UNIT 10 SERVICE SECTOR

Structure
10.0 Objectives
10.1 Introduction
10.2 Service Sector: Concept and Meaning
10.2.1 Composition of GDP
10.3 Composition of Service Sector in India
10.4 Key Service Industries
10.4.1 Information Technology and Business Process Outsourcing (IT-BPO) Services
10.4.2 Telecommunication Services
10.4.3 Internet Services
10.4.4 Energy Services
10.4.5 Air Transport Services
10.4.6 Education Services
10.4.7 Financial Services
10.5 Performance of Service Sector in India
10.5.1 Sectoral Composition of GDP Growth
10.5.2 Employment Contribution of the Service Sector
10.5.3 Productivity Growth in Service Sector
10.6 Exports of Services
10.6.1 World Trade in Services
10.6.2 India’s Exports of Services
10.6.3 Determinants of Exports of Services
10.6.4 Need and Prospects to Push Exports of Services
10.7 Causes of Rapid Increase in Tertiary Sector
10.8 Prospects and Opportunities
10.8.1 Domestic Factors
10.8.2 International Factors
10.9 Implications
10.10 Limitations
10.11 Need for an Integrated Policy
10.12 Let Us Sum Up
10.13 Exercises
10.14 Some Useful Books
10.15 Answers or Hints to Check Your Progress Exercises

10.0 OBJECTIVES
After going through this unit, you will be able to:
 state the meaning of service sector;
 make distinction between service sector and other sectors;
 discuss the composition of service sector;
 explain the performance of service sector; 49
Sectoral Developments  describe the key service industries;
 identify the export prospects of the service sector;
 appreciate the prospects of growth of the service sector;
 identify the problems being faced by the sector; and
 comment on the future prospects of the sector.

10.1 INTRODUCTION
We have come a long way from the days of physiocrats and mercantilists when
agriculture and trade in goods respectively were the engines of growth of economies.
Production and trade in services have come to the forefront. In modern economies,
service sector performs many important roles. First, it represents a major share
of the developed economies and is increasingly integrated in the overall production
system. Second, it plays an active role in market integration and globalisation.
Third, the creation of employment, value added, income and exports is increasingly
related to the good performance of the services. In India, the service sector has
evolved continually over the past thirty years, modifying the structure of employment
and the composition of value added. It constitutes a large part of the Indian
economy both in terms of employment potential and its contribution to national
income. The sector covers a wide range of activities from the most sophisticated
in the field of Information and Communication Technology to simple services
pursued by the informal sector workers, for example, vegetable sellers, hawkers,
rickshaw pullers, etc. Currently, this sector accounts for over 50 per cent of the
value added. However, despite its growing weight, the share of the working-age
population employed in services remains low.

10.2 SERVICE SECTOR: CONCEPT AND

MEANING
The economy has basically three sectors. First, the primary sector comprising of
agriculture, fishing, and extraction such as mining. Second sector is the secondary
sector comprising of manufacturing. Third sector is the tertiary sector also referred
to as service sector.
The basic characteristic of service sector is the production of services rather than
end-products. Services are intangible goods which include attention, advice,
experience, and discussion. These are used to enhance productivity, performance,
potential and sustainability. The production of information is also regarded as a
service. However, some economists like to classify services relating to the information
service in a fourth sector, now known as the quaternary sector i.e., the sector that
comes after the third and just before the fifth in position.
The tertiary sector involves the provision of services to other businesses. Services
may involve the transport, distribution and sale of goods from producer to a
consumer, pest control, entertainment or hotel industry. The goods are transformed
in the process of providing the service. However, the focus is on people interacting
with people and serving the customer rather than transforming physical goods.
The composition of GDP of an economy explains the relative significance of the
different producing sectors. When a country is in a state of underdevelopment,
primary sector makes the largest contribution to the national income. As the country
grows and gets developed, the contribution of the industrial and service sectors
50 gradually increases.
The explanation for this shift is as follows: Service Sector

Income elasticity of demand for agricultural products is relatively low; as a result,

with rising levels of income, the demand for agricultural products relatively declines
and that for industrial goods increases and, after reaching a reasonably high level
of income, demand for services increases sharply. Accordingly, the shares of
different sectors in the national product get determined by the changes in the
pattern of demand. On the supply side, agriculture, being mainly dependent on a
fixed factor of production, namely land, faces a limit on its growth and is subject
to early operation of the law of diminishing returns. Industry, specially manufacturing,
on the other hand, offers large scope for use of capital and technology, which
could be augmented almost without limit with human effort. The same applies to
services where application of technologies seems to offer much larger scope.

10.2.1 Composition of GDP

For the past few decades, there has been a considerable shift from the primary
and secondary sectors to the tertiary sector in the Indian Economy. The tertiary
sector is now the largest sector of the economy and is also the fastest-growing
sector. Examples of service sector employment include: Government, hospitals,
public health, waste disposal, education, banking, insurance, financial services,
legal services, consulting, news media, hospitality industry (e.g. restaurants, hotels,
casinos), tourism, retail sales, franchising, real estate, and sales.

