OUR PERVIEW OF THE INDIAN SERVICE

SECTOR

S- Satisfying both Indian and Global consumers

E- Economic growth indicator

R- Rapid Advancements

V- Virtually Alive

I- Innovative

C- Contributes highest to the GDP

E- Enormously huge in size

 INDIAN ECONOMY- INTRODUCTION
As per the nominal GDP, economy of India is the eleventh largest economy in the world and the fourth
largest by purchasing power parity (PPP). The 2009 repots enumerates following data:

• India’s per capita per capita GDP (PPP) is $3,176

• The IMF ratings have ranked the economy on 127th.

From 1947-1991, India was dominated by social democratic-based policies. The economy was
characterized by extensive regulation, protectionism, public ownership, pervasive corruption and slow
growth. Since 1991, continuing economic liberalization has moved the country toward a market-based
economy.

After the strong economic reforms the socialist inspired economy of a post-independence Indian nation,
began to develop a fast-paced economic growth, as free market principles were initiated in 1990 for
international competition and foreign investment. The LPG (liberalization, privatization, and globalization)
reforms marked the beginning of free flow of goods and services across the global world without any legal
and economic trade barriers. Economists predict that by 2020, India will be among the leading economies
of the world.

A revival of economic reforms and better economic policy in first decade of the 21st century accelerated
India's economic growth rate. By 2008, India had established itself as the world's second-fastest growing
major economy. However, as a result of the financial crisis of 2007–2010, coupled with a poor monsoon,
India's gross domestic product (GDP) growth rate had significantly slowed down to 6.7 percent in 2008-09,
but thereafter it recovered to 7.2% in 2009-10, while the fiscal deficit rose from 5.9% to a high 6.5% during
the same period.

The statistics show that India's large service industry accounts for 57.2% of the country's GDP while the
industrial and agricultural sector contributes 28% and 14.6% respectively. However, Agriculture is the
predominant occupation in India, accounting for about 52% of employment. The service sector makes up a
further 34% and industrial sector around 14%. The labor force comprises of half a billion workers. Major
agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water
buffalo, sheep, goats, poultry and fish. Major industries include telecommunications, textiles, chemicals,
food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information
technology enabled services and pharmaceuticals. Previously a closed economy, India's trade has grown
fast. India currently accounts for 1.5% of world trade as of 2007 according to the WTO. According to the
World Trade Statistics of the WTO in 2006, India's total merchandise trade (counting exports and imports)
was valued at $294 billion in 2006 and India's services trade inclusive of export and import was $143
billion. Thus, India's global economic engagement in 2006 covering both merchandise and services trade
was of the order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India's trade has
reached a still relatively moderate share 24% of GDP in 2006, up from 6% in 1985.

Indian Economic Indicators

Gross domestic product (GDP), being the value of all final goods and services produced within the national
boundaries of the country in an accounting year, is thus reflective of the aggregate demand and output of
the Indian economy. So we have made use of the GDP figures and data over the past years to interpret
about the growth of Indian economy and the share of service sector in that growth.
Growing domestic demand and increased production have changed the Indian economy. GDP has
picked up, trade has become global and the services sector has led change by throwing its gates open to
outsourcing. Indian economic indicators are pointing towards the country’s transition to a developed
economy.

GROWTH PERFORMANCE
During the last three decades, Indian economy has witnessed a significant shift in its position in the world
economy.
“The share of Indian economy in the world GDP stood at 6 per cent of world GDP in 2002. During the
eighties, India along with China, contributed to the rising share of Asia in world GDP. The last three
decades have witnessed a shift in the structure of world GDP away from US the single largest economy, in
favor of emerging economies like India and China. With the robust growth witnessed in these economies,
the ongoing trend of change in their weights in the world GDP is expected to strengthen further.”
Source: Working Paper, ICRIER

An independent study suggests that by 2025, the share of Indian economy in the world GDP is expected to
scale up from 6 per cent in 2002 to 11 per cent in 2025 and further to 14 per cent in 2035. Thus it became
the third largest contributor to the world GDP after China and US, significantly above Japan and Euro zone
economies.

