Over the years, the service sector has seen an evolution in the type and quality of services offered to customers. Service providers have grown to realize that change is the only constant thing, and if they do not evolve with the market, they risk losing market share to their competitors. Increasing competition has made it necessary for service firms to grow from purely selling services to building lasting relationships with their customers.
The service industry forms the backbone of the social and economic development of a region. It has emerged as the largest and fastest-growing sectors in the world economy, making higher contributions to the global output and employment.
Its growth rate has been higher than that of agriculture and manufacturing sectors. It is a large and most dynamic part of the Indian economy both in terms of employment potential and contribution to national income.
Growth of Service Environment
Over the years, the service sector has seen an evolution in the type and quality of services offered to customers. Service providers have grown to realize that change is the only constant thing, and if they do not evolve with the market, they risk losing market share to their competitors.
Increasing competition has made it necessary for service firms to grow from purely selling services to building lasting relationships with their customers. The growth of the service sector in the Indian economy can be understood with the help of the following points:
1) Services GDP: The survey reveals that the share of services in India’s GDP at factor cost (at current prices) increased from 33.5% in 1950-51 to 55.1% and 56.3% in 2011-12 and 57% in 2013-14 as per Provisional Estimates (PE). If construction is also included, the Service Sector’s share increased to 64.4% in 2011-12 and 64.8 % in 2013-14. The Indian service sector grew at approximately 8 percent per annum and contributed to about 64 percent of India’s GDP in FY 2015-16.
Out of the overall services sector, the sub-sector comprising financial services, real estate, and professional services contributed 21.6 percent to the GDP and grew the fastest among all sub-segments at 10.3 percent year-on-year in 2015-16. Projecting the employment figures, the survey says that while agriculture continues to be the primary employment-providing sector, the service sector (including construction) is in second place.
2) FDI in the Services Sector: The growth of the service sector is closely linked to the FDI inflows into this sector and the role of transnational firms. In contrast, the ambiguity in classifying the different activities under the services sector continues. In 2011-12, FDI inflows to the services sector (top five sectors including construction) grew robustly at 57.62 percent to the U.S. $12.14 billion compared to overall FDI inflows 33.6 percent.
In 2013-14, FDI inflows to the services sector (top five sectors, including construction) declined sharply by 37.6 percent to US$ 6.4 billion compared to overall growth in FDI inflows at 6.1 percent. The Indian services sector has attracted the highest amount of FDI equity inflows in April 2000-March 2016, amounting to about US$ 50.79 billion, which is about 18 percent of the total foreign inflows, according to the Department of Industrial Policy and Promotion (DIPP).
3) State-Wise Comparison of Services: A comparison of the share of services in the Gross State Domestic Product (GSDP) of different States and Union Territories (UTs) in 2012-13 shows that the service sector is the dominant sector in most states of India. States and UTs such as Chandigarh, Delhi, Kerala, Mizoram, West Bengal, Tamil Nadu, Maharashtra, Nagaland, and Karnataka have higher than all-India shares.
In 2013-14, the services sector was the dominant sector in most states of India, with a share of more than 40 percent in the gross state domestic product (GSDP) except for Arunachal Pradesh and Sikkim. Chandigarh is at the top with 88.4 percent, followed by Delhi with 87.7 percent. Banking and insurance have a vital share only in a few states/ union territories (UT) like Delhi, Maharashtra, and Chandigarh.
In 2013-14, Bihar had the highest services growth of 17.3 percent and Uttrakhand the lowest of 5.5 percent. In 2014-15, Delhi was at the top in services GSDP with a share of 87.5 percent, followed by Maharashtra at 63.8 percent, with growth rates of 8.2 percent and 5.7 percent, respectively. Puducherry had the highest services growth at 16.3 %, followed by Meghalaya at 13.2 %, owing to an increase in the growth rate of high weighted sectors like trade, hotels and restaurants, and real estate and business services.
Jammu and Kashmir had the lowest services growth at 2.0 %, mainly due to low and negative growth in most sectors except public administration. Bihar’s services sector growth was among the fastest with consistent double-digit growth in the last seven years due to high growth in the high weighted sectors like trade, hotels and restaurants, and real estate.
