Composition & Contribution of Service Sector in India

The service sector consists of the soft parts of the economy such as insurance, government, tourism, banking, retail, education, and social services. Currently service sector is contributing near about 60 % of Indian GDP. Service sector is also known as tertiary sector.

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.

Market Size

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:

a. Trade

b. Hotels and restaurants

2. Transport, storage and communication

a. Railways

b. Transport by other means

c. Storage

d. Communication

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.

Employment Scenario

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

  1. In post-1991 period, there were several measures undertaken by the government to develop services sector, especially through deregulation of some sub-sectors of services sector. Foreign Direct Investment (FDI) varying from 26 per cent (in print media) to 100% in information technology (IT) sector, business process outsourcing (BPOs), e-commerce activities, infrastructure etc.) has been permitted.
  2. A large number of steps like launching of National Telecom Policy 1994, New Telecom Policy 1999, and National Telecom Policy-2012, Broad Band Policy 2004 etc. were undertaken. In addition to this, a number of promotional measures have been taken up in IT and ITES (Information Technology Enabled Services) segment, trade, tourism, banking and insurance and real estate sectors.
  3. The Government of India announced that all the major tourist spots like Sarnath, Bodhgaya and Taj Mahal will have a Wi-Fi facility as part of Digital India initiative. Besides, the Government has started providing free Wi-Fi service at Varanasi Ghats.
  4. The Government of India has launched an initiative to create 100 smart cities as well as Atal Mission for Rejuvenation and Urban Transformation (AMRUT) for 500 cities with an outlay of Rs 48,000 crore (US$ 7.47 billion) and Rs 50,000 crore (US$ 7.78 billion) crore respectively. Smart cities are satellite towns of larger cities which will consist of modern infrastructure and will be digitally connected. The program was formally launched on June 25, 2015. The Phase I for Smart City Kochi (SCK) was launched in July 2015 which will be built on a total area of 650,000 sq. ft., having a floor space greater than 100,000 sq. ft. Besides, it will also generate a total of 6,000 direct jobs in the IT sector.

Problems/Challenges Ahead

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).

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