World Share of GDP at purchasing power parity

Current Projections (2002 prices)

2002 2015 2025
US$ billion Share Share Rank Share Rank
China 586.1 12.1 19.5 1 25.2 1
US 1030.8 21.3 19.5 2 17.8 2
India 280.5 5.8 8.2 3 11.2 3
Japan 342.5 7.1 5.2 4 5.5 4
Germany 223.8 4.6 3.5 5 3.0 5
France 150.1 3.3 2.7 6 2.4 6
UK 154.9 3.2 2.7 7 2.3 7
Russia 118.8 2.4 2.8 8 2.8 8
Italy 152.5 3.1 2.5 9 2.0 9
Brazil 135.5 2.8 2.2 10 1.9 10

During 2004-05, the economy grew by 7.5%, further the growth had rose to 8.1% in 2005-06. This
accelerated growth has boosted up the sentiments and expectations of the economists with respect to the
future growth prospects.
The current growth momentum is supported by strong performance of the manufacturing and services
sector. The performance of agriculture however has been marked by significant volatility. The sector
recovered from the drought of 2002-03 to record a strong growth of 10 per cent in 2003-04, growth slowed
down again in 2004-05 to 0.7 per cent.

During the last decade while the industrial growth has been led by the manufacturing sector, the service
sector has registered accelerated performance on account of growth of sub-sectors like communication,
hotels and restaurants and banking and insurance.
 Figure1: Sectoral Growth V o l a t i l i t y

Growth
GrowthVolatility
V o l at i l t yi
1 . 05
1 . 05

1 1.0 .0

per c e n t 5 .0
5 .0
cent
0 .0
per 0 . 0
1 9 9 3 -9 4

1 9 9 4 -9 5

1 9 9 7 -9 8
1 9 9 6 -9 7

1 9 9 9 -0 0

2 0 0 0 -0 1

2 0 0 5-0 6 A E
2 0 0 3-0 4
2 0 0 1 -0 2

2 0 0 2 -0 3

2 0 0 4-0 5
-5 .0
-5.0
1993-94 1994-95 1995-96 1996-97 1997-98 1 9 - 99 9 8
1999-00 2000-01 2001-02 2002-03 2003-04 2 0 - 00 5 4
2 0 - 00 65 A E
-1 .0

GDP Agricult ure I n d u s t ry Se rv ic e s

In the above figure, the horizontal OX axis represents the time periods and the vertical OY axis represents
the percentage GDP growth of Indian economy. The single black line denotes the growth of agriculture
sector, the dark black line denotes the service sector and the pink line is for the contribution of industry in
the GDP growth percentage.

It could be easily inferred that the agricultural growth was highly volatile; and its contribution to the gross
domestic product has been continuously declining. Agriculture’s share fell from 42 per cent during 1970s to
35 per cent and then to 29 per cent during 1980s and 1990s respectively. The share has further reduced to
about 21.7 per cent of the total domestic product during 2000-05. Further the share of industrial growth has
remained strong since the start and has remained stable around 26%. Services sector on the other hand, now
accounting for more than half of the GDP has exhibited continued and significant growth acceleration.
These figures have been given by Central statistical organisation.
 APPENDIX TABLE 3: QUARTERLY GROWTH RATES AND COMPOSITION OF
REAL GROSS DOMESTIC PRODUCT
(1999-2000 prices)

