Over the years, the service sector has seen a transformation in the type and quality of services offered to customers. Service providers have come to understand that change is the only constant. If they do not adapt to the market, they risk losing their market share to competitors. The increase in competition has necessitated service firms to evolve from simply selling services to building enduring relationships with their customers.
The service industry forms the backbone of social and economic development in a region. It has emerged as the largest and fastest-growing sector in the world economy, contributing significantly to global output and employment.
Its growth rate has outpaced those of the agriculture and manufacturing sectors. It represents a large and extremely dynamic part of the Indian economy, both in terms of employment potential and its contribution to the national income.
Growth of Service Environment
Over the years, the service sector has seen a significant evolution in both the type and quality of services offered to customers. Service providers have come to realise that change is the only constant. If they do not evolve with the market, they risk losing market share to their competitors.
The escalating competition has made it imperative for service firms to evolve from merely selling services to building enduring relationships with their customers. The growth of the service sector in the Indian economy can be understood with the help of the following points:
1. Services GDP
The survey reveals that the share of services in India’s GDP at factor cost (at current prices) has seen a significant rise, increasing from 33.5% in 1950-51 to 55.1% in 2011-12, 56.3% in 2012-13, and finally reaching 57% in 2013-14 as per Provisional Estimates (PE). When construction is also considered, the Service Sector’s contribution shoots up to 64.4% in 2011-12 and 64.8% in 2013-14. The Indian service sector has exhibited robust growth, expanding at approximately 8 per cent per annum and contributing to about 64 per cent of India’s GDP in FY 2015-16.
Of the broad services sector, the sub-sector that includes financial services, real estate, and professional services has been the fastest-growing. It contributed 21.6 per cent to the GDP, with a year-on-year growth rate of 10.3 per cent in FY 2015-16. In terms of employment, the survey reveals that while agriculture remains the primary employment-providing sector, the service sector (including construction) stands in second place.
2. FDI in the Services Sector
The growth of the service sector is intricately linked to the Foreign Direct Investment (FDI) inflows into this sector and the role played by transnational firms. However, there remains a persisting ambiguity in classifying the various activities under the services sector. In the fiscal year 2011-12, FDI inflows to the services sector, including the top five sectors and construction, witnessed a robust growth of 57.62 percent, amounting to US$ 12.14 billion. This was in stark contrast to the overall FDI inflows, which stood at 33.6 per cent.
In the fiscal year 2013-14, FDI inflows into the services sector — encompassing the top five sectors and construction — sharply declined by 37.6 percent to US$ 6.4 billion, compared to the overall growth in FDI inflows of 6.1 percent. According to the Department of Industrial Policy and Promotion (DIPP), the Indian services sector attracted the highest amount of FDI equity inflows from April 2000 to March 2016. The total amount reached approximately US$ 50.79 billion, accounting for about 18 per cent of the total foreign inflows.
3. State-Wise Comparison of Services
A comparison of the share of services in the Gross State Domestic Product (GSDP) of different States and Union Territories (UTs) in 2012-13 reveals that the service sector is a dominant player in most Indian states. States and UTs such as Chandigarh, Delhi, Kerala, Mizoram, West Bengal, Tamil Nadu, Maharashtra, Nagaland, and Karnataka possess shares higher than the all-India average.
In 2013-14, the services sector was the leading sector in most Indian states, contributing more than 40 percent to the GSDP, with the exceptions being Arunachal Pradesh and Sikkim. Chandigarh led with 88.4 percent, followed closely by Delhi at 87.7 percent. The banking and insurance sectors held a significant share only in a few states/union territories (UT), such as Delhi, Maharashtra, and Chandigarh.
In 2013-14, Bihar experienced the highest growth in services at 17.3 per cent, while Uttrakhand reported the lowest at 5.5 per cent. In 2014-15, Delhi topped the list with a services GSDP share of 87.5 percent, followed by Maharashtra at 63.8 percent. The growth rates for these states were 8.2 per cent and 5.7 per cent, respectively. Puducherry reported the highest growth in services at 16.3%, followed by Meghalaya at 13.2%, primarily due to increased growth in high-weighted sectors like trade, hotels and restaurants, and real estate and business services.
Jammu and Kashmir reported the lowest services growth at 2.0%, primarily due to low and negative growth in most sectors barring public administration. Bihar’s services sector growth was amongst the fastest, maintaining consistent double-digit growth over the last seven years, driven by high growth in high-weighted sectors such as trade, hotels and restaurants, and real estate.
