Development Of Services Sector In India

VI Development in Services Sector

Services

sector,

along

with

Chart 6A: Share of Srvices Sector in GDP at 1999-2000 Prices

manufacturing sector, has emerged as a

56.0

significant growth propellant during the

gross domestic product (GDP) of the

54.0 52.2 Pper cent

current decade with its contribution to the

54.9 53.7

52.0 50.0

country sustaining at the levels more than

48.0

50 per cent, through our these years (Chart

46.0

49.8

54.1

52.1

50.5

2000- 2001- 2002- 2003- 2004- 2005- 200601 02 03 04 05 06 07 (QE) (RE)

6A). As generally known, the services sector comprises ‘trade, hotels, transport

and communication’, ‘financing, insurance, real estate and business services’ and ‘community, social and rural services’. Data on output growth across these sectors of the economy are used as services sector performance indicators since the two are closely associated; dominant among these have been enumerated in Table 6.1. While most of these have been discussed in pertinent sections of the MER, these indicators are considered as growth propellants of services sector activities.

Major Sectors

Table 6.1: Select Indicators of Services Sector Activities (Growth rates in per cent) Latest Period^ Full Financial Year 2007-08 2006-07 2006-07 2005-06

1 Tourism (April-June) Tourist arrivals (numbers) Foreign exchange earnings (US $) 2 Transport Automobiles (April-Jun) Commercial vehicles production (numbers) Passenger vehicles production (numbers) Commercial vehicles domestic sales (numbers) Passenger vehicles domestic sales (numbers) Railways (April-May) Railway revenue earning freight traffic (tonnes) Railway revenue earning passenger traffic (numbers) Railways passenger earnings (Rs crore) Railways goods earnings (Rs crore)

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8.2 21.1

17.5 16.2

13.5 14.8

14.0 17.5

6.6 13.2 3.8 13.0

40.6 16.9 47.2 20.4

33.0 18.0 33.3 20.7

27.0 22.2 22.0 17.7

6.0 5.5 12.1 10.1

9.4 -

10.7

9.2

15.0 16.6

7.2 17.9

Major Sectors

Table 6.1: Select Indicators of Services Sector Activities (Growth rates in per cent) Latest Period^ Full Financial Year 2007-08 2006-07 2006-07 2005-06

Shipping (April-May) Cargo handled at major ports (tonnes) 17.6 Civil Aviation (April) Cargo handled at international terminals (tonnes) 7.3 18.1 Cargo handled at domestic terminals (tonnes) 13.4 3.2 Passengers handled at international terminals (numbers) 18.6 19.6 Passengers handled at domestic terminals (numbers) 31.0 58.6 3 Communication (April-May) New cell phone connections (numbers) 116.8 82.4 New landline connections (numbers) 81.5 Total new telecom connections (numbers) 51.1 4 Banking and Finance* Aggregate deposits # (Rs crore) 24.4 20.9 Non-food credit (Rs crore) 24.4 32.8 5 Public Administration (April-May) Central government expenditure (Rs crore) -1.3 53.9 Notes: '-'means not available, ^: latest available period specified against each indicator * Refers to scheduled commercial banks and the figures are as on July 06, 2007 #Data reflect redemption of India Millennium Deposits (IMDs) on Dec 29, 2005 Sources: Data are taken from respective ministries or other government authorities and CMIE

9.5

10.4

10.9 10.1 15.1 38.5

18.6 22.2 16.7 24.2

85.5 -

89.4 -

11.3 26.6

30.8 32.8

15.2

1.7

Travel and Tourism Though being a traditional segment of the services sector, development of travel and tourism industry has been accelerated in the recent past on account of expansion in the business and trading activities, improved standards of living and changing lifestyles of the masses, and different kind of fiscal measures. India is becoming increasingly popular for foreign visitors from the point of medical attendance, cultural activities, historical developments and tourism. This has resulted in country witnessing increasing number of inbound tourists and thereby excellent growth in foreign exchange earnings. According to some analysts, the global campaign known as 'Incredible India' initiated by the Ministry of Tourism in 2002 had helped boost the Indian tourism industry to a great extent. For instance, the growth rate of inbound tourists accelerated to 14.7 per cent during calendar year 2003 from -6.3 registered in 2002 and trend continued in 2004 as well with the growth rate peaking to 26.4 per cent. However, growth rate of foreign tourist arrivals decelerated in 2005 to 13.3 per cent and this was sustained during calendar year 2006 as well. This growth trend has been reflected in foreign exchange earned by the sector during the same period (Chart 6B).

