Indian Services Sector

INDIAN SERVICE SECTOR OVERVIEW AND IMPLICATIONS

PREPARED BYDEEPTI KAUR GABA SHWETA KASHYAP GURSIMRAN KAUR UMANG ANAND PALLAVI AGGARWAL

SERVICE 

Service is Intangible

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It is an economic activity that does not result in ownership

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Creates value for the customer

Providers of services constitutes the Tertiary sector of Indian economy

OVERVIEW-INDIAN SERVICE SECTOR 

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India stands out from other emerging economies because its growth has been led by the service sector. The Sector constitutes a large part of the Indian economy both in terms of employment potential and its contribution to national income The services sector contributes more than half of the GDP in India, i.e., 55.8%(2007-08)and 60.7% as per the recent data. The Service exports in India have grown up from US $ 19.1 billion to US $ 73 billion in 2006. The sector covers a wide range of activities.

ACTIVITIES COMPRISING THE SERVICE SECTOR (a) Trade` (b) Hotels and restaurants (c) Transport including tourist assistance activities as well as activities of travel agencies and tour operators (d) Storage and communication (e) Banking and insurance (f) Real estate and ownership of dwellings (g) Business services including accounting; software development; data processing services; business and management consultancy; architectural, engineering and other technical consultancy; advertisement and other business services (h) Public administration and defence (i) Other services including education, medical and health, religious and other community services, legal services, recreation and entertainment services (j) Personal services and activities of extra-territorial organizations and bodies.

SERVICE-BEFORE AND AFTER LIBERALISATION 

Before liberalization Services was the residual sector drawing refugees from agriculture

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The share of services in GDP was 28.2% in 1950s and it rose consistently over the period of the five decades and stood at 44.3% in the 1990s.

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The service sector's share finally rose from 43.69 per cent in 199091 to 51.16 per cent in 1998-99.

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Between 1996 and 2005- the triple impact of India’s external liberalization, domestic economic reforms and the rise of a global market for skilled services facilitated by information technology makes itself felt, share of services in India’s GDP grew from just over 40% to about 54%.

COMPARISON OF SERVICES AS A SHARE OF GDP WITH OTHER COUNTRIES S e r v ic e s a s s h a r e o f G D P in 2 0 0 5

80 70 60 50 40 30 20 10 0 U n it U n it M ex ed S ed K ic o ta te in g d s om

R us In d i a sia n Fed e ra t io n

B ra z il

C h in a

REASONS FOR GROWTH OF SERVICE SECTOR 

Both demand and supply factors have led to this growth.

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On the demand side, the high growth of services output was mostly attributed to factors such as increasing input usage of services by other sectors, mainly manufacturing sector (i.e. higher domestic demand); higher foreign demand due to trade liberalization; and high income elasticity for services.

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On the supply side, the increased trade in services following trade liberalization policies and other reforms in the 1990s induced this growth.

IMPACT OF SERVICES SECTOR ON OTHER MACROECONOMIC VARIABLES Looking at the magnitude of services growth and its inter-linkages with other sectors of the economy, it is important to understand the impact of services sector on other macroeconomic variables. The following issues have been studied: (i)

Whether the robust growth of the services sector has added a dimension Stability to India's GDP growth. (ii) Whether there has been a growing complementarity between services and industrial sectors of the economy. (iii) Whether the services sector also experienced 'jobless' growth like other commodity-producing sectors. (iv) Whether high growth of services sector had any inflationary impact on the economy. (v) Whether the imposition of services tax has boosted the Government’s effort at mobilising more resources

SECTORAL GROWTH PERFORMANCE OF INDIAN ECONOMY Before understanding this first point let us see, the sectoral growth performance of Indian Economy. There have been considerable increases in the service sector during last two decades, and looking in the trend of last five years the GDP have increased to 8%.

Three major service sectors that have seen remarkable growth are communication, transportation and financial services.

Fact 1: DECLINE IN VOLATILITY OF OUTPUT  So far as the fluctuation in GDP growth is concerned, there has been a gradual reduction in volatility in recent years.  The reduction in volatility of GDP growth rate has been contributed significantly by the services sector as it recorded the least volatile growth as compared to other commodity-producing sectors viz. agriculture and industrial sectors.

