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ECONOMIC SURVEY VOLUME 2

CHAPTER 9

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CHAPTER – 9

SERVICES SECTOR

INTRODUCTION

The services sector continued to be the key driver of India’s economic growth contributing almost 72.5%
of gross value added growth in 2017-18. Due to reforms initiated by the government (such as
digitization, e-visas, infrastructure status to Logistics), the sector is expected to grow at 8.3% in 2017-18.

INTERNATIONAL COMPARISON

• Among top 15 countries (in terms of overall GDP), China (9.8 pp) recorded the highest increase
in services share to Gross Value Added (GVA) during 2006-16, followed by India (7.1 pp) and
Spain (7.0 pp).
• In 2016, services GVA growth rate (at constant prices), was highest in India at 7.8% followed by
China at 7.4%
• As per ILO’s estimates, the services sector accounted for more than two-thirds of total
employment in 2016 in top economies except India and China, with India’s share of 30.6% being
the lowest.
• As per the latest World Trade Organization (WTO) data for first half of 2017, services export
growth for the World was 4.3% (average of Q1 and Q2) and robust at 9.9% for India.

INDIA’S SERVICE SECCTOR

Services GVA

As per the First Advance estimates of national income 2017-18 released by Central Statistics Office
(CSO), following are the growth estimates:

Category 2017-18 2016-17

Services 8.3 7.7
Trade, hotels, transport, communication 8.7 7.8
Financial, real estate & professional services 7.3 5.7
Public administration, defence & other services 11.3 6.9

State wise comparison of services

• Out of 32 states and UTs, services sector contributes to more than half of the gross state value
added (GSVA) in 15 states and UTs.
• The major services in most of the states are trade, hotels and restaurants, followed by real
estate, ownership of dwellings and business services.
• Wide variation in terms of share and growth of services GSVA:

Category Top Bottom

GSVA share Delhi, Chandigarh (80%) Sikkim (31.7%)
GSVA growth Bihar (14.5%) UP (7%)

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FDI in India’s Services Sector

During 2017-18 (April-October), the FDI equity inflows to the services sector grew by 15.0%
In the last three years, the Government has undertaken a number of reforms to ensure that India
remains an increasingly attractive investment destination, which include announcement of
National Intellectual Property Rights (IPR) policy, implementation of GST, reforms for ease of doing
business, etc.

Recently, in January 2018, Union Cabinet approved amendments in FDI policy allowing 100% FDI under
automatic route for Single Brand Retail Trading. Foreign airlines also have been allowed to invest up to
49 per cent in Air India.

India’s Services Trade

• India remained the eighth largest exporter of commercial services in the world in 2016 (WTO,
2017) with a share of 3.4%, which is double the share of India’s merchandise exports in the
world at 1.7%
• 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.
• Services exports recorded a robust growth of 16.2% during April-September 2017-18, with a
turnaround in some major sectors like travel and software services.
• India’s services imports exhibited growth of 17.4% in April-September 2017-18. Net services
receipts rose by 14.6% during April-September of 2017-18.
• Net surplus in services financed about 49% of India’s merchandise deficit in 2017-18 H1 and
cushioned the CAD.
• To boost services exports, the Government in its mid-term Review of Foreign Trade Policy 2015-
2020, has increased incentives under Services Exports from India Scheme (SEIS) by 2%

MAJOR SERVICES: OVERALL PEFORMANCE

• Good performance of Tourism, Aviation, and Telecom sectors.

• Only sector showing signs of stress is the Construction and Real Estate sector.
• In the first two quarters of 2017-18, all sectors performed well except Hotel & Restaurant and
Construction & Real Estate sectors, in Q2.

Following table shows Growth in Net Sales of Select Services: Company Based Data

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MAJOR SERVICES: SECTOR-WISE PERFORMANCE AND SOME RECENT POLICIES

Tourism
In India, the tourist sector is performing well. Following shows the growth rates in FTA (Foreign Tourist
Arrival) and FEE (Foreign Exchange Earnings).

Categories 2016 2017

FTA 9.7% 15.6%
FEE 8.8% 20.8%

Various initiatives have been taken by the Government to promote tourism:

- introduction of the e-Visa facility under three categories of Tourist, Medical and Business for
the citizens of 163 countries;
- launch of Global Media Campaign for 2017-18 on various Channels;
- launch of ‘The Heritage Trail’ to promote the World Heritage Sites in India, launch of
International Media Campaign on various international TV channels;
- Celebration of ‘Paryatan Parv’ having 3 components namely :
o ‘Dekho Apna Desh’ to encourage Indians to visit their own country
o ‘Tourism for All’ with tourism events at sites across all states in the country
o ‘Tourism & Governance’ with interactive sessions & workshops with stakeholders on
varied themes.