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Chart 6B: Growth Scenario: Tourism Sector

Table 6.2: Performance of Tourism Sector in India Foreign Foreign Tourist Exchange Year Arrivals Earnings (million) (US $ million) 2000 2.65 3168 2001 2.54 3042 2002 2.38 2923 2003 2.73 3533 2004 3.45 4769 2005 3.91 5731 2006 4.43 6569 Jan-Jun 2007 2.33 3590 Jan-Jun 2006 2.08 3037 Source: Ministry of Tourism (www.tourism.nic.in)

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35.0

Growth Rate (per cent)

30

26.4

25

23.2 20.9

20

14.6

15 10 5

18.2

20.2 14.7

6.9 5.3

16.6

13.3 13.3

11.9

2000 2001 2002 2003 2004 2005 2006

Jan- JanJun Jun 2006 2007

0 -5 -10

-4.0 -4.2

-3.9 -6.3

Foreign Tourist Arrivals Foreign Exchange Earnings

In the current calendar year, during January-June 2007, around 2.3 million foreign tourist have visited the country, only 25 lakh more compared to the corresponding period of the previous year. Foreign exchange, thus, earned has risen slightly by US $ 553 million to US $ 3590 million (Table 6.2). According to the World Travel and Tourism Council, Indian tourism is expected to grow annually at 8.8 per cent till 2015, which is one of the highest growth rates in the world. Foreign-exchange earnings are expected to cross US $ 12 billion by the end of 2012. Tourism during the current monsoon season has performed beyond the expectations of tour operators recording a 50 per cent increase in both in-bound and out-bound traffic with Goa and Kerala being the favourite tourist destinations, as compared to the last year when the industry saw an increase of only 15-20 per cent in monsoon tourism. According to a Thomas Cook official, over the years, the number of international tourists visiting India during the monsoon, especially from the Gulf countries, has almost doubled; as the Indian monsoon during June-September coincides with the summer vacation in the Gulf countries. The states like Kerala, Goa, Madhya Pradesh, Sikkim and Meghalaya have already started taking advantages of monsoon tourism by starting special monsoon packages.

Retail Services A new strategy paper prepared by Government of India has proposed to hike foreign direct investment (FDI) for single-brand retail. In view of political resistance for this proposal, the other option that is being considered is to permit 49 per cent FDI in multi-brand retail in

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order to widen the scope of foreign investment in the sector. The strategy paper has also suggested allowing 100 per cent foreign equity in foreign-branded, specialised retail chains like luxury brands, consumer durables and semi-durables if political resistance becomes unavoidable. The government had allowed 51 per cent FDI in single-brand retail in January, 2006 while 100 per cent FDI is permitted only for back-end operations like wholesale trade. According to a latest study by Crisil Research, only one per cent of the Indian foodretailing sector is currently organised as against countries such as the US where the penetration is 80 per cent. The total market for staples and unprocessed fruits and vegetables is around Rs 4.7 trillion, or about $115 billion. However, huge wastages, high storage costs and commissions to various middlemen have resulted in an annual loss of Rs 1 trillion, or around US $24 billion. If organised retail manages to overcome these hurdles by its widespread penetration of the food and grocery sector, farm incomes could increase and even consumers pay lower prices. India’s retail giants like Reliance Retail, Bharti-Wal-Mart and AV Birla Retail have plans to develop their own logistics. With logistics market for organised retail growing at 16 per cent, the organised retail, which is growing at 400 per cent, is facing a serious supply crunch. Logistics cost component of the total retail price in India is as high as 7-10 per cent, which is just around 4-5 per cent at global level. Such higher costs make it imperative for retailers to internalise most operations and cut costs. According to Frost and Sullivan, retail growth in India is expected to be dominated by large retailers owning the logistics rather than outsourcing it to third and fourth party logistic providers, in near future simply due to the highly fragmented nature and lack of national as well as international logistics providers in the country. In terms of occupancy cost as a percentage of sales India has outstripped developed markets and in the emerging markets, it is now at par with Russia. Industry experts stated that the supply was terribly short against a burgeoning demand, especially with the builders taking more than the anticipated gestation period to develop property. In the fashion industry, the occupancy cost should not be more than 10 per cent of sales. However, the rentals have crossed 20 per cent, touching around 23 per cent. Within Asia, India ranks next to Japan and Hong Kong, which share the top slot with 30-35 per cent, as quoted by South Asia and Southeast Asia, Benetton. In the food and beverages segment, the ratio is now touching a high of 30 per cent. Retail chains are

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willing to pay high rents in the metros as they provide visibility, though for profitability, they rely on non-metro cities where rents have reached historical highs.