4. India’s Services Trade
India’s share of service exports in the world’s service exports, which rose from 0.6 percent in 1990 to 1.0 per cent in 2000, and further to 3.3 per cent in 2013, has been accelerating at a faster pace than the share of merchandise exports in world exports.
The growth rates of India’s service exports and the world’s show two distinct phases. The first phase lasted until 1996, when the two growth rates displayed a scissor-like movement. The second phase started post-1996, during which the growth of India’s service exports was higher than the world’s in almost all years except for 2009.
In this second phase, India’s growth rate significantly exceeded the world’s during upswings, but nearly converged with it during downswings. The overall openness of the economy, denoted by total trade (including services) as a percentage of GDP, indicated a higher degree of openness at 55.0 percent in 2011-12, compared to 38.1 percent in 2004-05.
The openness indicator based solely on merchandise trade stood at 43.2 percent in 2011-12, a notable increase from 28.3 percent in 2004-05. India’s service exports saw a significant leap from 16.8 billion US$ in 2001 to 155.6 billion US $ in 2014. This constitutes 7.5% of the GDP, making India the 8th largest service exporter in the world. Meanwhile, India’s service imports stood at 81.1 billion US$, marking a growth of 3.3% in the fiscal year 2014-15.
5. India’s Services Employment
Over the last two decades, the sectorial share of employment has witnessed significant changes. The share of agriculture reduced from 64.75 percent in 1993-94 to 48.9 percent in 2011-12, and industries saw a slight decrease from 12.43 percent to 11.9 percent. On the contrary, the shares of the services and construction sectors in employment increased during the same period from 19.70 percent to 26.8 percent and from 3.12 percent to 9.60 percent, respectively.
As per the National Sample Survey Office’s (NSSO) report on the Employment and Unemployment Situation in India for 2009-10, which is based on usually working persons in the principal and subsidiary statuses, out of every 1,000 people employed in rural India, 679 are employed in the agriculture sector, 241 in the services sector, and 80 in the industrial sector.
In urban India, out of every 1,000 employed people, 75 are employed in the agriculture sector, 683 in the service sector, and 242 in the industrial sector. The three major employment-providing service sectors are construction; trade, hotels, and restaurants; along with public administration, education, and community services.
Nonfarm payroll employment saw an increase by 151,000 in August 2016. Sectors such as health care and social assistance, food services and drinking places, professional and technical services, as well as financial activities witnessed a continued upward trend in employment.
6. Performance of Some Major Services
The performance indicators of various sectors reveal that industries such as telecom, tourism, and railways have thrived in recent years. Conversely, the shipping and ports sector has displayed a decline, reflecting the impact of the global slowdown. Evaluations and forecasts based on limited firm-level data indicate a mixed picture for this year’s performance across different service sectors. However, there is a certain degree of optimism for the upcoming year.
To avoid unnecessary repetition, this section will focus on India’s significant commercial services in terms of GDP, employment, exports, and future prospects, without duplicating the services covered in other chapters like infrastructure, financial intermediation, and social sectors.
India’s crucial services include trade, tourism, shipping and port services, real estate services, and business services – with a special focus on IT and IT-enabled Services (ITeS), Research and Development (R&D) services, legal services, and accounting and audit services.
Factors Responsible for Emerging Service Environment
There are numerous factors behind the success of the service sector in India, which are explained below:
1. Increase in Wealth
The wealth of citizens of developed countries and many developing countries have increased largely over the years. Many multinational companies are attracted to India due to a strong 250 million middle-income group that demands different products and services. The increase in the wealth of Indians has given a rise in demand for services such as travel, tourism, entertainment, personal services, clubs, etc.
2. More Spare Time
The tendency to have more spare time is increasing worldwide, allowing people to have enough time to spend with their families or attend to their personal work. Even in India’s semi-urban and rural parts, the perception of holidays or leisure time is changing. Individuals are investing much time and effort into education, training, and skill development. They are also dedicating time to entertainment, personal care, children, touring, and so on.
3. Working Woman
In most economies, there’s an observed increase in the number of working women. Gone are the days when women were considered merely as housewives or inferior to men. Women’s capabilities have proven to be equal to, and in some areas, even more competent than men. Hence, there is a need for services that can alleviate their load of both domestic and professional activities.
