Growth of Service Sector in Indian Economy

India is an emerging economy and has been witnessing unprecedented levels of economic expansion, along with countries like China, Russia, Mexico and Brazil. India is the seventh largest country in the world by geographical area, the second most populated after China, and the largest democracy in the world. The economy of India is the fourth largest in the world in terms of purchasing power parity with an over 8% annual economic growth rate. Indian economy has been recording impressive growth rates after economic reforms were initiated in the early 1990s and is one of the fastest growing economies of the world for over a decade. This can be partly attributed to the multi sector structural reforms aimed at enhancing productivity, efficiency and international competitiveness of the economy.

Factors Influencing the Growth of Services

The main factors that contribute to the growing requirements for services sector are as follows: 1. Increase in the disposable Income 2. Increased complexity of life and business 3. Working women 4. Technology advancement 5. Public administration services

An Overview of Indian Economy

The Indian economy has been showing a trend of growth since independence. With the stupendous growth of Indian information technology sector, Indian service industry and the Indian BPO sector, the Indian GDP has been shot up to a remarkable destination. During the fiveyear period from 199899 to 200203 average growth was only 5.4%, while the highest growth rate achieved during the period was 6.7% (in 199899). It was after 2003, that the growth of the gross domestic product of India showed considerable improvements, mainly geared by the growth in the Indian service and manufacturing industry. The Indian GDP figure stood at an extraordinary 8.8% in the previous five years (200304 to 200708) in succession (Table 1).

Table 1: Indias Real GDP Growth Rates

Year GDP Growth 200304 8.5 % 200405 7.5 % 200506 9.4 % 200607 9.6 % 200708 9.0 % 200809 6.7 %

Source: Economic Survey of India 200304 to 200809

The global economic conditions in 200809 remained very weak, largely on account of financial meltdown in many developed as well as developing countries, especially in the second half. In relation to the record average growth of 8.8% achieved during 200308, 6.7% growth in 200809 represents a notable deceleration, through terms of growth performance of major countries around the world Indian growth remained one of the highest. The real GDP growth turned around at 7.4 per cent in 2009-10, up from 6.7 per cent in 2008-09.In India, several conventional and unconventional measures were taken during 200809 by the Government of India and Reserve Bank of India to lessen the impact of the financial shock. The Indian economy, however, remained on the positive growth track, in all the quarters of the year though at lower levels. Agriculture, industry, and services are the principal sectors of any economy in the world. In India, the structure of economic development has undergone considerable change in the last decade. The services sector has become a major part of the economy with GDP share of over 60% and the country has become an important hub for exporting IT services. The share of agriculture in GDP declined from around 60% in 195051 to 17% in 200809. Those of industry have increased from 13% to 18.5% and of services from 28% to 64.5%. This pattern of shifts has been continuous throughout the period of over half a century, but the speed of the shift has been faster since 199091. Analysis of the contribution of various sectors to Indian economy indicates a decline in the share of agriculture from 59% to 35% in the first 40 years and from 35% to 17% in the next 20 years. Share of industry has grown slowly but has stagnated since 199091 and gradually reduced to 18.5% in the last fiscal year. Share of services in the real GDP increased from 28% to 40% in the first 40 years and has increased to 52% in 19992000 and reached 64.5% in the last fiscal year. The Indian economy has been shifted from agriculture to service economy. In 21st century, India is emerging as an economic power with vast human and natural resources, and a huge knowledge base. Economists have projected that India could even outperform the dynamic economies over the next fifty years. If so, by 2050 India could be the thirdlargest economy in the world by a significant margin, behind only China and the United States. Such developments would profoundly shift the worlds economic centre of gravity. Table 1B: Contribution of Various Sectors in GDP