10.3 COMPOSITION OF SERVICE SECTOR IN

INDIA
In India, the national income classification given by Central Statistical Organisation
is followed. In the National Income Accounting in India, service sector includes
the following:
1) Trade, Hotels and Restaurants (THR)
1.1 Trade
1.2 Hotels and Restaurants
2) Transport, Storage and Communication
2.1 Railways
2.2 Transport by other Means
2.3 Storage
2.4 Communication
3) Financing, Insurance, Real Estate and Business Services
3.1 Banking and Insurance
3.2 Real Estate, Ownership of Dwellings and Business Services
4) Community, Social and Personal Services
4.1 Public Administration and Defense (PA & D)
4.2 Other Services
51
Sectoral Developments Table 10.1: India’s GDP at factor cost: Industry-wise growth rate.

Industry 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

(P) (QE)
1. Agri, forestry & 5.1 4.2 5.8 0.1 1.0 7.0
fishing (Primary
Sector)
1.1 Agri 5.5 4.1 6.3 –0.3 0.7 7.8
1.2 Forestry & 1.8 3.3 1.4 1.9 2.8 2.9
logging
1.3 Fishing 5.9 6.6 5.8 2.7 3.0 3.0
2. Mining & 1.3 7.5 3.7 2.1 6.3 5.0
quarrying
3. Manufacturing 10.1 14.3 10.3 4.3 9.7 7.6
3.1 Registered 12.1 15.8 10.1 5.9 11.7 7.8
3.2 Unregistered 6.5 11.6 10.7 1.3 5.4 7.1
4. Electricity, gas & 7.1 9.3 8.3 4.6 6.3 3.0
water supply
5. Construction 12.8 10.3 10.8 5.3 7.0 8.0
Secondary Sector 9.7 12.2 9.7 4.4 8.4 7.2
(Industry)
6. Trade, hotels & 12.2 11.1 10.1 5.7 7.8 9.0
restaurants
6.1 Trade 11.6 10.8 9.8 6.7 8.3 9.1
6.2 Hotels & 17.4 14.4 13.0 –3.3 2.8 7.7
restaurants
7. Transport, 11.8 12.6 12.5 10.8 14.8 14.7
storage &
7.1 Railways 7.5 11.1 9.8 6.7 8.3 9.1
7.2 Other means 9.3 9.0 8.7 5.3 7.2 8.4
7.3 Storage 4.7 10.9 3.4 14.1 8.7 7.9
7.4 Communication 23.5 24.3 24.1 25.1 31.7 27.2
8. Financing, 12.6 14.0 12.0 12.0 9.4 10.4
insurance, real
estate & business
services
8.1 Banking & 15.8 20.6 16.7 14.0 11.3 14.5
insurance
8.2 Real estate, 10.6 9.5 8.4 10.4 7.8 6.9
ownership of
dwellings &
business services
9. Community, 7.1 2.8 6.9 12.5 12.0 4.5
social & personal
services
9.1 Public 4.3 1.9 7.6 19.8 18.2 1.3
administration &
defence
9.2 Other services 9.1 3.5 6.3 7.4 7.2 7.3
Tertiary Sector 10.9 10.1 10.3 10.0 10.5 9.3
(Services)
Total gross 9.5 9.6 9.3 6.7 8.4 8.4
domestic product at
factor cost

P: Provisional; QE: Quick Estimates

52 Source: CSO.
The services sector has been the most dynamic sector of the Indian economy, Service Sector
especially over the last two decades or so. Table 10.2 below shows the changes
that have been taking place in the composition of GDP over the last few decades.
Table 10.2 below shows sectoral shares in India’s national income and their
Growth Rates during the era of planning in India.
Table 10.2 : Composition of Gross Domestic Product and Growth Rates
(at constant prices).
Primary Secondary Tertiary
Share Growth Share Growth Share Growth
Rate Rate Rate
1950-51 to 1959-60 56.0 2.3 16.0 5.7 28.0 4.1
1960-61 to 1969-70 47.8 2.5 21.1 6.5 31.4 4.9
1970-71 to 1979-80 42.8 1.3 22.8 3.7 34.4 4.5
1980-81 to 1989-90 36.4 4.4 25.0 6.8 38.6 6.6
1990-91 to 2000-01 28.6 2.9 27.1 5.9 44.3 7.6
2001-02 to 2007-08 22.9 3.2 20.4 6.1 56.7 8.5
2001-11 to 2010-11 16.5 2.6 18.7 4.2 64.8 9.2
Note: Till 1999-2000 at 1993-94 prices, and beyond at 1999-2000 prices.

