
sector has been the largest and fastest-growing sector in recent year which have played a key
role in improving economic performance by accelerating the overall economic growth.
Services like Information technology (IT) and business process outsourcing (BPO) with their
amazing growth and export have placed India on the global map and also helped improve
productivity and competitiveness in every sector of the economy.
TRENDS IN THE SERVICE SECTOR

• Analysing the trends, the Indian service sector has exhibited phenomenal growth rates
during the 1990s and 2000s.
• In (CAGR) term there has been a consistent rise from 6.2 to 7.3 during the 1980s
to1990s and further to 8.7 percent during 2001-16 period.

COMPARING WITH OTHER SECTORS

• Comparing with other sectors like agriculture and industry have exhibited mixed
performance, where CAGR in agriculture exhibited a declining trend from 3.5 in 1980s
to 2.9 percent during 1990s and 2001-16 while industry sector registered a decline in
its CAGR from 7.9 to 6.3 and then rising to 7.3 percent in 2001-16 period.
• Speaking in average annual growth term, services growth has decelerated from 10.1
percent in 2005-09 to 7.9 percent during 2010-16 but however exceeding the overall
growth and that of the other two sectors.
• Growth performance within the service sector has, however, been uneven. The key
driving segments are communication, banking and insurance, construction, and trade
and distribution services, which marks a growth of 7 percent during the 2000-09 period,
while services such as railways and public administration grew at less than 4 percent.
• Range of services has widened, including air transport, public administration, real
estate, professional and other services, alongside trade and distribution,
communication, and financial services which have maintained high rates of growth.
• Transport and communication services have consistently registered the highest growth
rates within the services sector while services like construction witnessed a decline in
growth, from an average growth rate of over 8 percent in 2005-10 to 4.2 percent in
2011-16.
• There has been a shift of ratios in the share of GDP from 30 percent decline of
agriculture sector to a 23 percent increase of the service sector between 1990- 2016.
The high growth rate of services has contributed to the sector's rising share in the overall
economy

IN CONTRAST WITH OTHER DEVELOPING ECONOMIES

• If we further try to compare the growth pattern of the Indian economy with different
developing economies, it has been observed that a decline in the share of agriculture
 has been followed by a corresponding rise in the share of industry, in particular
manufacturing, and then later in services whereas in case of India there has been a direct
leapfrogging from the primary to the tertiary sector.
• The service sector contribution share in GDP increased by 10 percent but the growth
was not remarkable in terms of employment level which in turn had aftereffects of
lower total output and employment elasticity, indicating that the growth has mainly
been based on productivity gains and technological improvement.

TRADE IN INDIA’S SERVICE SECTOR

• The export of services is channelled through all the four modes of service trade as per
the GATS classification
• India’s main service exports were in the field of software services apart from that India
has been among the top five source country for temporary skilled workers and
professional service providers.
• India's services exports have steadily grown from a mere $2.9 in 1980 to $16.7 to
$183.9 billion in 2017 whereas imports have also risen significantly, from $2.9 billion
in 1980 to $10.2 rising to $154 billion in 2017.
• In CAGR terms, India's services exports grew the most rapidly among all countries at
11.1 percent over the 2005-17 period. The share of services in India's total exports has
risen from 18.1 percent in 1995 to over 37.7 percent in 2017. These trends highlight the
export-oriented nature of services growth in the Indian economy
• Rapid growth in services trade has strengthened India's grip of the world services
market over the past two decades, reflecting India's growing competitiveness in global
services, especially in the post-2000 period.
• India's share in world services exports has risen from less than 1 percent in the 1980s
and 1990s to 1.9 percent in 200, 2.9 percent in 2010, and 3.44 percent in 2017. Its share
in world services imports has similarly increased from 0.7 percent in 1990 to 2.3 percent
in 2005 and further to nearly 3 percent in 2017.
• India's services exports have in general grown much more rapidly than its merchandise
exports. Further, India's penetration of the world services markets not only exceeds that
for goods but has also risen more rapidly, particularly in the latest decade.
• Applying the comparative advantage theory in service versus goods shows an increase
of 50 percent in (RCA) for services in the period between 1990 and 2017. Also, there
 has been a shift in the structure of India’s service export away from traditional services
such as transport and travel towards other commercial services.

IT-BPO SERVICES

• The computer and information service segment as mentioned earlier had played a very
crucial role in India’s integration with the world economy. India’s IT-BPO exports
consist of varieties of services like banking and finance services industry, telecom,
manufacturing, retail, healthcare, and travel and tourism.
• IT-BPO services industry increased from 70 $ bn or 6 percent of GDP in 2009 to 152$
bn in 2016-17 or 8 percent of GDP.
• The IT-BPO industry accounts for approximately 3.7 million jobs.
• The industry is highly export-oriented, where the US has been the most important
market for India.

FDI AND TRADE AGREEMENT

• Average share of services in FDI rose from 10.5 percent for the 1990-94 to 28.3 percent
during the 1995-99 period & registered a CAGR of 36 percent between 1992/93 and
2001/02 and of 36.7 percent between 2006 and 2009.
• Service sector FDI has grown more rapidly than manufacturing FDI, with a CAGR of
28.4 percent between 2013/14 and 2017/18 compared to a mere 2.1 percent CAGR for
manufacturing FDI over this same period
• The main areas of FDI inflow are communication, business, and financial services.
• Important areas of FDI export include IT, restaurants and hotels, and construction,
Indian firms have increasingly emerged as exporters of capital.
• Recent FDI approvals include the development of bullet train by Japan, Amazon India's
expansion in the logistics space, and Google's investment plans in internet services
• Outward FDI from India has increased in the 2000s with services accounting for a
growing share of these outward FDI flows.
• The main outward destinations for India's services FDI include the UAE, Singapore,
Mauritius, and to a more limited extent the US and the UK

Conclusion??
Question: Highlight the adverse impact of the Covid-19 pandemic on India's services sector.

