March , 2019
Higher service sector growth is redefining India's growth narrative
14:18 pm

Tushar K. Mahanti

India’s services sector’s activity accelerated last February providing some relief to policymakers. It boosted hopes of GDP growth in the quarter ending March 2019. This was after the economy lost momentum in the third quarter of the current year when it grew by 6.6%, the lowest in five quarters.

The Nikkei/IHS Market Services Purchasing Managers' Index rose to 52.5 in February from January's 52.2, staying above the 50-mark that separates growth from contraction. The upturn was driven by a quicker expansion in new work orders that supported a faster increase in output and job creation.

Despite input price pressures remaining high, firms did not fully pass that on to customers, suggesting overall inflation could remain below the central bank’s medium-term target of 4% in the coming months, giving the bank room for lowering policy rates. According to this survey, the service providers are optimistic about growth in the year ahead, although the expectations index still remained below the long-term average.

It is good news. India’s economic growth in recent years has largely been dependent on the performance of the service sector, which has grown steadily to become the biggest contributor to GDP. India in fact, is often cited as an example of an economy that is modernising by jumping directly into services without passing through manufacturing. The weight of manufacturing in India has been relatively stable over the past two decades, at much lower levels than China and other ASEAN countries. Business services – a high value added sector – represent a larger share of economic activity in India as compared to Europe.

Contribution to GDP apart, the sector’s growth is all the more important as it generates a large number of jobs. As per the ILO’s estimates, among the top 15 economies, the services sector accounted for more than two-thirds of total employment in 2016. If India’s share at 30.6% was lower compared to others, the share increased by about 5.5% point over the decade, between 2006 and 2016.

The sector is advancing rapidly. It is now poised for a bigger slice of India's GDP. Service sector accounted for about

55% of gross value added (GVA) in 2017-18. The share of industry and the primary sector was 28% and 17%, respectively, during the same period. Not only the share of service sector in GVA is overwhelmingly high but it has been increasing steadily. In seven years, between 2011-12 and 2017-18, the share of service sector in GVA has increased by 5.8% against the decline of 4.3% and 1.5% of the primary and industry sector.

This is no ordinary achievement for a country that is predominantly dependent on agriculture. The achievement of the sector is even more admirable since it has come against the backdrop of challenges of policy changes, a fragile world economic environment, and rising growth capital.

According to a recent report by the Confederation of Indian Industry (CII) and KPMG, India has moved up to become the fastest growing service economy in the world. The services sector is a dominant sector in India's GDP, with attractive foreign investment flows and its contribution to exports. The sector has attracted the largest FDI inflows in recent years and has witnessed substantial revenue generation with growing sectoral activities across trade, tourism, healthcare, transport, communications, information technology, finance, insurance, real estate, business services, social and personal services. The factors leading to this rapid rise are obvious. Increasing purchasing power, rising social mobility, and digital penetration to rural markets are creating a spurt in demand for the services sector in India.

The contribution of the services sector has increased very rapidly in India's GDP, with many foreign consumers showing interest in the country's service exports. This is attributed largely to our country's pool of highly skilled and educated manpower, who are not expensive to hire. Foreign companies are outsourcing their work to India especially in the area of business services, including business process outsourcing and information technology services. This has given a major boost to the services sector in India, which in turn has increased the services share in GDP.

IT industry is transforming India’s image in global market

Taking advantage of its skilled manpower and relatively low wages, India has become the leading centre of information technology. The Indian IT industry has set an ambitious target to touch $350 billion in revenue by 2025 from the present $ 150 billion. India’s information technology and business process management (IT & BPM) sector has grown at double digits despite static growth in global tech spending.

India is the leading sourcing destination across the world, accounting for approximately 55% market share of the $ 185-190 billion global services sourcing business in 2017-18. Indian IT & ITeS companies have set up delivery centres in about 80 countries across the world. The country has become the digital capabilities hub of the world. Indian IT industry is known for its cost competitiveness and high quality services across the world and has been instrumental in transforming the perception of India in the global economy.

An important growth driver, the IT industry contributes about 7-8% to India’s GDP. The sector is also a big employment generator. The sector employed an estimated 3.86 million workers directly and another 12 million indirectly in 2017 against 1.96 million and 9 million in 2009. India’s biggest software company, Tata Consultancy Services had a total employee strength of 4,00,875 as on September 2018 – up by two and a half times in eight years from 1,60,429 in 2010.

According to National Association of Software and Solutions Companies estimates, the industry is likely to create one lakh jobs in 2019, similar to the previous year. IT sector, which hired around one lakh net additional people in 2018, is now in a better position to capitalise on demand for digitised services from its clients. Backed by IT services, India is now the eighth largest exporter of commercial services in the (WTO, 2017) world with a share of 3.4%, which is double the share of India’s merchandise exports at 1.7%. Moreover, the ratio of services exports to merchandise exports increased from 35.8% in 2000-01 to 58.2% in 2016-17 indicating the growing importance of the services sector in India’s exports. India’s services exports increased at 8.3% annually compounded, during 2006-07 to 2016-17. Exports recorded a robust growth of 16.2% during the first half of 2017-18, with a turnaround in some major sectors like travel and software services. Notwithstanding the pricing pressure on traditional services and a challenging global business environment facing domestic software companies, software services exports increased by 2.3%, a mild improvement over the previous period.

Tourism turns a big employer

Tourism is another industry that has contributed significantly to service sector’s growth. India has done exceedingly well in the tourism sector in recent years. According to the World Tourism Organisation, international tourist arrivals in India reached a total of 10.04 million in 2017 – up by 14% over 8.8 million in the previous year. Foreign exchange earnings of the sector increased 19.1% in 2017 from $2.29 billion in 2016 to $ 2.73 billion.

The direct contribution of travel and tourism was accounted for 3.7% of GDP in 2017 and estimated to rise by 7.6% in 2018. This primarily reflects the economic activity generated by industries such as hotels, travel agents, airlines and other passenger transportation services including activities of the restaurant and leisure industries directly supported by tourists.

According to the World Travel and Tourism Council’s report ‘Travel and Tourism – Economic Impact 2018 India’s travel and tourism generated 26.15 million jobs directly in 2017 (5.0% of total employment) and this is forecast to grow by 2.8% in 2018 to reach 26.88 million. It also includes, for example, the activities of the restaurant and leisure industries directly supported by tourists. The travel and tourism sector is projected to employ about 33.20 workers directly by 2028 – an increase of 2.1% per year over the next ten years.

Real estate attracts huge FDI inflows

Real estate is another big job provider in India. Real estate and construction together, is the second largest employment provider in the country, next only to agriculture. The sector employed over 40 million workers in 2013, and as per projections is slated to employ over 52 million workers by 2017, and 67 million by 2022. Some of the recent reforms and policies related to Real Estate sector include the Pradhan Mantri Awas Yojana (PMAY).

Real estate sector in India is expected to reach a market size of $ 1 trillion by 2030 from $ 120 billion in 2017 and contribute 13% of the country’s GDP by 2025. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.

The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. The sector has attracted huge foreign investment over the years too. According to data provided by the department of industrial policy and promotion, the construction development sector in India received FDI equity inflows of $ 24.87 billion in the period April 2000-June 2018.

Services sector growth is governed by both domestic and global factors. The Indian facilities management market is expected to grow at 17% CAGR between 2015 and 2020 and surpass the US$19 billion mark supported by booming real estate, retail, and hospitality sectors.

The implementation of the Goods and Services Tax (GST) has created a common national market and reduced the overall tax burden on goods. It is expected to reduce costs in the long run on account of availability of GST input credit, which will result in the reduction in prices of services.


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