2005- 2006-07 2007- 2008-

SECTOR Q Q06 Q Q Q Q Q Q Q Q2 08 Q Q Q Q 09
Q3 Q4
1 2 1 3 2 4 3 5 4 6 1 7 2 8 3 9 4 10 1 11 12 3 13 4 14 1 15 2 16 17
1. Agriculture and Allied 3. 4. 8. 5. 2. 3. 4. 5. 4. 3. 8. 2. 3. 2. - 2.
Activities 7 4 2 9 8 3 1 3 3 9 1 2 0 7 0.8 7
(19. (16. (23. (18. (18. (15. (22. (17. (17. (14. (22. (16. (16. (13. (20. (16.
2. Industry 7) 0) 4) 7) 5) 0) 2) 9) 6) 3) 0) 9) 8) 6) 6) 4)
9. 6. 7. 8. 10. 10. 10. 11. 8. 7. 7. 5. 5. 4. 1. -
of which: 9 7 3 7 1 7 4 6 5 5 6 9 1 8 6 0.5
a) Manufacturing (19. (20. (18. (19. (19. (20. (18. (19. (19. (20. (18. (18. (19. (19. (17. (17.
8) 4) 4) 1) 9) 5) 6) 4) 7) 2) 3) 9) 2) 7) 6) 8)

APPENDIX TABLES
b) Mining and
quarrying 10. 8. 8. 9. 11. 11. 11. 12. 10. 8. 8. 6. 5. 5. 0. -
7 1 2 4 5 9 0 5 0 2 6 3 5 1 9 1.4
c) Electricity, gas and (15. (15. (14. (14. (15. (16. (14. (15. (15. (16. (14. (14. (15. (15. (13. (13.
water Supply 2) 9) 3) 9) 5) 2) 6) 2) 6) 1) 5) 9) 2) 7) 8) 9)
7. 1. 3. 6. 7. 7. 9. 11. 0. 3. 4. 4. 4. 3. 4. 1.
3. Services 5 8 9 3 2 0 2 4 1 8 2 7 6 7 9 6
(2. (2. (2. (2. (2. (2. (2. (2. (2. (1. (1. (2. (1. (1. (1. (2.
of which: 2) 1) 0) 2) 1) 0) 0) 2) 0) 9) 9) 1) 9) 9) 9) 0)
a) Construction 7. 2. 4. 5. 3. 5. 6. 4. 6. 5. 3. 4. 2. 3. 3. 3.
2 4 8 9 6 9 9 7 9 9 8 6 7 8 5 6

Note : 1. Figuresin parenthesesare percentageshare to GDP.

2. Quarters Q1, Q2, Q3 and Q4 denote April-June,July-September,October-Decemberand January-
March,respectively.
3. Constituentsmay not add up to 100 due to roundingoff.
Source: Central StatisticalOrganisation.
 ROLE OF REFORMS
During 1980s, India witnessed an average growth rate of 5.9 per cent. The growth, however, was primarily
financed by increased government borrowings resulting in increased accumulation of debt, thus resulting in
a severe balance of payments crisis in 1991, and arousing a shift in policy framework. The reforms of
1990s aimed at a systematic shift towards a more open economy with a greater involvement of market
forces, change in the regulatory structure, increased participation of private sector and redefining the role of
public sector.
Post reforms period saw the average growth during the 1992-93/99-00 increasing up to 6.4 per cent. While
the average growth during the 90s was slightly better than that during the
80s, unlike the latter period it was backed by a stable external debt scenario. Post reform period also
witnessed a sharp reduction in overall poverty in the country.

Growth and Development Performance (Per cent)

Economic Prospects for 2010

The global economy seems to be recovering after the recent economic shock. The Indian economy,
however, was hit in the latter part of the global recession and the real economic growth witnessed a sharp
fall, followed by lower exports, lower capital outflow and corporate restructuring. It is expected that the
global economies will continue to sustain in the short-term, as the effect of stimulus programs is yet to bear
fruit and tax cuts are working their way through the system in 2010. Due to the strong position of liquidity
in the market, large corporations now have access to capital in the corporate credit markets.