FMCG The decline in sugar and wheat prices during the last six months has helped fast-moving consumer goods (FMCG) companies that make bread, biscuits and beverages to reap higher realisations. Wheat prices have slumped due to an increase in output from 69.5 million tonnes last year to 73.7 million tonnes and sugar prices have also dipped over the same period owing to a 45 per cent jump in output from 19.2 million tonnes to 28 million tonnes. The wheat-based industry was incurring losses when prices of these inputs were high. The beverages industry, including Coca-Cola and Pepsi, has been another gainer from the crash in sugar prices. According to sugar industry estimates, both companies, on an average, consume 150 thousand tonnes of sugar annually. At an average monthly consumption of 25,000 tonnes, the two companies would be able to save Rs 7.5 crore every month. After shampoos and oral care, fast-moving consumer goods (FMCG) companies are concentrating on soaps during the current year. The segment is one of the biggest FMCG categories in the country. Bathing and toilet soaps contribute around 30 per cent to the soaps market. The per capita consumption of toilet or bathing soap in the country is 800 gm, whereas it is 6.5 kg in the US, 4 kg in China and 2.5 kg in Indonesia. The industry players expect the soaps segment to grow by 15 per cent this year, as companies introduce more and more specialised products to create a differentiation in the market. For instance, Dabur India Ltd. is planning to introduce a new line of herbal and ayurvedic soaps under the Dabur brand and expand the range of soaps under its Vatika brand with newer variants. The company already has soaps under the Dabur brand in the international market. Likewise, Wipro Consumer Care, which claims to be the third-largest brand in soaps at present, is also looking at a range of soaps launch under its Santoor and Chandrika brands. According to industry estimates, Hindustan Unilever controls about 60 per cent of the soaps market, with brands including Lifebuoy, Lux, Rexona, Breeze and Hamam followed by Nirma and Godrej with their respective brands.

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Real Estate The real estate activities in India has remained buoyant in recent times and is also witnessing a number of changing trends within the country; besides attracting vast interest from foreign players. New Trends One such major trend is of developers shifting focus towards Tier II & III cities. Consistent rise in the cost, scarcity of space and saturation in certain areas like Delhi, Mumbai, and Bangalore has forced the real estate developers to turn to Tier II & III cities, which provide cost advantages of 20-40 per cent over Tier I cities. Apart from being state capitals, educational hubs or satellite cities, these cities have gained commercial interest with IT, ITES and BPO firms setting up their offices in these cities. The Tier II cities in India poised to emerge as major centers for the offshoring of activities by IT companies over the next few years as they have a hand over the Tier I cities in terms of land availability, costs of labour and real estate, business environment as well as physical and social infrastructure. Another trend observed is of builders acquiring land and setting up residential complexes in ‘extended suburbs’ of Mumbai. Extended suburbs on the western suburbs in Mumbai include areas beyond Vasai and Virar apart from Dombivali, Thane on the eastern belt and Panvel on the harbour route. A very high land acquisition cost in south Mumbai and the suburbs seems to be the main driving force that has caused developers to search for the land in these peripheral areas. For instance, Akruti Nirman has decided to acquire about 500 acres of land in the eastern and western suburbs spread across Vasai, Virar, Thane, Dombivali and Panvel to develop mini townships to include residential buildings and factory outlets on a lease model business. While Kalpataru is acquiring 300 to 500 acres of land, Hiranandani Construction is planning to acquire 300 to 400 acres of land in extended suburbs. K Raheja Universal, JLL Meghraj also have similar plans. However, many of these projects would work out to be long-term activities. Shooting up of Commercial Rent Limited supply of office space is leading to an increase in commercial rental rates by 1020 per cent on a quarterly basis in most Indian cities. While Delhi has registered an increase in rentals by 7-8 per cent (in central business district) and 15-20 per cent (in the secondary business

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district), in Bangalore it is to the tune of 10-20 per cent. Chennai has seen a moderate increase in commercial rental rates by 8-15 per cent, Hyderabad by 5-10 per cent, Kolkata by 10 per cent and Mumbai by 15 per cent. Pune is the only exception, with rentals showing no appreciation owing to high vacancy levels in the city. According to real estate consultants DTZ, rentals continued to increase in the Delhi due to steady demand generated by expansion plans of companies.

