The services sector, with around 60 per cent contribution to the Gross Domestic Product (GDP) in 2014-15, has made rapid strides during the past decade and a half to emerge as the largest and one of the fastest-growing sectors of the economy. The services sector is not only the dominant sector in India’s GDP, but has also attracted significant foreign investment flows, contributed significantly to exports as well as provided large-scale employment.
India’s services sector covers a wide variety of activities such as trade, hotels and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction.
The services sector contributed US $ 783 billion to the 2014-15 GDP (at constant prices) growing at CAGR of 9 per cent, faster than the overall GDP CAGR of 6.2 per cent in the last four years.
Out of overall services sector, the sub-sector comprising financial services, real estate and professional services contributed US$ 305.8 billion or 20.5 per cent to the GDP. The sub-sector of community, social and personal services contributed US$ 188.2 billion or 12.6 per cent to the GDP. The third-largest sub-segment comprising trade, repair services, hotels and restaurants contributed nearly US $ 187.9 billion or 12.5 per cent to the GDP, while growing the fastest at 11.7 per cent CAGR over the period 2011-12 to 2014-15.
Composition of Service Sector in India
In India, the national income classification given by Central Statistical Organization is followed. In the National Income Accounting in India, service sector includes the following:
1. Trade, hotels and restaurants:
b. Hotels and restaurants
2. Transport, storage and communication
b. Transport by other means
3. Financing, Insurance, Real Estate and Business Services
a. Banking and Insurance
b. Real Estate, Ownership of Dwellings and Business Services
4. Community, Social and Personal services
a. Public Administration and Defense (PA & D)
b. Other services
Performance of Services Sector in India
Sectoral Composition of GDP Growth:
The analysis of the sectoral composition of GDP and employment for the period 1950-2000 brings out the fact that there has taken place ‘tertiarization’ of the structure of production and employment in India.
The service sector output increased at a rate of 6.63% per annum in the period 1980-81 to 1989-90 (i.e. pre-reform period) compared with 7.71% per annum in the period 1990-91 to 1999-2000 (i.e. post- reform period). The share of this sector in GDP further increased to 55.1% in 2006-07. Currently it is contributing around 60% of Indian GDP.
The sectoral distribution of workforce in India during the period 1983 to 2004-05 reveals that the structural changes in terms of employment have been slow in India as the primary sector continued to absorb 56.67% of the total workforce even in 2004-05, followed by tertiary and industrial sectors (24.62% and 18.70%) respectively. The service sector was contributing about 28% total employment in the whole country in 2012.
It is important to point out that within the services sector employment growth rate is highest in finance, insurance, and business services, followed by trade, hotels and restaurants and transport etc. The community social and personal services occupy the last rank in growth rates of employment.
Policy Measures for the Development of the Services Sector
The sustainability of impressive growth of Indian economy has been questioned in the wake of some challenges in the form of lack of social infrastructure, physical infrastructure, IT infrastructure, agricultural and industrial sector reforms, etc. Besides, challenges in the field of IT and ITES like rising labour costs, rapid growth in demand for talented manpower/quality staff, high attrition rate, outsourcing backlash etc. are some other limiting factors. The growth of IT and ITES is having social, economic, health, ethical and environmental implications also.
The problem gets further compounded because of the entry of new species of services (like IT, ITES etc ) and lack of development of concepts on the one hand and non-inclusion of unpaid households on the other. Further, quality of each unit of the same service varies from the other. Therefore, it is too difficult to achieve the same level of output in terms of quality has been pointed out. Further, quality improvements stemming from the application of new technologies are extremely hard to measure.
Prospects for Growth in the Services Sector
One of the major drivers of service sector growth in the post globalization era in India is the IT and ITES sectors. That is why NASSCOM (2005) says that, “The IT and BPO industries can become major growth engines for India, as oil is for Saudi Arabia and electronics and engineering are for Taiwan. Saudi Arabia’s oil exports accounted for 46% of GDP in 2004; Taiwan’s electronics and engineering exports accounted for 17% of GDP in the same year. India’s IT and BPO industries could account for 10-12% of India’s GDP by 2015.” (NASSCOM, 2005, p.80).