4) India’s Services Trade: India’s share of service exports in the world exports of services, which increased from 0.6 percent in 1990 to 1.0 in 2000 and further to 3.3 percent in 2013, has been increasing faster than the share of merchandise exports in world exports.
The growth rates of exports of services of India and the world show two distinct phases, the first till 1996 when the two growths had a scissor-like movement, and the second phase after 1996 when the growth of India’s service exports was higher than that of the world in almost all the years except 2009.
In this second phase, the former was much above the latter in upswings but almost converged with the latter during downswings. The overall openness of the economy reflected by total trade, including services as a percentage of GDP, shows a higher degree of openness at 55.0 percent in 2011-12 compared to 38.1 percent in 2004-05.
The openness indicator based only on merchandise trade is at 43.2 percent in 2011-12 compared to 28.3 percent in 2004-05. India’s services export grew from 16.8 billion US$ in 2001 to 155.6 billion US $ in 2014, which constitutes 7.5% of the GDP, making the country the 8th largest services exporter in the world. India’s Services Import at 81.1 billion US$ grew by 3.3% in 2014-15.
5) India’s Services Employment: The pattern of the sectorial share of employment has changed over the last two decades, with the share of agriculture falling from 64.75 percent in 1993-94 to 48.9 % in 20011-12 industries falling from 12.43 percent to 11.9 %. The shares of the services and construction sectors in employment, on the other hand, increased in the same period from 19.70 %to 26.8 % and 3.12 % to 9.60 %, respectively.
As per the National Sample Survey Office’s (NSSO) report on Employment and Unemployment Situation in India 2009-10, based on usually working persons in the principal and subsidiary statuses, for every 1,000 people employed in rural India, 679 people are employed in the agriculture sector, 241 in the services sector and 80 in the industrial sector.
In urban India, 75 people are employed in the agriculture sector, 683 in the service sector, and 242 in the industrial sector. Construction; trade, hotels, and restaurants; public administration, education, and community services are the three major employment-providing service sectors.
Nonfarm payroll employment increased by 151,000 in August 2016. Employment continued to trend up in health care and social assistance, food services and drinking places, professional and technical services, and financial activities.
6) Performance of Some Major Services: The performance of the different services based on the different indicators shows that sectors like telecom, tourism, and railways have done well in recent years. Shipping and ports show poor performance reflecting the effects of the global slowdown. The performance and outlook for the different services sectors based on limited firm-level data, based on estimates and forecasts, show a mixed picture for this year, though there are some grounds for optimism in the coming year.
Based on their significance in terms of GDP, employment, exports, and future prospects, India’s important commercial services have been dealt with in detail in this section. Care has been taken to avoid duplication to the extent possible of services covered in other chapters like infrastructure, financial intermediation, and social sectors.
India’s important services include trade, tourism, shipping and port services, real estate services, business services including IT and IT-enabled Services (ITeS), Research and Development (R&D) services, legal services, and accounting and audit services.
Factors Responsible for Emerging Service Environment
There are numerous factors behind the success of the service sector in India, which are explained below:
1) Increase in Wealth: The wealth of citizens of developed countries and many developing countries have increased largely over the years. Many multinational companies are attracted to India due to a strong 250 million middle-income group that demands different products and services. The increase in the wealth of Indians has given a rise in demand for services such as travel, tourism, entertainment, personal services, clubs, etc.
2) More Spare Time: The tendency to have more spare time is increasing worldwide so that people can have enough time to spend with their families or do their personal work. Even in India’s semi-urban or rural parts, people change how they used to look at the holidays or leisure time. Individuals are spending a lot of time and effort into education, training, and skill development. They are also spending time on entertainment, personal care, children, touring, and so on.
3) Working Woman: Most of the economies see an increase in the number of working women. Gone are the days when women used to be considered as merely housewives or inferior to men. The capability of women is proven equal to and in some areas, even more, competent than men. There is a requirement of those services that can reduce their burden of the house and office activities.