This validates our hypothesis of the growing synergy between the commodity producing sectors and the services sector.

FACT2:MUTED CYCLICITY IN GDP The size of output gaps have tended to become more moderate. Looking at the supply side, services sector has been the growth driver in the recent growth process, with more than sixty per cent share in Gross Domestic Product. This emerging growth dynamics of the Indian economy is expected to provide necessary a cushion to any likely international oil price shock to the economy.

It being less cyclical in relation to other sectors, the cyclicity in GDP growth is actually on the decline, with muted cycles operating now. Moreover, services are less fuel-intensive compared to the industrial sector.

Fact 3: Consumption demand as the major growth driver Looking at India's growth dynamics, it is found that the growth process remains significantly domestic demand driven, engendered by consumption and investment, although the share of exports is witnessing a gradual rise over the years. Consumption accounts for more than 60 per cent of India’s GDP. Since consumption is the least volatile component of demand, the volatility of this growth process is greatly reduced by the presence of its dominance.

CONSUMPTION DEMAND AS THE MAJOR GROWTH DRIVER AND GROWING PREPONDERANCE OF SERVICES IN CONSUMPTION It is found that the growth process remains significantly domestic demand driven, engendered by consumption and investment, although the share of exports is witnessing a gradual rise over the years. Consumption accounts for more than 60 per cent of India’s GDP. Since consumption is the least volatile component of demand, the volatility of this growth process is greatly reduced by the presence of its dominance.

GROWING COMPLEMENTARITY BETWEEN INDUSTRIAL AND SERVICES SECTOR GROWTH The principal objective here is assessing the contribution of services to industrial growth. 

It is found that producer services with a lion share of 70.4 per cent in 2004-05 dominates over various other services 

For the purpose of our analysis, we dis-aggregated the services sector value added into producer, consumer and government services since the eighties. It is found that producer services with a lion share of 70.4 per cent in 2004-05 dominates over various other services. 

It was found that the contribution of services to output growth was a meager 0.06 per cent per annum during the eighties, which increased substantially to 2.07 per cent per annum during the nineties. 

This validates our hypothesis of the growing synergy between the commodity producing sectors and the services sector.

Indian scenario-Services and inflation

On the contrary, an examination of the NAS (National accounts statistics) and price data indicates that the contemporary growth process is characterized by the co-existence of high services growth with low and stable inflation ,thanks to the credible monetary policy, which has kept the inflationary expectations at bay.

Trends in Services, GDP and WPI – Growth and Share (percent) GDP growth

Services growth

Share of services in GDP

3.16

4.22

40.69

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1981-82 to1990- 5.64 91

6.44

44.38

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1991-92 to 1995-96

5.38

6.67

47.97

7.99

1996-97 to 2000-01

5.92

8.03

51.68

5.08

2000-01 to 2004-05

6.30

7.95

56.28

1971-72 to 1980-81

WPI index

-

Conclusion drawn

The result clearly suggests that services sector share in GDP is not positively associated with inflation in the Indian case. The rise in services sector share in GDP along with effective monetary policy have, in fact, had a moderating impact on inflation. As seen in the table, in 1991-92 to1995-96 the service sector growth was 6.67, it was 8.03 in 1996-97 to2000-01.the service sector has shown a steady growth but WPI decreased during that period .

Factors that explain coexistence of high service growth and low inflation  In the recent years, inflationary impact of the services through growth in PAD(public administration and defense expenditure) appears to have been limited. Rising service invisibles have enabled a comfortable level of current account deficit that facilitated a more orderly movement of the exchange rate, in turn, moderating the inflationary impact on the economy 

IS SERVICE SECTOR GROWTH A“JOBLESS GROWTH”?? 

The concern that the acceleration in GDP growth in India in the post-reform period has not been accompanied by a commensurate expansion in employment has received a focused attention from the policy makers.

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It is generally argued that the growth in services sector is a ‘jobless growth’.

