services sector

Probable questions:

1. What is the contribution of services sector to India’s economy?
2. Do you think India is over-tertiarised?

Significance

• It is the largest and fastest growing sector globally contributing to the global output and employing more people than any other sector
• Why has services sector grown?
  • Increase in urbanisation, privatisation and more demand for intermediate and final consumer services
  • Availability of quality services is vital for the well being of the economy
• Service sector in India accounts for more than half of India’s GDP.
• Key service industry in India: health and education
  • A robust healthcare system will help create a strong and diligent human capital who in turn can contribute productively to the nation’s growth
• Marked increase in services sector growth in the post liberalisation period
• Account for 55.2 % share of GDP
• Grows annually by 10%
• Contributing to about a quarter of total employment, high share of FDI inflows, over one third of total exports and recording a very fast growth of 27.4 pc through the first half of 2010-11.
• The ratcheting of the overall growth rate (CAGR) of the Indian economy from 5.7% in the 1990s to 8.6 pc during 2004-05 to 2009-10 was to a large measure due to the acceleration of CAGR in the services sector from 7.5 pc in the 1990s to 10.3 pc in 2004-05 to 2009-10.
• Services sector growth has been around 10 pc since 2005-06

Contribution of Services sector to Indian economy

• Share in GDP
  • 1950-51: 30.5 pc
  • 2009-10: 55.2 pc
  • If construction is included (RBI and WTO method): 63.4 pc
• CSO Classification
  • Trade, hotels and restaurants (16.3 of national GDP)
  • Transport, storage and communication (7.8 of GDP)
  • Financing, insurance, real estate and business services (16.7)
  • Community, social and personal services (14.4)
• Services trade surplus: USD 54 bn (2008-09)
  • USD 35.7 bn (2009-10)
• China (10.5%) followed by India (8.9%) remain the two fastest growing economies in top 12 countries.
• Statewise
  • States such as Delhi, Chandigarh, Kerala, Maharashtra, Bihar, Tamil Nadu and West Bengal have shares equal to or above all-India share of services in the GDP

FDI in Services

• 44 pc of FDI inflows between 2000 and 2009 were in the services sector (construction excluded)
  • Of this financial and non-financial companies have attracted the largest FDI
• Not all sectors are fully open for FDI. Reforms are needed.
• FDI in retail <do detailed>
  • FDI in single brand retail is permitted upto 51%. Now 100 pc.
  • FDI in multi-brand retail is being debated
  • Permitting FDI in retail in a phased manner beginning with the metros and incentivising existing retailer to modernise could help the interests of consumers as well as farmers
  • FDI in retail in bring in latest technology and supply chain management in the country
  • The move for FDI in retail has been opposed on the ground that the move could result in widespread closure of small time shops.
  • The way out could be lay down strict rules of operation for foreign retail chains
    • Include requirement of local procurement
    • This will also lead to stabilising prices by cutting out the middlemen
  • FDI in insurance
    • There is a proposal to raise the FDI cap in the insurance sector from the current 26 pc to 49 pc.
    • A bill for this has been pending before the Parliament
    • Some new sectors in insurance should be opened up – like health insurance
    • This will enable India export super speciality hospital services and medical tourism
    • Withdraw FDI restrictions on foreign re-insurance companies. This will help India access the global re-insurance businesses
  • Banking
    • There is a scope for attracting large investments from abroad
    • Currently 74% investment is allowed.
    • There is 10 pc limit on voting rights in respect of banking companies
    • FDI in banking should be seen in the context of overall financial stability
  • New Areas for FDI
    • Railways
      • Rakesh Mohan Committee on infrastructure had recommended throwing up the entire railway sector open to private investment
      • The finance ministry paper (2010) suggested 26 FDI in railways which can help overcome the current drought in investment in the railways
    • Shipping
      • India’s shipping tonnage is inadequate, accounting for mere 1.17% of global registration
      • The share of India’s vessels in carriage of India’s overseas trade had dropped from 40% in late 1980s to about 9.5% in 2008-09
    • Accountancy, legal services, healthcare and education services

Way Forward

• Retain the country’s competitiveness in those services sectors where it has already distinguished such as IT and ITeS
• The next task is to make foray into some traditional realms such as tourism and shipping where other nations have already established themselves.
• Make serious inroads into globally traded services in still niche areas for India such as financial services, healthcare, education, accountancy, legal and other business services where the country possesses a huge domestic market but has also displayed signs of making a dent in the global market.
• This requires
  • Reciprocal movements on the part of India in opening up its own market, liberalising FDI not only to improve the infrastructure but also to absorb the best practices that are so universally acclaimed.
  • Set up strong institutional bodies in the form of regulatory agencies to take care of both domestic and international interests in case when market-distorting moves are made by either party.
• Non-equity modes of engagement could be used to bypass the political difficulties in reforms