From a low level of 27.5 per cent of GDP in 1950-51, the share of services
increased to about 60.0 per cent in 2011-12. Between 1950-51 and 1990-91,
the share of Services Sector in GDP rose by only 13.1 percentage points, which
is an increase of about 0.3 percentage points per annum. However, between
1990-91 and 1999-2000, the share had increased by 7.3 percentage points,
which is an increase of 0.8 percentage points per annum. Clearly, the rate of
growth was significantly higher in the 1990s. As we will see below, the sector
maintained rapid growth in subsequent decade also.
Check Your Progress 1
1) What do you mean by service sector? How is it different than the industrial
sector?
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2) Mention in brief the components of the service sector in India.
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3) How does economic growth affect composition of national income?
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53
Sectoral Developments
10.4 KEY SERVICE INDUSTRIES
10.4.1 Information Technology and Business Process
Outsourcing (IT-BPO) Services
Over the past decade, IT-BPO services have emerged as key contributors to
India’s export earnings, investment, employment and overall economic and social
development. Competitive labour costs, English language skills, technical expertise,
political stability, favourable tax rates and a reputation for high-quality services
have driven the sector’s rapid growth. IT-BPO revenue in India has been increasing
by leaps and bounds with the industry growing at an average annual rate of about
31 per cent. The industry employed approximately two million people within India,
employment growth being estimated at 24 per cent. The seven largest IT-BPO
firms accounted for nearly 50 per cent of the industry’s export revenues and nearly
35 per cent of employment. Yet most firms in the industry are small: nearly 90 per
cent of firms have annual revenues of less than $10 million while accounting for
about 17 per cent of the industry’s labour force. The leading IT services firms are
Tata Consultancy Services (TCS), Wipro, Infosys, Hewlett-Packard India, and
IBM India, while the top BPO firms are Genpact, TCS BPO, WNS Global
Services, Wipro BPO, and First source Solutions.
Factors Affecting Demand
Factors affecting demand for India’s IT-BPO services include economic and financial
conditions in key export markets, the relative attractiveness of competing providers,
and changes in the domestic market for outsourced IT-BPO services.
Factors Affecting Supply
Workforce challenges and government incentives affect the industry’s supply of
services. Among the former, attrition, wage inflation, and skill levels pose particular
challenges. High attrition tends to undermine the quality of services and to boost
costs for recruitment and training. And attrition is a problem for India: a recent
study found that nearly 60 per cent of call center employees in India had less than
one year of tenure, compared to less than 30 per cent in the United Kingdom,
United States and Canada. In order to reduce attrition, firms have raised wages
Pay in the IT-BPO sector was increasing.

10.4.2 Telecommunication Services

Sweeping liberalisation and deregulation undertaken by successive governments
over the past decade have transformed the Indian telecommunication services
industry from a market dominated by a few government-controlled entities into
one characterised by a large number of private sector rivals and high levels of
competition. Such competition has resulted in declining service prices, which have,
in turn, led to rapid market growth. Since 2004, for example, the total number of
telephone subscribers grew at a compound annual growth rate (CAGR) of 43 per
cent to approximately 900 million, causing total telephone subscriber penetration
to increase 70 per cent. This growth was driven almost entirely by the private
mobile telephone segment, which account for approximately 93 per cent of India’s
total telephone connections.
Leading Indian telecommunication service companies are Aircel, Maxis, Apollo
Group, Bharat Sanchar Nigam Ltd. (BSNL), Bharti Airtel Bharti Telecom Group,
54
Pastel Ltd, Indian Continent Investment Ltd , HFCL Infotel, Himachal Futuristic Service Sector
Communications Ltd, Idea Cellular Birla TMT Holdings, AT Birla Nuvo, Hindalco
Industries, Grasim Industries, Loop Mobile BPL Communications, Capital Global,
Gypsy Rover, Mahanagar Telephone Nigam Ltd. (MTNL) Government, Reliance
Communications Anil Dhirubhai Ambani Group, Sistema Shyam TeleServices
Sistema, Spice Communications Modi Wellvest, Telecom Malaysia, Tata
Teleservices Tata Group, NTT DoCoMo, Tata Communications (VSNL) Tata
Group, Vodafone Essar Vodafone Group.

10.4.3 Internet Services

Although Internet subscribers in India have grown at an annual rate of approximately
24 per cent during the last decade, a subscriber base of 18 million and Internet
penetration of approximately only 1.5 per cent by the end of 2011 make India one
of the world’s least-developed Internet markets. In general, the proliferation of
Internet services in India is hampered by high levels of poverty, particularly in rural
areas, and associated low levels of personal computer ownership. Internet subscriber
growth over the past decade has been driven almost entirely by the adoption of
residential broadband Internet services, which grew at a CAGR of 153 per cent
from 135,000 subscribers in 2004 to 8.1 million at the beginning of 2012. In
India, broadband Internet services are predominantly delivered over fixed-line
networks (i.e., DSL service), as opposed to delivery via cable television networks.
India’s Internet services market is in a state of flux, with more than 750 licenses
issued over the past few years, while 450 licenses have been revoked. As of
December 2011, only about half of India’s licensed Internet Service Providers
(ISPs) had launched Internet services. The top five ISPs in India, measured by
market share were BSNL (56 per cent), MTNL (15 per cent), Bharti Airtel (8 per
cent), Reliance Communications (8 per cent), and Hathaway Cable and Datacon
(2 per cent); all other ISPs each accounted for less than 2 per cent of the market.

10.4.4 Energy Services

India is the fifth largest electricity producer in the world, behind the United States,
China, Japan and Russia. During the last decade, India has increased the quantity
of electricity it produced by more than any other country in the world, aside from
China. Demand, however, has increased at an even faster rate, resulting in a
shortage of electricity and frequent power outages during peak hours. In addition
to a shortage of generation capacity, India faces significant challenges in electricity
transmission and distribution. Due to the lack of an integrated national transmission
system, India sometimes experiences simultaneous electricity surpluses in some
areas and deficits in others. It is estimated that India losses annually 198 billion
kilowatt-hours due to distribution losses, which is more than double the total
electricity production of neighbouring Pakistan. These losses account for 26 per
cent of total electricity output, which is nearly three times the global average for
distribution losses. Additionally, India’s per capita consumption of electricity is
lower than the average for every region in the world except South Asia. This
reflects India’s relatively low level of urbanisation compared to other lower-middle-
income countries, among other factors. The consequences of these inadequacies
for industries and individuals are severe. Electrical equipment is damaged and
burns out more quickly as a result of outages and fluctuating voltage, workers are
idled during blackouts, and businesses need to invest in costly diesel generators.