2008 2009 2010

GDP Growth 9.40% 7.30% 5.40%

CPI 6.40% 9.30% 5.50%

Indian Economy 2010

In order to sustain economic growth during the time of the worst recession, government authorities in
India have announced the stimulus packages to prop up economic growth. To finance the stimulus
packages, the Indian government has raised over $100 billion over the last four quarters in a way to finance
the stimulus package. The country’s public debt, according to the RBI, has surged to over 50% of the total
GDP and the RBI has started printing new currency notes.
 SERVICE SECTOR
DEFINITION
The segment of the economy that provides services to its consumers constitutes the service sector. This
includes a wide range of businesses including financial institutions, schools, transports and restaurants. It is
also known as "tertiary sector of industry," or "service industry/sector".

The various sectors that combine together to constitute service industry are:

• Trade
• Hotels and Restaurants
• Railways
• Other Transport & Storage
• Communication (Post, Telecom)
• Insurance
• Banking
• Dwellings, Real Estate
• Business Services
• Public Administration; Defense
• Personal Services
• Community Services
• Other Services

Over view of service sector

As per the statistics from a reliable source, Service Sector in India today accounts for more than half of
India's GDP. In year 2006-2007, the share of services, industry, and agriculture in India's GDP is 55.1 per
cent, 26.4 percent, and 18.5 per cent respectively. This sector plays a leading role in the economy of India,
and contributes to around 68.6 percent of the overall average growth in GDP between 2002-03 and 2006-
07. There has been a 9.4 percent growth in the Indian economy during 2006-07 as against a rise of 9
percent in the same during 2006-06. During this growth in Indian economy, the service sector witnessed a
rise of 11 percent in the year 2006-07 against the 9.8 percent growth in 2005-06.
 Review of recent 5-year plans in light of service sector

Eighth-five year plan (1992-97)

This plan was termed as Rao and Manmohan model of Economic development. The projected resource
allocation of the plan:

• Transport 879.10 billion

• Communication 2600 billion
• Trade 9.06%
• Financial services 10.21%
• Communication 14.31%
• Other services 6.22%

Ninth-five year plan (1997-2002)

Total outlay was 85920 billion

• Transport 12132 billion 14.1 %

• Communication 4761 billion 5.5 %
• Financial services 8.93%
• Communication 17.14%
• Other services 8.19%
• Trade 5.86 %

Tenth-five year plan (2002-07)

• The projected resource allocation of tenth year plan was 15,92,300 crores
• Transportation allocated 225977 crores
• Information Technology 5492 crores
• Post 1350 crores
• Telecommunications 86984 crores

Eleventh-five year plan (2007-2012)

• Transportation allocated 202045

• Post 3536
• Telecommunications 80753
• Tourism 4558
• Information technology 11048

Thus it can be clearly seen that a large portion of the total outlay for the upcoming planning period is
allocated by the planning commission to the service industry.
 Growing Importance of Services Sector for India
Services sector has become important for many economies in the world and very important particularly for
India. While for the medium and long term, it is important to accelerate the growth of industrial sector
particularly manufacturing sector to catch up with the growth of services sector and maintain a decent and
stable growth of agricultural sector, which is still subject to the conditions of nature, in the short and even
medium term, the sure bet for higher growth of the Indian economy lies in further accelerating the growth
of the services sector, which can be done with considerable ease compared to other sectors. This is evident
from the following facts and figures have been taken from the study done by Mnautiyal and from the
official site of RBI.

GDP Growth
In India, the growth rate of services in 2006-07, 2007-08 and 2008-09 were 10.6 percent, 11.3 per cent and
8.4 per cent, respectively. The GDP growth performance of the Indian economy during 2007-08 and 2008-
09 indicated rate of GDP growth of the economy from 8.6% to about 7.7% per year. The economy has even
moved up to 10.3% in 2005-06 and 9.8% in 2006-07. The manufacturing sector growth was more or less
the same at 6% in 1993-03 compared to 6.1% in 1983-93, though it has risen to 9.1 per cent in 2005-06 and
12.3% in 2006-07 with the aim of 12% (10.5% projection for Industries) in the 11th Plan period.
Agriculture sector growth was low at 2.3% in 1993-03 and fluctuated from one extreme of 10 per cent in
2003-04 to another extreme in 2008-09 to 2.7%. In 2005-06, agricultural growth rate was 6.0 per cent, but
in 2006-07 it again fell to 2.7% and is expected to continue at 4.1% for the eleventh plan period. As a
result, the share of services in India’s GDP has increased from 37.6% in 1993 to 54.1% in 2005-06 and
56.0% in 2008-09. If Construction is considered as services as done by RBI, this share will increase by
another 6.9% totaling to 65.9 per cent. Thus, India is nearing the shares of countries like the US, where the
share of services in GDP is 73% (2003).