INTRODUCTION

On March 11, 2020, the World Health Organization declared a global pandemic. COVID-19
pandemic hit the world economy very hard, leaving no industry unaffected. Globally, as of 8
April 2022, there have been 494,587,638 confirmed cases of COVID-19,
including 6,170,283 deaths, reported to WHO.

As the deaths rose from the virus that had no known treatment or vaccine, different
governments across the world imposed lockdowns in their respective countries thereby
stopping almost every activity, India being one of them. Speaking in economic terms, nearly
all the economic activity terminated suddenly and collapsed, resulting in an increase in the
unemployment rate and various other socio-economic problems.

The covid-19 pandemic has had an adverse impact on most sectors of the economy, the services
sector has been the worst affected as its’ share in India’s GVA declined from 55 percent in
2019-20 to 53 percent in 2021-22.

Within the services sector, the effect of Covid-19 has been varied. While non-contact services
such as information, communication, financial, professional, and business services have
remained resilient, the impact has been much more severe on contact-based services such as
tourism, retail trade, hotel, entertainment, and recreation, etc.

India's GDP contracted by 3.2 percent in 2020-21 followed by a moderate recovery in 2021-
22.

IMPACT ON INDIA’S SERVICE SECTOR

• The services sector contracted by 8.4 percent Year on Year (YoY) in 2020-21.
• This decline was driven by a sharp contraction of 18.2 percent YoY in the sub-sector
‘Trade, hotels, transport, communication & services related to broadcasting.
• Owing to its contact-intensive nature, the services included in this sub-sector had to
bear the maximum brunt of the disruptions caused by the prevailing pandemic.
• The sub-sector ‘Public administration, defence & other services’ which includes
expenditure by the government on one hand and services such as health, education,
recreation, etc, on the other, contracted by 4.6 percent YoY in 2020-21.
 • The relatively less contact intensive sub-sector ‘Financial, real estate & professional
services’ was the least impacted, with a marginal decline of 1.5 percent YoY in its GVA
during 2020-21
• In April 2020, the IHS Markit India Services Purchasing Managers' Index (PMI)
crashed to an all-time low of 5.4 from 49.3 in March, and recovered only slightly to
12.6, in May 2020.
• The freight traffic railways, airways, the port had fallen sharply as a consequence of the
complete lockdown in March 2020 but registered strong growth during April- June
2021, the impact of the second-wave was very modest
• Bank credit to the service sector which was moderately significant in 2019, started
picking up in 2020 but lost its momentum in 2021-22
• According to the World Investment Report 2021 by (UNCTAD), India was the fifth-
largest recipient of Foreign Direct Investment (FDI) in 2020 improving its rank by four
places, from the ninth position in 2019.
• In 2020-21, India registered the highest ever annual FDI inflows of US$ 81.97 billion.
The country has received US$ 43.12 billion in FDI inflows in the first six months of
2021-22

TRADE IN THE SERVICE SECTOR

• The slowdown in global services was predominately due to restrictions on travel and
tourism and a reduction in transportation services, largely in the passenger segment.
According to WTO, global services trade returned to positive growth territory in April-
June 2021
• Index measuring foreign demand for services fell to an unprecedented level of 0.
• Services such as aviation, tourism, and hospitality due to the pandemic, followed by
subsequent effects on services such as logistics, retail, and construction which have
been hurt by strict lockdown measures.
• Estimated losses in revenues and jobs highlight the severity of the impact on certain
services. The associated job losses in the service sector were also significant.

SERVICE EXPORT

• India remained top ten services exporter countries in 2020, with its share in world
commercial services exports increasing from 3.4 percent in 2019 to 4.1 percent in 2020
 • During 2020-21, India’s goods exports (BoP basis) declined by 7.5 percent (YoY),
while services exports declined by only 3.3 percent (YoY).
• In April-September 2021, travel exports were US$ 3.7 billion, which is slightly lower
than US$ 4 billion in April-September 2020 and far modest than US$ 14.6 billion
during the same period in 2019
• Growth in receipts from exports of transportation services had moderated to 4.1 percent
due to a slowdown in trade activity and supply chain disruptions in 2020-21

SERVICE IMPORT

• India’s services imports exhibited a sharper decline of 8.4 percent in 2020-21 in

comparison with services exports primarily on account of a fall in travel and
transportation payments
• During H1 2021-22, the growth of services imports was 20.7 percent
• International shortage in shipping vessels has increased the transportation cost.

POSITIVE EFFECTS

Although the impacts of pandemic have been proved to be adverse, there have been some
positive effects too.

• Start-ups in India have grown remarkably over the last six years, most of these belong
to the services sector. During 2021, the Government recognized over 14,000 new start-
ups as compared to only, only 733 during 2016-17. As a result, more than 61,400 start-
ups have been recognised in India as of January 10, 2022. FDI inflow was remarkable
during the period.
• The various efforts in manufacturing of medical equipment, disposables, drugs, and the
most recent vaccine efforts made by India have placed among global leaders. India not
only fulfilled the domestic requirements but also rose to the occasion and supported
other countries. Driven by better healthcare awareness, rise in incomes, increased
access to insurance, and lifestyle-related diseases, India’s healthcare market is expected
to reach USD372 billion by 2022
• IT and software-related services proved to be the ultimate driving factor of service
sector in India with high export rate.

Conclusion??