55
Sectoral Developments 10.4.5 Air Transport Services
India’s air passenger transport market is relatively small, accounting for only 2 per
cent of airline traffic worldwide. Indian airlines transport approximately 61 million
passengers per year, more than 80 per cent of whom are domestic travellers.
Operating revenue for India’s air transport industry is roughly $9.0 billion, and the
number of workers employed in the sector is nearly 60,000. Although India’s air
transport industry has experienced substantial growth over the past one decade,
such growth has been slowed by the recent financial crisis. Despite the current
downturn, growth potential remains as the young and increasingly affluent Indian
population selects air transport over other modes of domestic travel.
Major airlines in India are Indian Airlines, Alliance Air, Go Airways, Indigo Airlines,
Jet Airways, Kingfisher Airlines, Paramount Airways and Spice Jet Airlines.

10.4.6 Education Services

In the year 2011, India’s higher education system has 563 universities, out of
which 44 central universities, 285 state universities, 129 deemed universities and
106 private universities*. Nevertheless, both the quantity and quality of services
supplied by India’s higher education system are insufficient to meet demand from
eligible students and their prospective employers. A small portion of India’s higher
education institutions is renowned for producing graduates who are adequately
prepared for advanced degree programmes, research or employment in scientific,
technological or commercial fields in India and abroad. However, most of India’s
universities and colleges lack the financial resources, authority and flexibility to
equip graduates with the skills demanded by India’s expanding business and
technology sectors. Many students from India, therefore, pursue higher education
opportunities abroad. With about two-thirds of the population of India under age
25, national and state government funding priorities for education for the 20-year
period through 2005 centered on increasing participation in elementary education
(grades 1 through 5), especially among the population segments with relatively low
levels of participation in education. Despite India’s progress in recent years in
making elementary education more available – especially to historically
underrepresented segments such as girls and children in eastern India, and culturally
disadvantaged groups – substantial numbers of students continue to exit the
education system at every level. As a result, only about 13 per cent of 18- to 24-
year-olds in India had enough prior education to advance to higher education in
2011. The 12th five-year plan (2012–17) has elevated the policy and fiscal priorities
of higher education relative to other levels of education.

10.4.7 Financial Services

The Indian financial services industry is a strong contributor to the nation’s economy,
accounting for approximately 5.5 per cent of GDP and creating jobs at a steady
pace. There are approximately 1 million jobs in the Indian banking sector, and
according to one industry estimate, that figure had the potential to grow to about
2.5 million by 2020. India’s sustained economic growth has created an expanding
middle class with disposable income and increasingly sophisticated financial services
needs. Indian households save an average of 32 per cent of their income, yet less
than half of that money has made its way into the formal financial system.
Furthermore, many Indian businesses are rapidly expanding their domestic and

56 * en. wikipedia.org
foreign operations and need access to financing. While most developed, and many Service Sector
developing, countries have experienced upheaval in their markets as a result of the
global financial crisis, India’s financial system has not been seriously impacted.
This is largely because Indian banks did not have significant exposure to subprime
markets. Indian regulators tend to be conservative, and state-owned banks have
had their capital augmented by the government when necessary, though the global
liquidity shortage that followed the financial crisis did affect Indian banks’ lending
levels. All of these factors combine to make the Indian banking industry highly
attractive to global banks seeking new growth in developing markets. However,
the market is not fully open to foreign participation, and foreign firms that do have
a domestic presence face a number of hurdles in competing with their Indian
counterparts. Top 10 commercial banks by loan advances are State Bank of
India, ICICI Bank, Punjab National Bank, Bank of Baroda, Bank of India, Canara
Bank, IDBI Bank, HDFC Bank, Union Bank of India and Central Bank of India.
Check Your Progress 2
1) Name four key service sector industries in India.
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2) State two important factors that determine the demand for IT services.
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3) State two important factors that determine the supply of IT devices.
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10.5 PERFORMANCE OF SERVICE SECTOR IN

INDIA
Performance of service sector in India can be assessed with the help of three
parameters as follows:
1) Sectoral composition of GDP Growth
2) Employment contribution of Service Sector
3) Productivity Growth in Service Sector

57
Sectoral Developments 10.5.1 Sectoral Composition of GDP Growth
The share of each of the Primary, Secondary and Tertiary Sector in India’s GDP
and their relative rate of growth is shown in Table 10.1.
It would be seen that over the period, the primary sector’s share has fallen by 40
per cent, while those of the secondary and tertiary sectors have increased. This
trend is projected to go further in wake of liberalisation of the economy. This may
happen primarily because of the following factors: (a) reduced restrictions on
private sector involvement in areas like software development and information
services, (b) technological advances, and (c) lower fixed capital requirements.
It would be seen from Table 10.2 that the rate of growth of the secondary and
tertiary sectors has been more than double than that of the primary sector, with
the secondary sector having an edge over the tertiary sector during the first two
decades. In the subsequent decade, the tertiary sector grew faster than either of
the other two sectors. During the 1980s, when all the three sectors were growing
at a faster rate, the secondary sector was the fastest. Subsequently, the tertiary
sector has been growing the fastest. (To an extent the growth of the services
sector may have been overstated as new technologies and competitive pressures
have led to widespread outsourcing of non-core activities by manufacturing firms,
which then show up a services growth. Also, one suspects that in the system of
National Accounts, services are a residual category that ends up including some
household and cottage sector production activity. Nevertheless, there is no denying
the importance of the growth momentum generated by the services sector).
As a result, the service sector has become the growth-driver in the Indian economy.
It is clear from the data given below:
Table 10.3: Sectoral percentage contribution to Increase (in GDPFC).