The remittances in the balance of payments are continuously growing, which reflects that the income from
India’s labor services abroad. This indicates a positive sign for a country like India where transfers due to
labor services are becoming increasingly important.
Considering this aspect, it can be said that a better indicator reflecting national growth and income is the
Gross National Disposable Income (GNDI) which includes these transfers (besides net factor income
from abroad). The absolute value of GNDI has been higher than GDP for India, though the growth rate has
been more or less the same at 9.2% in 2006-07 and 9.3% in 2005-06. Thus there is no doubt that India’s
growth in the last decade has been led and driven by service sector and the 2005 UNCTAD Trade and
Development report has included South Asia along with East Asia as the new growth pole due to the
economic dynamism of India in South Asia & China in East Asia.

As it is known that the Development theory usually identifies three stages of development,
• 1st stage when the primary sector is the dominant sector in GDP,
• 2nd stage in which manufacturing is dominant and
• 3rd stage in which the tertiary sector is dominant and is identified with countries in an advanced
stage of development.

India’s growth experience does not seem to follow this theory of stages as the high growth and high share
of services sector which is a feature of a developed economy has been attained by India even before
reaching a developed stage.

If we look at the reasons behind this pattern of growth, then we see that it is mainly the constraints in the
industrial and agricultural sectors and the natural advantage of India in services sector has led to a service
led growth of the economy.
Services sector growth can also complement growth in manufacturing sector. There are sectors where a lot
of complementarily exists between services & manufacturing growth e.g. Telecom Services and Telecom
equipment manufacturing, electronic hardware & software where a hardware-software combination can
accelerate growth of both hardware and software as suggested in the Medium Term Export Strategy
(MTES) of the Department of Commerce, healthcare services and pharmaceutical sector, shipbuilding
along with ship repair & maintenance services and shipping where growth is sure with growth in volume of
trade, R&D services and pharmacy & biotech sectors, etc. Identifying and promoting the growth of these
sectors with considerable backward – forward linkages can help growth of both services and manufacturing
and some manufacturing sub-sectors can ride piggy back on the success of the complementary services to
achieve quick growth.

Thus the services sector has high potential. Even the recent growth in export of professional services is an
example of the potential of other services.

Sectoral composition in GDP

Services Export Growth

While there is a services dominated growth, India is also moving to a services dominated export growth.
While merchandise export growth was 21% in 2006-07 on the top of a 23%, growth in 2005-06, services
export growth rate in 2006-07 was 32.5% on top of a 31.7% growth in 2005-06. While the $ 31.3 billion
software services grew by 32.6% in 2006-07 on top of a 37.2% growth in 2005-06, the $31.1 billion non-
software miscellaneous services (mainly including business services) neared the value of exports of
software services with growth of 39.3% in 2006-07 on top of a 67.0% growth in 2005-06 and 150.3%
growth in 2004-05. Services Exports at $ 81.3 billion in 2006-07 is nearing merchandise exports at $124.6
billion. If labor services (reflected in private transfers) are taken, then the contribution of services will be
still higher. India’s share in world merchandise exports is at the 1% level in 2006 with the rank at
28, while its share in world commercial services exports is 2.7% with a rank of 10.