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IT –BPM Services

• India’s Information Technology – Business Process Management (IT-BPM) industry grew by 8.1%
in 2016-17 to US$ 139.9 billion.
• IT-BPM industry is estimated to employ nearly 3.9 million people in 2016-17.
• Initiatives taken:
- establishment of BPO Promotion and Common Services Centres to help create digital inclusion
and equitable growth and provide employment to 1.45 lakh persons, mostly in the small towns;
- setting up a separate Northeast BPO promotion scheme with 5000 seats and having
employment potential of 15000 persons;
- preparing the draft open data protection policy law;
- Initiatives like Digital India, Make in India, Smart Cities, e-Governance, push for digital talent
through Skill India, drive towards a cashless economy and efforts to kindle innovation through
Start-up India.

Real Estate and Housing

• Real estate and construction together, is slated to employ over 52 million workforce by 2017,
and 67 million workforce by 2022. But growth in real estate has decelerated over the past few
years.
• Residential launches across top 14 cities in India during H1 2017 fell to the lowest in past five
years to about 58,000 units as per the National Real Estate Development Council (NAREDCO).
• The reason for the substantial and continuous decline in FDI investments in this sector over the
past five years was that the offshore investors have been deploying majority of their funds
through debt or structured debt route.
• However, it has begun to show signs of improvement with the total FDI of US$257 million in H1
2017 due to - regulatory environment, enhanced infrastructure, and amendments to Real Estate
Investment Trusts (REITs).
• On demand side, the individual housing loan disbursements of PSBs and Housing Finance
Companies (HFCs) have shown an increase of nearly 1% in 2016-17 over 2015-16.
• However, rising NPAs, higher risk provisioning assigned to real estate sector and dwindling
profits in the real estate sector, have made banks reluctant to lend to the sector. Interestingly,
Private Equity (PE) funds and financial institutions such as pension funds and sovereign wealth
funds have replaced banks as the largest source of this sector.

Initiatives taken to meet target of ‘Housing for All by 2022’ mission:

- PPP policy for affordable housing segment

- Pradhan Mantri Awas Yojana (PMAY): Government sanctioning over 3.1 million
houses for the affordable housing segment in urban regions.
- Extension of Credit Linked Subsidy Scheme (CLSS) under PMAY to the Middle Income
Group (MIG)
- Enactment of Real Estate (Regulation & Development) Act, 2016: It involved
compulsory disclosures and registrations to increase transparency whereas
increased accountability would lead to higher growth across the real estate value
chain.

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Research and Development

• India-based R&D services companies, which account for almost 22% of the global market, grew
at 12.7%, however, India’s gross expenditure on R&D has been low at around 1% of GDP.
• India’s Engineering R&D (ER&D) globalization and services market, which currently stands at
about US$ 22 billion, is expected to reach US$ 38 billion by 2020.
• Initiatives undertaken:
- Establishing the Atal Innovation Mission (AIM) in the NITI Aayog.
- The agreement between India and Israel in 2016 to enhance bilateral cooperation in science
and technology: it provides US$ 1 million from each side in the next two years to support new
R&D projects in the areas of big data analytics in healthcare and cyber security.
- MoEFCC has announced an R&D initiative to develop next generation sustainable refrigerant
technologies.
- DIPP aims at lowering the time taken to clear pending Intellectual Property Rights (IPR)
applications.

Space Services
- Satellite based mapping and launching services are the two areas in which India is making a
mark and has huge potential for the future.
- Indian Space Research Organisation (ISRO) is pursuing a project to support ASEAN Member
states including Myanmar to receive and process data from Indian remote sensing satellites
(Resourcesat-2 and Oceansat-2) and also to provide training in space science, technology and
applications for the benefit of the ASEAN member countries.
- Foreign exchange earnings of India from export of satellite launch services increased noticeably
in 2015-16 and 2016-17 to Rs 394 crore and Rs 275 crore from Rs 149 crore in 2014-15.
- During 2017-18, Antrix has been working with various resellers across the globe for distribution
of IRS data, including Europe, USA, Latin America, Africa and South Eastern Countries.

Conclusion

The prospects of services sector look bright with good performance of sub sectors like Tourism,
Aviation, and Telecom, robust services trade performance with even growth of major services like
software returning to positive territory.
The downward risk, however, lies in the external environment for software and business services.

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