1951-52 1961-62 1971-72 1981-82 1992-93 1997-98

Sectors to to to to to to
1960-61 1970-71 1980-81 1990-91 1996-97 2010-11
Primary 45.2 35.1 27.2 24.2 20.3 12.7
Secondary 23.7 26.5 25.6 28.6 30.9 23.6
Tertiary 31.3 38.4 47.2 47.2 48.8 64.1
Total 100.0 100.0 100.0 100.0 100.0 100.0

Presently, about two-thirds of the incremental growth in the Indian economy can
be attributed to the tertiary sector.
This pattern of structural change in Indian economy has deviated from the
development pattern of Western and South East Asian economies. Those economies
experienced first a shift from primary to secondary sector and only in their advanced
stage did they experience a significant shift in favour of tertiary sector. That pattern
of development enabled them to transfer growing labour force from primary to
secondary sector. In India, this has not been possible because secondary sector
has not expanded fast enough to absorb growing labour force. The unskilled and
uneducated rural masses have continued to struggle in the primary sector and
those who have been forced out by economic, social and political factors have
joined the urban slum sector. Moreover, the sharp increase in the share of tertiary
sector in GDP in India has occurred at a much lower level of per capita income
than that in the developed countries when they experienced a similar expansion.
58
This pattern of growth underlines the link between the growing poverty and Service Sector
unemployment and the inadequate growth of manufacturing and building activity in
the country.

10.5.2 Employment Contribution of the Service Sector

The sectoral distribution of workforce in India during the period 1983 to 2009-
10 reveals that the structural changes in terms of employment have been slow in
India as the primary sector continued to absorb 54.9 per cent of the total workforce
even in 2009-10, followed by tertiary and industrial sectors (25.5 per cent and
19.6 per cent) respectively. There has been disproportionate growth of tertiary
sector, as its share in employment has been far less when compared to its
contribution to GDP.
It is important to understand 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.
Further, there was a sharp drop in labour absorptive capacity of growth in the
economy (employment elasticity of growth) from 0.40 to 0.15 during post-reform
period (1993-94 to 1999-2000) initially, reflecting the phenomenon of jobless
growth. However, during 1999-2000 to 2009-10 period the employment elasticity
of growth registered an increase from 0.15 to 0.51.With the exception of one sub-
sector of tertiary sector i.e. transport, storage, communication all other sub-sectors
of services sector exhibited an increasing trend in employment elasticities and
thereby overall elasticity of employment increased from 0.15 to 0.51.

10.5.3 Productivity Growth in Service Sector

The process of acceleration in growth started in 1980s rather than in 1990s. Of
the 2.4 percentage point increase in the rate of economic growth that took place
in the post-1980 period, about 40 per cent is accounted for by a faster growth
in TFP in services. The three sectors viz. agriculture, industry and services have
witnessed acceleration in the growth rates of output, output per worker and total
factor productivity (TFP) in the post-1980 period. However, the increase is more
marked in case of services. Partially, the spurt in growth rate is attributable to
productivity growth in certain sub-sectors of services sector. It has been noticed
that growth rate in output per man is highest in case of PA &D and other community
social and personal services (4.2 per cent p.a), followed by transport, storage,
communication (3.3 per cent pa), trade , hotels, restaurants (2.9 per centpa) and
banking, insurance, real estate and business services. The acceleration in growth
rate of output per worker in PA &D and other community, social and personal
services might have resulted from the downsizing of the public sector because of
privatisation and hikes in the salaries of the central and state government employees
from time to time (i.e due to accounting reasons). Whereas productivity growth in
THR has derived stimuli from surge in demand for such services with a subsequent
expansion in these activities. Part of the productivity growth in the services sector
might be an outcome of application of IT services. Despite increase in growth rate
of labour productivity in service sector, measurement of service sector output and
productivity are still debatable issues.

59
Sectoral Developments
10.6 EXPORTS OF SERVICES
Exports of services supplement the merchandise-exports as a source of foreign
exchange earnings. Services encompass telecommunications, transportation, tourism,
banking, insurance, construction, computer-related services and professional ones.
But as with trade in goods, the nature of services, too, is daily changing, acquiring
fresh dimensions. Trade in services, and high technology industries are also virtually
symbiotic.

