Service Sector in India
#GS III Indian Economy
- According to a monthly survey released on Friday, the Indian services industry grew at its fastest rate in 12 years in February, helped by favourable demand conditions and new business gains.
- Its highest level in 12 years, the seasonally adjusted S&P Global India Services PMI Business Activity Index increased from 57.2 in January to 59.4 in February.
- In terms of GDP, the services sector dominates the Indian economy the most. Also, it has drawn a lot of international investment and contributes significantly to India’s exports. Also, it employs about 30% of the labour force in India. A wide range of activities are included in the services sector in India, including trade, lodging and dining, transportation, storage, and communication, financing, insurance, real estate, business services, community, social, and personal services, as well as services related to construction. In order to reach the targets of a US$ 5 trillion economy in the medium term and a developed economy status in the long term, the services sector is positioned to play a critical role.
What role does the services sector have in India’s economy?
- Contribution to GVA: In FY21–22, India’s services sector, which continues to be the country’s main source of economic growth, provided 53% of the country’s Gross Value Added (GVA) at current exchange rates.
- In the first half of 2021–22, the Services Sector as a whole increased by 10.8% Year on Year (YoY).
- In 2021–22, the GVA of the entire services sector is projected to increase by 8.2%.
- Contribution to Exports: India’s market share for services exports increased from 3% in 2010 to 3.5% in 2019 and 4% in 2020 and 2021, according to the WTO. The net export of services increased by about 25% in 2021–2022 notwithstanding COVID–19’s effects. The government has set a goal of US$350 billion in services exports in FY2022-23, which is 37% more than US$255 billion in exports in 2021–2022.
- Beneficial for FDI inflows: From April 2000 and March 2022, the Services Sector in India received the most FDI inflows totaling US$ 94.19 billion. According to data given by the Directorate for Promotion of Industry and Internal Trade, the services category ranked first in FDI inflow (DPIIT).
- Contribution to Start-ups and Patents: Over the past six years, start-ups in India have increased significantly, with the services sector accounting for the majority of these. By January 2022, India has acknowledged more than 61,400 start-ups.
What are India’s services sector’s prospects for the future?
- Future industries are anticipated to help India’s services sector expand quickly: In India, the digital economy is predicted to reach US$ 1 trillion by 2025, the healthcare sector is predicted to reach US$ 372 billion by that year, the IT and business services sector is predicted to reach US$ 14.3 billion by the end of 2023 with an 8% growth rate, and artificial intelligence (AI) is predicted to increase India’s annual growth rate by 1.3% by 2035, according to a discussion paper by Niti Aayog.
- A common national market has been established and the overall tax burden on goods has decreased as a result of the Goods and Services Tax (GST) adoption. Long-term expenses are anticipated to be lower due to the availability of the GST input credit, which will lead to lower service pricing. By 2030, it is anticipated that India’s software services sector would be worth $1 trillion.
What elements have fueled India’s rise in the services sector?
- Demand growth: The service industry flourished as corporations outsourced their communication, advertising, computer support, and banking operations to India from abroad, particularly from industrialised nations. The service sector expanded rapidly as a result of this high demand. Demand for services increased as the population of the country grew. With an increase in population, there is a greater need for fundamental services including hospitals, schools, post offices, telegraphs, police stations, courts, transportation, and banking.
- Technology and Structural Changes: There have been a number of technological and structural changes to the Indian economy. Changes in economic dependency from primary to tertiary industries are included. The outsourcing landscape has changed as a result of technological improvements, fueling the growth of the service sector. The primary and secondary industries also saw expansion thanks to technology. The need for services like transportation, storage, and trade has grown as a result of the development in the agricultural and industrial sectors.
- Economic Reforms in 1991: The reforms of the 1990s have been associated with the expansion of India’s service industry. The service industry began to expand in the middle of the 1980s, but expansion picked up speed in the wake of the 1991 economic reforms. Privatization, the abolition of FDI restrictions, and the simplification of approval processes are only a few of the effects of service sector reforms. Demand evolved from necessary to discretionary consumption as a result of economic expansion and rising per capita income, which fueled the expansion of services. The sector’s expansion has been facilitated by the demand for services at high income levels being elastic. The demand for services like tourism, retail, catering, and elite education increased along with the rise in average income.