4. Increased Population of DINKS
The term for a double-income group with no kids is DINKS. These couples do not have any physical impediments to bearing children. However, due to their hectic schedules and career commitments, they choose not to have children. In the initial years of marriage, they consciously avoid starting a family. Later, owing to the intense demands of their jobs, coupled with the pressures associated with promotions and transfers, they eventually decide against having any children. It’s common for DINKS to indulge in extravagant spending on services.
5. Increased Life Expectancy
A better life expectancy is resulted due to better economic prosperity and improved living standards, which have eventually led to an increased number of older people. Due to this, there is an increased demand for healthcare services and nursing homes.
6. More Complex Products
Many new products are offered to customers due to increased technological advancement. Compared to past generations, there is a very complex and greater requirement of different types of services from people in day-to-day life. Experts need to maintain a computer, washing machine, fridge, laptop, etc. Thus, there is an increased demand for these types of services.
7. Complex Lifestyles
Several roles are being played by the members of the society. In order to reduce or share their burden, there is an increased demand for various services. The services of legal consultants, labour supply services, employment services, income tax consultants, baby care centres, etc., are some examples.
8. Increased Anxiety for Limited Resources and Ecology
Financial resources are often limited for most individuals. Yet, there’s a constant need to utilise various services, which necessitates financial strength to acquire tangible products for different types of services. However, these products may not be fully utilised by individuals.
Consequently, there is an increasing demand for door-to-door services, car rentals, accommodations, and computer hardware rentals, among others. The focus of numerous economies has shifted towards maintaining environmental and ecological balance.
9. More and More Products
In past years, many choices of different products have been offered to the customers. Due to the rapid development of new and innovative products, the lives of existing products are reduced significantly. The product’s functionality is not entirely considered by the consumers before buying it due to their busy schedules. Therefore, there is an increased demand for various consultancy services.
10. Young Generation
Compared to the old generation, more and more services are used by the young generations, and they require a lot of them. The consumption of different services will facilitate the young generation to deal with numerous changes occurring in their lives.
11. Technology Innovation
The implementation of advanced tools and methods is commonly known as technology. There is a continuous attempt from innovative service providers to look for the different methods of reducing the processing time, automating the service providing, reducing the cost (and thus prices), having a close connection with the customers, developing new services, creating appeal for the existing products, enabling fast delivery of services, etc.
12. Cultural Changes
The diverse types of knowledge, taboos, behaviours, values, and traditions passed down through generations are referred to as ‘culture.’ Culture significantly influences individuals’ lifestyles. Being a dynamic and evolving process, culture is ever-changing.
Change is an integral part of the culture. The pace of this change varies across different societies. Some cultures evolve rapidly, some at a moderate pace, and some very slowly. The changes in Indian culture are not uniform. These changes have been most noticeable in the past century.
13. Increased Awareness of Healthcare
There has been a significant improvement in healthcare services in India. The enhanced awareness of ordinary citizens towards healthcare has culminated in the form of higher life expectancy. The heightened demand for healthcare services is apparent from the rise of psychological counselling, health centres, medical counselling, diagnostic centres, fitness clubs, and health-related information sites.
In order to disseminate awareness among the rural population and illiterate individuals, various campaigns have been initiated by the government and numerous social organisations. Many drives such as immunisation, childcare, preventive medicines, and family planning, have been launched to promote healthcare awareness in India’s rural regions.
14. Economic Liberalisation
Many significant changes were induced in the Indian business scenario by economic liberalization initiated in 1991. The Indian market was opened to MNCs. The state-owned monopolies were finished in many service areas due to disinvestments and privatization policies. Entrepreneurs were encouraged to start their ventures in different fields due to the eradication of licensing.
15. Migration
One of the major reasons behind India’s service sector’s development was the migration from rural to urban and semi-urban areas. Expansion of different cities and townships resulted due to migration in the hopes of earning livelihood and jobs. Due to this, many sectors, such as transportation, real estate, infrastructure services, rentals, etc., have seen unprecedented growth. There is an increased demand for personal services and urban placement services.
16. Export Potential
There is an upward trend in the global export market for services, with India emerging as one of the top prospects. India exports a myriad of services to different parts of the world.
These include software services, tourism, banking, insurance, transportation, data services, construction labour, entertainment, maintenance services, communication, education, healthcare, accounting services, design engineering, and commercial services. These are commonly exported to various countries.