India's exports of Services as a percentage of World imports of Services :

by types

India' Percentage Percentage share in

World imports ($ s exports shares of India India's
billion) ($ in world imports total services exports
billion)
2003 2004 2003 1998 2003 1998 2003
 1. Goods 7395.8 8989.5 59.3 0.6 0.8

2. Services 1887.2 2222.3 23.4 0.8 1.2

a) Transportation 479.7 581.5 3.1 0.4 0.7 15.4 13.3
i) Passenger Services 91.9 107.8
ii) Freight 269.3 332.8
iii) Other Transportation 118.5 140.9
b) Travel 499.4 583.8 3.9 0.7 0.8 24.8 16.7
c) Govt. Services 90.9 101.8
d) Other Services 817.2 955.2 16.4 1.2 2.0 59.8 70.1

Services and Balance of Payments

Services trade has been acting as a cushion for India’s current Account of Balance of Payments helping in
covering the trade deficit. If remittances, which reflects a factor service like labor service is also
considered, then the two components (factor and non-factor services) have more than covered the trade
deficit leading to a current account surplus till 2003-04. While in 2002-03 and 2003-04, the gap between
net services and net transfers was substantial, this gap has now narrowed down, and in 2006-07 net services
of $32.7 billion was higher than the $ 27.4 billion net transfers. This has happened despite the liberalization
of services imports resulting in a near doubling of services imports in 2004-05 compared to 2003-04 and
further growths of 20.5% and 29.5% in services imports in 2005-06 and 2006-07, respectively. This is due
to the near doubling of services exports in 2004-05 compared to 2003-04 and further growths of 31.7% and
32.5% in 2005-06 and 2006-07, respectively.
In today’s situation, where high Petroleum prices leading to high oil imports is a reality and high non-oil
imports a necessity to sustain the high growth of exports and industrial production, the best possible way to
have a positive current account balance or a low current account deficit, is by boosting services exports.

There is a debate that for a developing country like India, current account deficit is needed and a current
account surplus may not really be a good sign. However, the real issue is not the current account deficit, but
trade deficit. If the current account surplus or low current account deficit is due to the positive impact of
services and remittances, then there is no issue.

Openness of the Economy

India’s trade in merchandise as a percentage of GDP which is usually used to measure the openness of an
economy shows an increase from 14.7% in 1990-91 to 37% in 2006-07. If services trade which has been
increasing steadily for India is also considered, total trade as a percentage of GDP shows a remarkable
increase from 17.5% in 1990-91 to 52.7% in 2006-07.

FDI in Services
The world Investment Report 2004 has stated that world over there is a shift in FDI towards services. This
is more so with India’s FDI inflow to services sector. In 2006-07 services sector (financial & non financial)
constituted around 30% of FDI equity inflows compared to the 12.5% in 2004-05. This is however an
underestimate as the Department of Industrial Promotion & Policy’s (DIPPs) definition of services does not
include computer software, telecommunications and transport.
WTO negotiations on Services
Another important development in the services sector is the ongoing negotiations at WTO on Services.
While the Doha round of negotiations which was freezed due to the stalemate in Agricultural negotiations
has been de-freezed, failure of negotiations could result in loss to India in services sector where it could be
a major beneficiary unlike other developing countries. A clear cut strategy for services highlighting the
potential gains for India in terms of growth, employment and exports is needed to give a possible new
direction to the Indian strategy in WTO negotiations.

Employment and Services

The tertiary sector is the leading sector of growth in the Indian economy not only in terms of output, but
also in terms of employment. Studies show that the employment elasticity in the tertiary sector as a whole
in the post-reform period (1993-2000) has been 50 per cent higher than in manufacturing sector. India’s
share of employment growth in the tertiary has been higher than in manufacturing sector on Usual Principal
Status (UPS) basis (Table 1). In the decades of eighties and nineties, the fall in the share in employment in
agriculture sector has been increasingly absorbed by the tertiary sector.
However, in 2004-05 compared to 1999-2000, there is a change with the fall in employment share of the
agriculture sector being absorbed both by the manufacturing and tertiary sectors with a higher share for the
former. Like other countries of South East Asia, like Malaysia, Thailand and Indonesia, in India also a
larger share of employment has been created in the tertiary sectors, in the eighties and nineties.
 Shares and change in Sectoral shares of employment in India
(UPS basis)

1983 1993-94 1999-2000 2004-05

Shares Agri Man Serv Agri Man Serv Agri Man Serv Agri. Man Ser.