- Attractive ecosystem: The government’s decision to introduce “Start-up India” intends to build an open ecosystem for businesspeople and encourage innovation. Services play a significant role in this system. The potential for the sector in India has expanded due to the technological infrastructure needed for such an ecosystem. This industry appeals as a location for investment because to its low setup costs. India also has a fair amount of financial market development.
- Skilled Manpower: India has become a centre for global outsourcing because to a sizable pool of competent IT workers. It currently controls a 55% portion of the world market for sourcing.
- Increased Productivity: The growth of the service industry is also influenced by a rise in labour productivity. Better technologies and increased labour productivity have increased manufacturing and agricultural output while requiring fewer labour.
- Global Technology Hub: With 75% of the world’s digital talent present, India is the world’s hub for digital capabilities. The Ministry of Electronics and Information Technology is seeking to increase the digital economy’s contribution to GDP to 20% during the following five years. The government is constructing cloud-based infrastructure for cooperative networks that may be used by entrepreneurs and startups to develop creative solutions. India has submitted over 4000 patents for artificial intelligence (Al) over the last five years (until July 2021).
What difficulties does India’s services sector face?
- Lack of Government Incentives: According to many experts, the government has not given incentives to the services sector in the same way that it has to the manufacturing sector. For instance, in 2018–19, the MEIS (Merchandise Exports Incentive Scheme), an export promotion programme for manufacturing, helped merchandise exporters to the tune of over INR 40,000 crore. The SEIS (Services Exports Incentive Scheme) equivalent reward for service exporters was INR 4,000 (10% of merchandise exporters).
- Similar to this, the government offers rewards like tax breaks for new manufacturing enterprises. Similar incentives are not present when establishing infrastructure for service industries like tourism, hotels, hospitals, and colleges, among others. PLI programmes are lacking in the services industry.
- Trade Restrictions: Foreign countries’ restrictions on the migration of service professionals, domestic certification requirements for foreign service providers, taxes on Indian service firms’ offshore income, etc., hinder the services sector. The services sector in India’s export potential is constrained by these limitations. In a similar vein, India fares poorly on the OECD’s Services Trade Restrictiveness Index (STRI), with only Thailand and Indonesia being more restrictive than India out of the 50 sample nations.
- Although there is a sizable pool of qualified professionals, it is insufficient to support the sector’s expansion. Experts in the field bemoan the fact that many graduates lack employable skills and that significant effort is needed to train them.
- Infrastructure: Services industries like tourism and hospitality are constrained in their potential by a lack of infrastructure (such as transportation, connectivity, and communication).
- Finance: Many small service companies struggle to find reasonable financing to expand their operations. Lack of funding prevents people from upgrading their skills, upgrading systems and processes, which affects their competitiveness.
How can the problems be solved?
- First, the government must make organised policy interventions in India’s services sector. Similar to Made in India, the government should start a “Services from India” initiative. To encourage a rise in service exports, the government should take into account increased tax advantages and a PLI-like plan for the services sector.
- Second, in trade discussions, services need to be given more weight. The goal of India’s FTAs has been to promote commerce in goods. The India-Australia ECTA has a number of steps to help India’s service exports even if the trend is changing (like mutual recognition of professional services, avoiding double taxation on offshore income of Indian service firms in Australia etc.). The future FTAs with India should make sure of this.
- Finally, India should promote the creation of international data governance norms. Outsourcing of consultation services will be greatly aided by the removal of data and privacy obstacles. The Indian services industry stands to gain the most.
- Fourth, the IT sector makes up about 55% of the entire services sector. The government needs to develop a thorough plan for further diversifying the services industry. For continued expansion, sub-sectors including healthcare, tourism (particularly medical tourism), banking and financial services, and telecommunications must be supported.
- India’s largest and fastest growing industry is the service sector. It now boasts the highest labour productivity and is predicted to grow quickly in the coming years. India has a higher share of services in global trade than the typical country. The service industry will be able to contribute to inclusive growth through boosting investment, fostering the development of human resources and workforce, and enhancing infrastructure. A rising nation like India, which has a sizable, youthful population, must prioritise the creation of high-quality jobs and moving up the value chain. To increase the contribution of the services sector in India, the government must provide a stable and transparent policy environment and offer incentives similar to those offered to the manufacturing sector.
Source The Hindu