200506

200708

200304

200405

200607

Sector

(Average) 200203 to

Agriculture Industry Service

26.5% 22.1% 50.5%

21.7% 21.6% 56.7%

20.5% 21.9% 57.6%

19.7 % 19.4 % 60.9 %

18.5 % 19.5 % 62.0 %

17.8 % 19.2 % 63.0 %

17.0% 18.5% 64.5%

Source: RBI Annual Reports

Role of Services Sector in Indian Economy

The services sector forms a backbone of social and economic development of a region and has emerged as the largest and fastestgrowing sector in the world economy, making higher contributions to the global output and employment. Global economies are progressing from industrial economies to service economies, with services sector contributing to more than 60% of jobs in many developed and developing countries. Economic development of todays developed countries has historically followed a common pattern of having decline in agriculture and industry. The share of services has accelerated in the latter half of the twentieth century, the period during which industry has seen a decline in its share and, therefore, is often described as a period of Deindustrialization in the developed countries. Technological advancements over the past few decades have led to increasing demand for services. Development of communication technologies and movements of people across countries have produced demonstration effect creating similar pattern of demand in developing countries as in the developed countries leading to larger demand and consequently production of services. Growth in the services sector has been substantive and has resulted in the emergence of a new breed of larger more sophisticated service companies in most nations. The tremendous growth of this sector, due to various reasons, has been playing a vital role in the development of world economy. In 1948, 54% of the GDP of the United States was generated by services. Now it has crossed 80% mark. The latest government survey of Singapore's service sector shows that its share of the economy reached a new high of 68.8% of GDP in 2008. In UK, services sector contributes 76.2% to its GDP. However,

200809

199394

for most developing countries service industries are at different stages of the development range from low to intermediate. For most of these countries, service sector is recognized as strategic to their development. The services sector is assuming increasing importance in India so much so that it dominates the Indian economy today contributing more than half of Indias national income. Since 1980s, the share of services sector in the real GDP in India has surpassed that of agriculture and industry. Liberalisation, Privatisation, and Globalisation (LPG) have also played an important role in the growth of this sector. Consequently, the real annual growth rate in services has generally outperformed the overall GDP growth rate and the trend is likely to continue in future. The services sector has consistently showed resilience since 199091, and remained largely unaffected by the past instances of external crises such as the Gulf crisis in 1991, EastAsian crisis in 1997 and the technology meltdown in 2000. The growth in services sector had remained consistently higher than the overall growth in the economy except for two years (199495 and 199697). More importantly, as compared with rest of the economy, the services sector appears to have been less affected by the global financial crisis. After the year 2000, the Indian services sector has been showing a consistent overall growth. However, the services sector, which made rapid strides in growth in the Indian economy over the past few years, witnessed moderate slowdown in growth during 200809, owing to the contagion from the global economic downturn (Table 3). Table 3: Performance of the Services Sector
Year Growth 200203 7.50% 200304 8.80% 200405 9.90% 200506 11.20% 200607 11.30% 200708 10.80% 200809 9.40%

Source: RBI Annual Report 200809

According to the estimates released by the CSO, as quoted in RBI annual reports, the growth in real GDP originating from services sector moderated to 9.4% during 200809 from 10.8% in 200708. While services sectors share in GDP improved marginally from 63.0% in 200708 to 64.5% during 200809, its relative contribution to GDP growth increased significantly from 74.1% to 88.2% during the same period. Moderation in the services sector growth during 200809 was largely confined to construction, trade, hotels, and transport and communication, financing, insurance, real estate and business services. The sluggish condition in the real estate market, contraction in household disposable income and slowdown in project execution in the private sector operated as a drag on construction activities. Trade, hotels, transport and communication services were affected by global slowdown through reduced traffic related to business, commerce and tourism.