Aviation New Civil Aviation Policy The central government has constituted a high powered group of ministers (GoM) headed by External Affairs minister Pranab Mukherjee to which the proposed new civil aviation policy, known as ‘Vision 2020’, has been referred as the cabinet ministers could not reach to an unanimous decision on the crucial aviation policy, which focuses on the revamping of the Airports Authority of India (AAI) and recommends far-reaching changes in the country’s aviation sector. As a part of the new policy, the ministry of civil aviation (MoCA) is planning to increase the foreign direct investment (FDI) limit in cargo carrier companies to 74 per cent from the current 49 per cent. MoCA is also planning to set up a cargo hub at Nagpur, which would be positioned as the national cargo hub. Another proposition in the policy pertains exempting ‘regional airlines’ from airport and navigation charges for destinations they fly for a period of five years. Regional airlines, defined as carriers with aircraft having less than 80 seats and which operate exclusively on regional routes from any one metropolitan airport, which includes Delhi, Mumbai, Chennai, Kolkata, Bangalore and Hyderabad, would be set up to improve regional connectivity and create regional hubs. The Ministry has also suggested that the first airline to connect cities that are not linked by air should be exempt from all airport and navigation charges at both airports for the first year of operation. For regional airlines, navigation and landing charges could constitute around 10 per cent of overall costs.

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Under the new policy, the Ministry has proposed the establishment of an Essential Air Services Fund (EASF) to provide subsidy to airlines that operate on ‘uneconomical but essential routes’ like the northeast. The subsidy support from the fund would be established through a transparent process of minimum subsidy bidding. The draft policy has also suggested that the Indian Meteorological Department and the AAI enter into an agreement or a memorandum of understanding to ensure better coordination between them, as timely and accurate meteorological information is required for safe and regular air transport. Airport Development Changi Airport International (CAI) is planning to enter Indian airport development business through joint venture route to develop greenfield airports and the 35 non-metro airports in the country. For instance, forming a consortium with the Tata Group, it has already undertaken development of Shimoga, Gulbarga and Bijapur airports in Karnataka. CAI is also interested in taking up joint venture projects with an Indian counterpart for the development of regional airports in India. Proposition for Introduction of Differential Tariffs The civil aviation ministry has once again mooted the proposal of introducing differential tariffs for peak and non-peak hours in an attempt to curtail congestion at busy airports. The ministry had proposed to double charges during the peak hours and to half those in the non-peak hours three months back. The decision was put on hold due to hefty opposition from airline companies. Now, the government has once again floated the idea to specifically incentivise nonpeak hour travel in order to better utilise the airport infrastructure between midnight and 5 am.

IT and ITeS According to the National Association of Software and Services Companies (Nasscom), the Indian IT-ITeS industry has recorded 30.7 per cent growth in its revenue to US $39.6 billion in 2006-07, exceeding the projected growth of 27 per cent for the year on account of buoyant growth in exports and strong domestic demand. The software and services exports has grown by 33 per cent to register revenues of US $31.4 billion in financial year 2006-07 up from US $23.6 billion of the previous year. The IT services exports have surged by 35.5 per cent to $18 billion

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from US $13.3 billion in 2005-06. While the ITES-BPO exports have risen by 33.5 per cent to US $8.4 billion from US $6.3 billion over the period of one year, the engineering services exports have improved to US $4.9 billion from US $4 billion during the same period. The country’s software and services revenues expected to grow by 24-27 per cent to touch $ 49-50 billion in the current financial year 2007-08 with the IT software and services exports contributing US $28-29 billion, followed by ITeS/BPO between $10.5-11 billion. With the Software Technology Parks in India (STPI) Policy-specific tax holidays expiring in March 2009, several small and midsize ITeS companies have started searching for space in special economic zones (SEZs). For the ITeS companies moving to SEZs would impose restrictions to get high-quality manpower apart from entailing huge investments. As per the industry analysts, according to SEZ regulations, an IT/ITeS company with facilities in areas not in SEZs can move into an SEZ facility only by starting a fresh and setting up new infrastructure, instead of merely transferring physical assets from its existing set-up. Thus these small and midsize ITeS companies would have to bear additional capital burden.

Automobile The government of India is planning to invest Rs 100 crore in the Indore Auto Proving ground for developing climatic wind tunnel to design aerodynamics of cars. The climatic wind tunnel can simulate solar radiation, rainfall, and snowfall as well as temperature and humidity. It is a unique facility to test car air-conditioner performance and engine cooling performance. If created this facility would be first in India and probably one of its kind in the world. According to the International Organisation of Automobile Manufacturers (OICA), India has stood at 14th position in the 2006 world rankings for growth in passenger car production, three ranks lower compared to world rankings for 2005. India has posted a growth of 16.5 per cent in 2006 compared with 7 per cent in 2005. Yet, it was pushed down the ranking list largely because countries such as Finland and Nigeria, have posted growth of over 50 per cent. However, in absolute terms, India, with a production of 14.73 lakh cars, moved up one place to the seventh position in 2006 replacing the UK, which produced a total of 14.42 lakh cars, recording a drop of 9.7 per cent from the previous year. Japan ranks first with a production of 97.56 lakh cars followed by Germany with about 54 lakh and China with 52.33 lakh cars. 48