EMPLOYMENT AND SERVICES SECTOR – NOT SO 'JOBLESS' 

India’s share of employment growth in the tertiary has been higher than in manufacturing sector on Usual Principal Status (UPS) basis. In the decades of eighties and nineties, the fall in the share in employment in agriculture sector has been increasingly absorbed by the tertiary sector.

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However, in 2004-05 compared to 1999-2000, there is a change with the fall in employment share of the agriculture sector being absorbed both by the manufacturing and tertiary sectors with a higher share for the former.

THE TABLE PROVES THE ABOVE FACT

While the recent rise in share in employment growth in manufacturing sector is a positive development, the importance of services in employment creation needs to be noted, particularly when India is competitive in many laborintensive and skill-intensive services and there is a huge market even now.

Total employment (both organized and unorganized sector) trends as captured in the NSSO surveys are indicative of the fact that services sector has recorded a relatively faster growth in employment

CURRENT SCENARIO  Services sector in future providing about 70 per cent of the new job opportunities in the economy  Share of agriculture in total employment already falling, in the coming years, the share of services would increase  New employment possibilities in the services sector are construction, trade, transport, storage, financial services, communication and personal services  Employment in manufacturing would also expand, but its contribution to the total increase in employment would only be around 17 per cent. Thus, given the employment trends as emerging from diverse sources and the employment potentials at the sectoral levels, it may be argued that a broadbased high growth of GDP would lead to higher employment in the economy, with services sector playing a lead role.

SERVICE TAX-A SOURCE OF REVENUE   

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The number of services being taxed in India has increased progressively from 3 in 1994-95 to about 92 in 2006-07 . The services tax was imposed at the rate of 5 percent, this has now been increased to 12 per cent. There has also been a substantial growth in assesses base, which increased from 3,493 in 1994-95 to 7, 74,988 in 2004-05. The collection of the services tax revenue has witnessed a substantial expansion since 1994-95, rising from Rs. 407 crore in 1994-95 to Rs. 23,000 crore in 2005-06.

Services tax revenue as a percentage of total tax revenue has also increased substantially from 0.4 per cent in 1994-95 to 6.2 per cent in 2005-06 and is expected to reach 7.8 per cent in 2006-07 . The growth in services tax collection has equally been impressive. Growth in services tax revenue has been facilitated both by increase in rate of taxation as well as increased number of services being taxed. In more recent years, after recording a higher growth of 91.4 per cent in 2003-04, the growth in services tax collection has come down to 62 per cent in 200506,which is also by and large, impressive.

THE TABLE SHOWS THE ABOVE FACT

SERVICE SECTOR-COMPONENT OF INDIRECT TAXES 

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Further, services tax is emerging as an important component of indirect taxes. The share of services tax in indirect taxes has increased more than twenty-folds from a mere 0.6 per cent in 1994-95 to 13 per cent in 2005-06 . On the contrary, following the rationalization of duty structure, the share of indirect taxes has decreased over the years. Thus, it appears that falling share of custom duty has been amassed by the services Almost 60 per cent of the GDP is contributed by the services sector alone. The growth in absolute quantum of GDP and higher proportion of services sector therein holds promise for a larger revenue generation.

FUTURE POTENTIAL-THE INDISPENSABLE SERVICE SECTOR 

The fact already floating in the air of "TERRITORY ECONOMIA" that service sector has revivified the whole Indian economy by injecting life serum into it, is ample enough to approve it as an indispensable growth component of the Indian economy.

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The latest growth figures and its performance graph during last few years reveal that it is headlong in progression to enlist itself with the list of developed nations of the world.

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There has been a structural shift from the agriculture (primary) sector to industrial (secondary) and service (tertiary) sector like any other developed nation.

EFFECTS OF U.S. RECESSION ON INDIAN SERVICE SECTOR 

Not much effect as Indian Service Sector’s boom attributed to the hike in internal consumption and the per capita income of Indian lot.

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Certain sectors led by IT/ITES which make substantial amount of export to US are incurring losses.

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However, impact of US led recession which clicked from the sub prime crisis would be partial and somewhat of short span on our economy.

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Services like tourism, health care education, engineering, communication, transportation, finance, IT, banking will continue it boom.

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