As per the Central Statistical Organisation, the services sector has continued to grow in the second quarter of 200910. Trade, hotels, transport and communication grew 8.5% in JulySeptember 2009 from a year earlier. Financing, insurance, real estate and business services grew at 7.7% in JulySeptember 2009 from a year earlier. Community, social and personal services grew at 12.7% in JulySeptember 2009 from a year earlier. A stable and consistent growth of services sector is expected in the future. As Indian economy is looking forward for more liberalization, sectors like banking are to loom large and occupy a more significant position in Indias economy. However, in spite of the rising share of services in GDP and trade, there has not been a corresponding rise in the share of services in total employment. This jobless growth of Indias service sector, with no corresponding growth in the share of manufacturing sector, has raised doubts about its sustainability in the long run. Moreover, it is to fear that liberalisation is only for rich particularly in case of health and education conditions of the country. It is therefore a concern that a balanced growth in all sectors should be ensured in order to maintain the overall growth of our economy.

Services Sector and its Types

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. Services can be classified into five subgroups: business, trade, infrastructure, public administration and social/personal services. Services can be divided into two categories; first, those that necessarily require the physical proximity of the user and the provider and second, those that do not essentially require this though it may be useful. Services that require essential physical proximity have been further categorised into three groups: Mobile provider and immobile user, e.g., shifting labour to the construction site in other country, Mobile user and immobile provider, e.g., hospital services, and Mobile user and mobile provider, e.g., lectures, haircuts, etc. He further states that services for which physical proximity is inessential, i.e., the long distance services, are on a rise due to technical progress, e.g., banking and insurance. In the Indian economy, the most striking feature of the structural change in recent decades has been the preeminence of services sector as the major contributor to growth, raising its share rather sharply in the national output. The various sectors that combine together to constitute service industry in India are:

 Trade (Wholesale trade and retail trade in commodities both produced at home (including exports) and imported, purchase and selling agents, brokers and auctioneers) Hotels and Restaurants (services rendered by hotels and other lodging places, restaurants, cafes and other eating and drinking places) Railways and other Transport (roads, water, air transport, services incidental to transport) Storage Communication (Post, Telecom)

Banking and Financing (banks, banking departments of RBI, post office, saving bank, nonbank financial institution, cooperative credit societies, employees provident fund) Insurance (life, postal life, non life) Dwellings, Real Estate Business Services Legal Public Administration Defense Personal Services (domestic, laundry, barber, beauty shops, tailoring, others)

Community Services (education, research, scientific, medical, health, religious and other community) Other Services (recreation, entertainment, radio, TV broadcast, sanitary services)

Contribution of various sectors of services to our economy had been increasing for the last decade. Especially, banking and insurance services contribute the major chunk of financial services in India. However, there was an overall decline in the growth in the last fiscal year. The deceleration of growth in 200809 was spread across all subsectors community, social and personal services. Growth rate in trade, hotels, transport, and communication services was considerably low as compared to the past fiscal years. Financing, insurance, real estate and business services sectors has too declined in 2008 09. The construction industry consists of different segments like housing, infrastructure, industrial construction, commercial real estate, etc. While the industry went through a boom phase with growth as high as 16.2% in 200506 and continued to grow thereafter, the increase in the costs of construction due to a rise in the prices of inputs like steel and cement and interest costs had started impacting the industry. Even though community, social and personal services showed slow growth till 2007, the higher growth in this

sector during 200809 was mainly due to an expansionary fiscal policy that was reflected in the demand side of GDP as higher growth of government consumption expenditure. Table 4 shows the performance of various subsectors of services industry. Table 4: Performance (Growth Rate) of SubSectors
200203 200304 200405 200506 200607 200708 200809 9.0 % 7.8 % 13.1 % 7.2 %

Subsectors

Trade, Hotels, Transport and Communication Financing, Insurance, Real Estate and Business Services Community, Social and Personal Services Construction Source: RBI Annual Reports

9.4 %

12.0 %

10.7%

12.1 %

12.8 %

12.4 %

8.0 % 3.9 % 7.9 %

5.6 % 5.4 % 12.0 %

8.7 % 6.9 % 16.1 %

11.4 % 7.0 % 16.2 %

13.8 % 5.7 % 11.8 %

11.7 % 6.8 % 10.1 %