10.6.1 World Trade in Services

World trade in service exports has taken a big leap forward with service exports
growing at a rate of 10 per cent in recent years. There are factors both on demand
and supply sides that have contributed to this trend.
On the demand side, world trade in services is certain to accelerate in the coming
years with advances in generic technology of computers and telecommunications.
It is considerably influenced by the emerging demand for a whole range of business
services due to innovations, new technology, sophisticated buyer needs, opening
of new markets, service-based inputs and globalisation strategies.
On the supply side, the factor that has contributed most to growth in world trade
in services is that many services which were earlier in-house activities of business
firms, for instance legal services – are getting highly specialised and are splintering
off to outside business firms possessing the required expertise.
The lead in the growth of service trade is likely to increase in the new millennium
due to the expected expansion of the freer market supported by the WTO
agreements on telecommunications, information technology and financial services.
Their cross-border trade is estimated already at $100 bn, 210 bn and 50 bn,
respectively.

10.6.2 India’s Exports of Services

India’s exports of services are valued at about $100 billion annually. These form
about 2.7 per cent of world’s total exports of services. (Apparently, India’s share
in world’s exports of services is more than the share of India’s merchandise
exports in world’s total merchandise exports.)
These are in the form of four modes of services delivery as defined in the WTO’s
General Agreement on Trade in Services (GATS). Mode 1 refers to cross-border
supply, for instance call centres. Mode 2 relates to consumption aboard. Medical
care, education and tourism are few of the services delivered by this mode. Mode
3 refers to commercial presence, where delivery requires FDI, for instance banking
and financial services. Mode 4 refers to movement of natural persons, where
services are delivered by individuals travelling to other countries, eg., IT
professionals.
Balance of Trade in Services
The present trends indicate that there is not much parity between service exports
and imports. This is especially true of items like transportation and business services
coupled with a factor service like investment income. The latter has grown fast on
account of interest and service payments on foreign loans and credit. As a result,
trade in services has suffered from trade deficits, and these deficits have been
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widening.
10.6.3 Determinants of Exports of Services Service Sector

A recent study identifies the following as the principal determinants of exports of

services:
i) Travel receipts have been mainly dependent on expansion of tourist facilities
in the country.
ii) Transportation receipts have been dependent on merchandise exports originating
from the country.
iii) Insurance receipts have been dependent generally on exports of merchandise.
iv) Receipts of repatriation of international investment income have been mainly
dependent on growth of world economy.
v) Professional, technical and other services receipts abroad have been mainly
dependent on development of the expertise in the country.

10.6.4 Need and Prospects to Push Exports of Services

Trade deficits on account of services may further widen if service exports do not
respond appropriately to the technology inflows from abroad. The impact of these
deficits will be felt on BOP and external value of rupee. Hence, it is important that
India should make efforts to reap the benefits of booming services the world over.
India’s competitive advantages in selected services can be identified and targets
and incentives may be fixed at the micro level with appropriate support for marketing
and other infrastructure. Two kinds of services which India can vigorously pursue
for exports are tourism and business services based on its respective strength as
a tourist attracting country and large inventory of skilled human resources. For this
to happen, it is necessary to learn in terms of flexibility, customised operations,
technologies and global strategies from the service provide of the north.
India has a comparative advantage in Mode 1 as captured by outsourcing activities,
Mode 3 as seen in increasing outward investment by Indian companies in US, UK
and other developed and developing countries markets and Mode 4 as captured
by movement of Indian software professionals in the US, EU, etc.
The most ambitious area is that of software exports. If software exports continue
grow to at the present pace – admittedly a big if – they will by 2015 total $ 150
billion. Even at that level, they will constitute no more than one per cent of global
software production, so from that view point, the target is not excessively ambitious.
SWOT analysis of India’s services exports, as presented below, indicates clear
possibilities for these exports to surge ahead.

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Sectoral Developments Table 10.4: SWOT analysis of India’s Services Exports.

Strengths Weaknesses
Economical wage and other bills, and Traditional, labour constrained
the favourable time-zone difference financial system
between Indian and Western cities

Trained/skilled, English speaking, Still developing telecommunications

younger manpower

Well-established financial network Higher inflation (Consumer prices)

Promotional fiscal and Exim policy Regional disparities

Opening up of world markets Technological lag

Euro-zone as one market Low telecommunication intensity

Global business links and FDI Rigid labour situation

possibilities
Restricted capital account compared
Emerging conclaves with good image to all competing countries

Threats and weaknesses have to be given due attention, particularly technological

upgradation to augment competitiveness.
Our services performance should make us think the way we look at WTO. If we
have a natural space in the services arena, our misplaced concerns in agriculture
and merchandise trade should not compromise our interests in services.

10.7 CAUSES OF RAPID INCREASE IN TERTIARY

SECTOR
The tertiary, i.e., the non-commodity sector, has been growing at a much faster
rate than the commodity sector. This in essence means that income generated in
the process of circulation grew at a much faster pace than that in the directly
productive process, and thereby resulting in an increase in the share of the non-
commodity sector. This trend can be attributed to a number of factors, among
which, the more important are as follows:
i) A very important factor has been the advent of information technology and
the knowledge economy. This has enhanced the growth of the high productivity
segment of the services sector as well as a variety of service activities involving
low productivity activities catering to a large mass of people.
ii) A large part of the service sector consists of infrastructure such as banking,
insurance, finance, transport and communication and social and community
services such as educational and medical facilities. An urgent requirement of
development is the proper expansion of infrastructure to cater to the needs
of other sectors of the economy and the expansion of the social and community
services for the well-being of the people.