4) Increased Population of DINKS: Double income group with no kids is called DINKS. There is no physical problem associated with couples for not having children. Because of their busy schedule and careers, they do not attempt to have children. In the first few years of marriage, they avoid having any child. Later, due to the high pressure of their jobs and the pressure exerted due to their promotion and transfers, they ultimately decide not to have any child. DINKS also tend to spend lavishly on services.
5) Increased Life Expectancy: A better life expectancy is resulted due to better economic prosperity and improved living standards, which have eventually led to an increased number of older people. Due to this, there is an increased demand for healthcare services and nursing homes.
6) More Complex Products: Many new products are offered to customers due to increased technological advancement. Compared to past generations, there is a very complex and greater requirement of different types of services from people in day-to-day life. Experts need to maintain a computer, washing machine, fridge, laptop, etc. Thus, there is an increased demand for these types of services.
7) Complex Lifestyles: Several roles are being played by the members of the society. In order to reduce or share their burden, there is an increased demand for various services. The services of legal consultants, labor supply services, employment services, income tax consultants, baby care centers, etc., are some examples.
8) Increased Anxiety for Limited Resources and Ecology: Financial resources are scarce or limited for most individuals, but there is always a need for utilizing various services. There will be a requirement of financial strength for having a tangible product for different types of services. Similarly, these products may not be used fully by the individuals.
Thus, there will be an increased demand for door-to-door service, car rentals, accommodation, computer hardware rental, etc. The focus of many economies has shifted towards maintaining the environment and ecological balance.
9) More and More Products: In past years, many choices of different products have been offered to the customers. Due to the rapid development of new and innovative products, the lives of existing products are reduced significantly. The product’s functionality is not entirely considered by the consumers before buying it due to their busy schedules. Therefore, there is an increased demand for various consultancy services.
10) Young Generation: Compared to the old generation, more and more services are used by the young generations, and they require a lot of them. The consumption of different services will facilitate the young generation to deal with numerous changes occurring in their lives.
11) Technology Innovation: The implementation of advanced tools and methods is commonly known as technology. There is a continuous attempt from the innovative service providers to look for the different methods of reducing the processing time, automating the service providing, reducing the cost (and thus prices), having a close connection with the customers, developing new services, creating appeal for the existing products, enabling fast delivery of services, etc.
12) Cultural Changes: Different types of knowledge, taboos, behavior, values, and traditions that are passed from one generation to another are known as ‘culture.’ There is a powerful impact of culture on the lifestyle of individuals. As culture is a process of development, it is dynamic.
Change is an inevitable part of the culture. Different societies have a different pace of change. Some cultures change fast, some moderately, and some very slowly. There is no uniformity in the changes which occur in Indian culture. The effects of these changes are felt more in the last century.
13) Increased Awareness of Healthcare: There is a significant improvement in healthcare services in India. The awareness of common citizens towards healthcare has resulted in the form of higher life expectancy. The increased demand for healthcare services is evident from psychological counseling, health centers, medical counseling, diagnostic centers, fitness clubs, and health-related information sites.
In order to spread awareness among the rural population and illiterate individuals, different types of campaigns have been started by the government and many other social organizations. Many campaigns such as immunization, childcare, preventive medicines, and family planning have been initiated to promote healthcare awareness in India’s rural parts.
14) Economic Liberalisation: Many significant changes were induced in the Indian business scenario by economic liberalization initiated in 1991. The Indian market was opened for MNCs. The state-owned monopolies were finished in many service areas due to disinvestments and privatization policies. Entrepreneurs were encouraged to start their ventures in different fields due to the eradication of licensing.
15) Migration: One of the major reasons behind India’s service sector’s development was the migration from rural to urban and semi-urban areas. Expansion of different cities and townships resulted due to migration in the hopes of earning livelihood and jobs. Due to this, many sectors, such as transportation, real estate, infrastructure services, rentals, etc., have seen unprecedented growth. There is an increased demand for personal services and urban placement services.
16) Export Potential: There is an upside movement in the export market of services worldwide. India is among the top prospect sources for services. Several services are exported to different parts of the world by India. Software services, tourism, banking, insurance, transportation, data services, construction labor, entertainment, maintenance services, communication, education, healthcare, accounting services, design engineering, and commercial services are the common services that are exported to other countries.