(percentage) 66.2 14.6 19.8 61.7 15.7 22.6 58.5 16.7 24.7 54.2 19.4 26.4

Change in 83 to 93-94 93-94 to 99-00 99-2000 to 2004-05

shares Agri Man Serv Agri Man Serv Agri Man Ser.

-4.5 1.1 2.8 -3.2 1.0 2.1 -4.3 2.7 1.7

Source: Planning
commission

While the recent rise in share in employment growth in manufacturing sector is a positive development, the
importance of services in employment creation needs to be noted, particularly when India is competitive in
many labor-intensive and skill-intensive services and there is a huge market (both domestic & external)
including outsourcing to India, which needs to be tapped further.

Inflation & Services and Domestic Terms of Trade including Services

The Wholesale Price Index (WPI) which is the main indicator of inflation, in India does not include
services. The consumer price index for industrial workers (CPI-IW), Consumer Price Index for Urban Non-
Manual Employees (CPI-UNME) and Consumer Price Index for Agricultural Laborers and Rural Laborers
(CPI-AL&RL) include some services but their weightage is only about 10-15 per cent, though services
form 54 percent of the GDP.
While, in USA, where the contribution of services to GDP is around 73 percent, the consumer price index
for all urban consumers (CPI-U) gives 59.9% weightage for services and consumer Price Index for urban
wage earners and clerical workers (CPI-W) gives 55.4% weightage for services. In India, the services
included in CPI-IW and CPI-UNME is Medical Care, Education, Recreation & Amusement, and Transport
& Communication, while in the GDP of India the major services are trade, hotels, transport and
communication and financing, insurance, real estate and business services. Even these indices are based on
some sample surveys and are sometimes just approximations. A look at some services items included in
CPI-IW for the latest available month shows that in May 2007, point to point inflation of Education &
Recreation is only 2.0% compared to general CPI-IW inflation of 6.6%. Another item, Medical care
(including both services and commodities) has inflation of only 5.9%. Transport and communication has a
inflation of only 1.6% which is also a reflection of the low inflation of fuel. But none of these services have
the high inflation of 9.1% of food group. While the services taken here are very limited, with the fall in
prices of services like telecommunications, air transport (with no frills flights) and metro services, there is
an indication that inflation could have a moderating effect, if services are included in inflation calculations.
Besides, prices of services do not fluctuate at short intervals like commodity and manufacturing prices.

The expert committee to formulate services price index in India is examining the different methodologies to
include services in the inflation index which would give a true picture of inflation in India. It would be
interesting to see whether these services have a lower inflation rate with the growth in technology. This is
also important in the context of domestic terms of trade which at present (except for a few attempts to
compute domestic terms of trade including services) reflects only the prices of agriculture and
manufacturing sectors. Inclusion of services in domestic terms of trade would reflect the actual change in
distribution of income between all the three sectors.
 Mile stone in the growth of service sector

If we throw light on the growth of the Indian economy since its emergence, it could be easily inferred from
the figures that India has evolved as one of the fastest growing economies in the world mainly due to the
rapid and sustainable growth in the service sector. The sector has been experiencing double-digit since
2004-05 importantly, a strong growth of 10 % in 2005-06 has been instrumental in providing a strong base
to all real sector activity in the economy and propelling it towards a sturdy growth.

Basically it was the Keynote reforms, initiated by the then Finance Minister Dr Manmohan Singh in 1991,
that resulted in a major reduction of the role of the public sector in the economy, a degree of deregulation,
and greater integration of India’s economy with the global world.