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iii) Public services grow more rapidly where national Governments have significant Service Sector
role in planning and production in the economy as a whole. In fact, the
‘visible hands’ of the modern governments as reflected in the government
policies and in the expansion patterns of the national and international authorities
during the last few decades are directed towards the creation of fast economic
and social infrastructures.
iv) Operation of the demonstration effect as a consequence of the growing mobility
due to expanding foreign trade, tourism and cultural and educational tours is
another important factor.
v) Increasing urbanisation may be regarded as another cause of expansion of the
service sector in the economy. In fact, urbanisation is closely associated with
a rise in demands for infrastructure services such as communications, public
utilities and distribution services. A substantial change in the private consumption
pattern of the economy is observed with increasing urbanisation. Many new
goods and services enter into the consumption basket.
vi) Tourism is becoming more and more international as knowledge is being
spread through television and Internet, and modern technology has made air
transport and hotel accommodations quite comfortable. Tourism, in turn, has
promoted all types of services.
vii) With the increasing complexities of modern industrial organisation,
manufacturing industries have become service oriented. This has been reflected
in the increasing functions of accounting, finance, legal services, advertisement,
marketing, public relations etc. Because of the prevalent labour laws, these
services are being increasingly outsourced, so that growth in industry is actually
being counted as growth in services.
In addition to the above factors, an increase in the share of the non-commodity
sector in the GDP can also be attributed to slow growth in the commodity producing
sector. While a part of this is explained by difficulties inherent in bringing about
a fast rate of growth in the primary sector, a part is undoubtedly due to the failure
of the secondary sector and its major component, which is manufacturing and
construction, to grow at the much faster rate that was necessary to give the
commodity sector a comparable status with the non-commodity sector in the
growth rate.

10.8 PROSPECTS AND OPPORTUNITIES

Both domestic and international factors augur well for the growth of services
sector in India.

10.8.1 Domestic Factors

Some of the important factors can be briefly stated as follows:
i) As real per capita GDP grows, demand for services increases more than
proportionately and this, in turn, reinforces GDP growth itself.
ii) Within the services sector, demand for producer and government services,
which constitute mainly intermediate consumption, have strong multipliers effects
on real GDP.
iii) The growth of such dynamic service activities, which are intensive users of
63
Sectoral Developments communication and information technology, will generate employment
opportunities on a rising scale.
iv) The process of economic growth has itself led to the emergence and expansion
of new series such as advertising, publicity, marketing, etc. These sub-sectors
provide essential service inputs to other sectors in the economy, thereby
developing strong linkages with the rest of the economy.
v) Efficient delivery of services increases the productivity of both labour and
capital in the economy as a whole. In general, services sector appears to be
highly growth inducing with positive externalities for other services making
service a catalytic agent of growth.

10.8.2 International Factors

Some of the recent global developments which provide opportunities for substantial
growth are as follows:
i) The fastest growing segment of services is the rapid expansion of knowledge-
based services, such as, professional and technical services. India has a
tremendous advantage in the supply of such services because of a developed
structure of technological and educational institutions and lower labour costs.
ii) Progress in IT is making it increasingly possible to unbundle the production
and consumption of information-intensive service activities. These activities –
research and development, computing, inventory management, quality control,
accounting, personnel administration, secretarial, marketing, advertising
distribution and legal services — are performed in all economic sectors.
iii) Unlike most other prices, world prices of transport and communication services
have fallen dramatically. The cost of communication is becoming independent
of distance. India’s geographical distance from several important industrial
markets is no longer an important element in the cost-structure of skill-based
activities.
iv) India does not necessarily have a low-cost producer of certain types of
goods (e.g., computers or discs) before it can become an efficient supplier
of services embodied in them (e.g., software or music). It is possible now to
provide value added services without waiting to ‘catch up’ in technology for
production of sophisticated equipment or products.
v) The decline in the share of manufacturing in the output of rich countries
implies a relative decline in their demand for industrial raw materials and fuels.
It means that growth in exports of developing countries in the future will
depend less on natural resources endowments and more on efficiency in
providing services and service-intensive goods.
vi) The aging of population in the developed world implies that the demand for
services will continue to grow.
As a result of the above developments, the sources of comparative advantage of
nations are vastly different now from what they were 50 or even 20 years ago.
And, there are very few developing countries which are as well placed as India
to take advantage of the phenomenal changes that have occurred in production
technologies, international trade, capital movement and deployment of skilled
manpower. It is now possible for India to take advantage of a virtuous circle of
higher growth, higher capital inflows and higher domestic incomes and savings,
which in sum can lead to further growth.
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Check Your Progress 3 Service Sector

1) Mention in brief the important causes of the growth in services sector in

India.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) State in brief the important domestic factors that favour the growth of service
sector in India.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) State in brief the important international factors that favour the growth of
service sector in India.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

10.9 IMPLICATIONS
The expansion in the service sector has wider implications for population,
employment, and trade prospects of the economy, some of which are as follows:
a) The growing share of the services sector points to the need for policy initiatives
towards introducing greater competition and efficiency in this sector so as to
ensure its sustained contribution to exports (especially software) and to higher
long-term growth.
b) The gains in productivity in the agricultural and industrial sectors resulting
from technological progress and innovation will have the effect of shifting
employment away from the non-service sector to the services sector. This
may also indicate a shift in real expenditures from commodities to value
added services.
c) The services sector constitutes a tax-base with vast but unexploited potential,
and therefore its growth has long-term implications for the fiscal policy.

