Role of service sector in Indian

economy

Presented by:-

ABRITY BHATTACHARYA

Three sectors of Indian economy• Primary Sector:

When the economic activity depends mainly on exploitation of natural resources then that activity comes under the primary sector. Agriculture and agriculture related activities are the primary sectors of economy.

• Secondary Sector:

When the main activity involves manufacturing then it is the secondary sector. All industrial production where physical goods are produced come under the secondary sector.

• Tertiary Sector:

When the activity involves providing intangible goods like services then this is part of the tertiary sector. Financial services, management consultancy, telephony and IT are good examples of service sector.

Evolution of an Economy from Primary Sector Based to Tertiary Sector

Based

• During early civilization all economic activity was in primary sector.

• When the food production became surplus people’s need for other products increased. This led to the development of secondary sector.

• After growth of previous two economic activities a support system was the need to facilitate the industrial activity. Certain sectors like transport and finance play an important role in supporting the industrial activity, more shops became need and then ultimately, other services like tuition, administrative support developed. These all came under tertiary sector.

Interdependency of economic sectors(An example of cold drink)

• A cold drink contains water, sugar and artificial flavor.• Suppose if there is no sugarcane production then procuring sugar will

become difficult and costly for the cold drink manufacturer. • Now to transport sugarcane to sugar mills and sugar to the cold drink plant

needs the services of a transporter. A person or system of persons is required to maintain and monitor all these movements of goods from farm to factory to shop in different locations. That is where role of administrative staffs comes.

• Let us go back to the farmer. He also needs fertilizers and seeds which is processed in some factory and which will be delivered to his doorstep by some means of transportation.

• To top it all, at every step of these activities we require the proper monetary and banking system.

• So, in a nutshell this describes how interrelated all sectors of an economy are.

Services : Definition• A type of economic activity that is intangible, is

not stored and does not result in ownership. A service is consumed at the point of sale. Services are one of the two key components of economics, the other being goods. Examples of services include the transfer of goods, such as the postal service delivering mail, and the use of expertise or experience, such as a person visiting a doctor.

Service sector activities

The services sector covers a wide array of activities:

• Services provided by the most sophisticated sectors like telecommunications, satellite mapping, and computer software.

• Simple services like those performed by the barber, the carpenter, and the plumber.

• Highly capital-intensive activities like civil aviation and shipping.• Employment-oriented activities like tourism, real estate, and housing.• Infrastructure-related activities like railways, roadways, and ports • Social sector- related activities like health and education.

Thus, there is no one-size–fits- all definition of services resulting in some overlapping and some borderline inclusions.

Service sectors mainly includes

(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 care services .

Listing methods

• The National Accounts classification of the services sector incorporates:

trade, hotels and restaurants; transport, storage, communication, financing, insurance, real estate, business services; and community, social and personal services.

• In the World Trade Organization (WTO) list of services and the Reserve Bank of India (RBI) classification, construction is also included.

Services

• Represent a heterogeneous group of activities and has now become a prominent sector in the economies of most developed and developing countries, in terms of its contribution to national income, trade flows and foreign direct investment

Inter country comparison of Sector wise contribution to

GDP

Structure of Services in Indian Economy

• With the development of the economy, the contribution of service sector in national income or gross domestic product GDP has been growing progressively. The sectoral dis-aggregation of national income shows that the service sector has been growing relatively faster than other two sectors - primary and secondary throughout the post independence period of the Indian economy.

• Sectoral growth analysis of 2012-2013 indicates decline in all the segments. On year-on-year basis, agriculture and allied sector increased by 1.2% in Q2 (3.1% in Q2 of 2011-12); industry 2.8% (3.7%) and services 7.2% (8.8%).

GDP at Factor Cost at 2004-05 Prices, Share to Total GDP and % Rate of

Growth in GDP (01-09-2013)

GLOBALIZATION in service sector• The term globalization means international

integration.• Opening up of world trade, development of

advanced means of communication, internationalization of financial markets, growing importance of MNC's, population migrations and more generally increased mobility of persons, goods, capital, data and ideas.

• The impact of globalisation has been highly positive in almost all spheres of economic and social life and virtually very less negative effect.