10.10 LIMITATIONS
However, the service sector, as at present, suffers from low productivity and
quality in spite of fairly large investment in technology.
The sector faces multiple challenges for sustained growth over the years. A number
of services where India enjoys comparative advantages experience lack of clear
policy thrust. A number of services in India are either predominantly associated 65
Sectoral Developments with the government or are not liberalised enough to ensure growth through
organised private initiatives. Services like professional, legal, postal, accountancy
and insurance need further liberalisation to harness their potential.
Unless sustained efforts are put in to improve these, with the increasing importance
of the services in wake of structural adjustment and liberalisation in the economy
we may get into two alternate scenarios.
a) Economic and social position of workers in the service sector will steadily go
down — since real incomes cannot be higher than productivity for any
extended length of time. This means economic stagnation and consequent
social tensions; or
b) The workers in this sector will use their numerical strength to get wages
higher than their economic contribution justified. This will impoverish others
— reducing everyone’s income and increasing unemployment.

10.11 NEED FOR AN INTEGRATED POLICY

To make services-led growth more widespread and sustainable, it is important to
systematically and simultaneously remove those constraints from which the sector
suffers presently. To do this, a coherent integrated services policy (in line with the
agricultural and industrial policies) needs to be developed. Reforms in services in
India have evolved in an ad hoc manner rather than as part of an overall strategy.
Consequently, the depth and pace of reforms lack uniformity across sectors.
Given the strong inter-linkages between different services, opening a particular
services sector may not yield results if not backed by corresponding reforms in
other complementary services. Such an integrated services policy should also
define the sequence as well as the pace of reforms to be undertaken simultaneously
in different services. Liberalisation should be followed in a phased manner
accompanied by social polices in sectors that have surplus labour so as to avoid
creating unemployment and social unrest. This will go a long way in sustaining the
dynamism of services-led growth. The details about the integrated policy will be
discussed in Unit 23.

10.12 LET US SUM UP

From the preceding analysis, it is evident that the Indian economy is becoming a
service-driven economy more in terms of output than employment. The pre-reforms
period was a period of high employment growth and rapid economic progress.
The tertiarisation process was dynamic and growth-driven. However, in recent
years, much of the rise in the service sector is because of lack of employment
opportunities in other sectors of the economy. As a result, a large proportion of
the service sector jobs created during this period are of distress in nature – petty
jobs taken up by the workers in the sectors like trade, hotels and restaurants –
pushed out by agriculture and not absorbed by manufacturing. There has also
been creation of a handful of high-income jobs in the sectors like financing, insurance,
real estate and business services that has been growth-driven leading to accentuation
of inequalities. A clear hierarchy exists within the service sector not only in terms
of employment growth or output growth but also in terms of the dynamism of the
growth process. Moreover, high-productive and high-income segments like
financing, insurance, real estate and business services within the services are
experiencing faster growth in terms of output. On the other hand, low-productive
66
and low-income segments viz. trade, hotels and restaurants are experiencing rise Service Sector
in terms of employment. These factors should be kept in mind while drawing
policy for the development of the service sector. Having found out the factors
affecting the service sector, it is important to note that priorities are essential.
While trying to move rapidly towards more open and competitive service markets,
at both national and international levels, it is necessary to foster new employment
opportunities in the service sector. A conducive fiscal environment and improvements
in the functioning of labour markets and institutions are essential to adjust
globalisation and the shift to services in the Indian economy. A well functioning
service sector provides important opportunities to strengthen employment and
productivity. It also helps in strengthening the capacity of the country to adjust to
economic globalisation and to the growing importance of services and to its future
growth. A comprehensive strategy is thus required to address the service sector
challenges, which is well suited to the Indian economy.

10.13 EXERCISES
1) How is the tertiary sector of an economy different than the other sectors in
the economy? What role does the tertiary sector perform in the development
process of an economy?
2) “The sequence of the growth process in India is different than what most of
the other countries experienced during the transition from a developing to a
developed nation”. Examine this statement and account for the causes of
rapid growth of the tertiary sector in India.
3) Examine the prospects and challenges faced by the service sector in India.
4) Examine the nature of foreign trade in services in India. Also examine the
prospects of exports of services from India.

10.14 SOME USEFUL BOOKS

Basu Kaushik (ed.) (2010): The Oxford Companion to Economics in India,
Oxford University Press, New Delhi.
Joshi Seema (2008): Growth and Structure of Tertiary Sector in Developing
Economies. Academic Foundation, New Delhi.
Dhingra Ishwar C. (2012): The Indian Economy Environment and Policy, Sultan
Chand, New Delhi.
Kumar Nagesh and Joseph K.J. (2010): International Competitiveness and
Knowledge-based Industires in India, Oxford University Press, New Delhi.

10.15 ANSWERS OR HINTS TO CHECK YOUR

PROGRESS EXERCISES
Check Your Progress 1
1) See Section 10.2
2) See Section 10.3
3) See Section 10.3
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Sectoral Developments Check Your Progress 2
1) See Section 10.4
2) See Sub-section 10.4.1
3) See Sub-section 10.4.1
Check Your Progress 3
1) See Section 10.7
2) See Sub-section 10.8.1
3) See Sub-section 10.8.2

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