• India's economic growth has been high, exports have boomed, incidence of poverty has been reduced, employment has surged, begging by India for economic aid has minimized, long-term inflation rate has gone down, scarcity of goods have disappeared, the quality of products available have improved substantially and overall India has become progressively vibrant and internationally competitive.

• Service sector is the lifeline for the social economic growth of a country.

• The real reason for the growth of the service sector is due to the increase in urbanization, privatization and more demand for intermediate and final consumer services. This scenario is a direct result of Globalization.

• After 1991, when globalization prominently entered India, service sector experienced a sudden boom.

• In advanced economies the growth in the primary and secondary sectors are directly dependent on the growth of services like banking, insurance, trade, commerce, entertainment, etc.

• Service sector is also a major contributor of national income and employment in recent days.

Service export• India has become one of the top five exporters of services amongst

developing countries.

• India’s services exports rose by 9.5% to $12.28 billion in February 2013, according to the Reserve Bank of India (RBI) data released on 15th April 2013.

• In February 2012, the services exports by Indian companies stood at $11.22 billion. However, the exports in February were down from a month ago at $13.89 billion in January. 

• The services sector contributes more than 50% to the country’s gross domestic product (GDP). During April-February period of 2012-13, the cumulative services receipt or exports have amounted to $121.18 billion. Imports of services were valued at $73.68 billion during the 11 months period in 2012-13.

Role of FDI in Service Sector

• FDI can play catalytic role in a growing economy like India. The role of FDI is becoming increasingly significant in the Indian economy. The service sector in India has tremendous growth potential and as a result it attracts huge FDI. The top subsectors attracting FDI inflows include service sector.

• The Computer Software and Hardware enjoy the permission of 100% FDI under automatic route.

• The limit of FDI in Telecom sector was increased from 49% to 74%.

• FDI Growth in various Service Sectors:

The share of services in FDI inflows increases to 48.4%.

If the shares of some other services like Hotels, tourism, trading, information and broadcasting, consultancy services, agricultural services, ports, retail trading etc are included then the total share of cumulative FDI inflows to the service sector would be 58.4%.

Contribution of service sector in employment

• Labor market outcomes are critical to economic policy evaluation. Growth of jobs, earnings, job quality in terms of worker status like regular work or casual or self employment and the access to social security benefits tell us much about the wellbeing of workforce in an economy.

• India’s experience appeared to be different with the share of services sector in GDP sharply going up in the 1990s, beginning with a share of 43% 1990-91, to reach a high share of 57% in 2009-10.

• India skipped the traditional sequence and the service-sector assumed the role of the lead sector in India’s growth path.

• In this scenario labor shifting out of agriculture got directly absorbed in services rather than in manufacturing. These labors got educated and trained to enter the field of services.

• Mostly skilled and educated labor forces are absorbed in this sector that comes mainly from urban India.

• In the decade of 2001-2011 the population of urban India grew by 2.76% per annum and its share of total population increased to 31.1 per cent in 2011 from 27.8 per cent in 2001.

• While analyzing the urban sector we pay particular attention to the following sectors: Manufacturing and Services.

• These two categories together have an employment share of 81% in total urban employment.

• The service sector output has grown rapidly since 1990 and by 2005 the share of services in GDP had reached well above the international norm (that corresponds to the average share of services in countries with similar per capita GDP).

• Estimates based on National Accounts Statistics (NAS) data indicate that, the service-sector has clocked an average annual compound growth rate of 8.7 % per annum between 1999-2000 and 2009-10, as against 7.7% achieved by manufacturing during the same period.

• Within the service-sector the group transport, storage and communications has grown the fastest at 11.8 %.

• Followed by trade and hotels at 8.5% and other business services at 7.9%

Service sector contraction• Services sector contracts for 4th successive month in October: HSBC

survey• According to Nov 5, 2013 news report:

India's services sector activity witnessed a moderate improvement in October from September's four-and-a-half year low of 44.6, even while indicating a fourth successive monthly contraction amid economic uncertainty, an HSBC survey said on Tuesday.

The HSBC/ Markit purchasing managers index for the services industry inched up to 47.1 in October from 44.6 in September, the fourth successive monthly contraction of service sector output across India.

An index value of below 50 indicates contraction. Business activity fell in five of the six categories monitored by the survey, with the sharpest decline noted at hotels and restaurants, HSBC