In addition to this, the sector has continued to exhibit a vibrant growth (10.6 per cent) during the first
quarter of 2006-07, mainly because of the growth in ‘trade, hotels, transport and communication’ (13.2 per
cent) followed by ‘finance, insurance, real estate and business services’ (8.9 per cent).

Due to the structural transformation of the Indian economy in the new millennium in favor of a service-
dominated economy, the share of the services sector in the total GDP has increased notably from 49.8% in
2000-01 to 54% in 2005-06. During the first quarter (April-June) 2006- 07, the services sector has
accounted for a share of 54.2% as compared to53.3% in the comparable period during last year.

Finally in 2008-09, in the 4th quarter, the share of service sector in the GDP increased to a peak high 64.2%,
mainly due to the growth in trade, transport, restaurants, communication and personal services.

In 2009-10, the contribution of service even increased more and rose to 66.8 in 2 nd quarter and 65.9% in the
4th quarter. This increase was reflective of the growth of financial sector and social and personal services.
Contribution of various services in the growth of service sector
Over the last decade and more, the growth of the Indian economy has been propelled by its services sector.
Agriculture and industry may have contributed their bit in various years, but as the above discussion
suggests, while the performance of agriculture has been marked by significant volatility, particularly since
1997-98. Industry though registering a buoyant growth, has been unable to increase its share in the total
domestic product over the years.
Only the services sector, which now collectively accounts for more than half of GDP, showed not only
remarkable stability but also significant acceleration in recent years from an already high base. The
contribution of the services sector to GDP growth during 1980s was 47.2 per cent. The contribution
increased to 56 per cent during the 90s and further to
62.3 per cent during 2000-01 to 2004-05.

The service sector of India has also witnessed a remarkable rise in the global market apart from the Indian
market. It has experienced a rise of 2.7 percent in 2006 from that of 2 percent in 2004. The broad-based
services in the trade sector have undergone a large-scale rise. A statistics concerning the growth of India's
service sectors are listed below:

• The software services in Indian economy increased by 33 percent which registered a revenue of
USD 31.4 billion
• Business services grew by 82.4 percent
• Engineering services and products exports grew by 23 percent and earned a revenue of USD 4.9
billion
• Services concerning personal, cultural, and recreational had a growth of 96 percent
• Financial services had a rise of 88.5 percent
• Travel, transport, and insurance grew by 23 percent

The software services in Indian economy along with the export of products is growing at a massive pace
and thereby witnessed an alarming rise of 35.5 percent and reached a lump some amount of USD 18 billion.
The ITES and BPO sectors grew by 33.5 percent and earned revenue of USD 8.4 billion. The service sector
of Indian economy has been the most high-powered sector in India's economy. It has also been focusing in
various investments of late. As Indian economy is looking forward for more liberalization, sectors like
banking are on its way to loom large and occupy a more significant position in India's economy.
BANKING

Banking in India originated in the first decade of 18th century with The General Bank of India coming into
existence in 1786.By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy.

During fourth year plan the then prime minister Indira Gandhi issued an ordinance and nationalized the 14
largest commercial banks.

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization and gave
licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks,
which included banks such as UTI Bank (now re-named as Axis Bank) (the first of such new generation
banks to be set up), ICICI and many more. This move, along with the rapid growth in the economy of India,
kick started the banking sector in India, which has seen rapid growth with strong contribution from all the
three sectors of banks, namely, government banks, private banks and foreign banks.

IT AND IT-ENABLED SERVICES

• India’s success in the export of IT Software and Related Services over the past decade remains
unparallel
• Total export revenues earned by this sector have grown from US$ 7.7 billion in 2001–02 to US$
31.3 billion in 2006–07, thus showing a near 32% compound growth rate
• India now accounts for65% of the global market in offshore IT and46% of the ITES market
The Banking and Financial Se The Banking and Financial Services, Communications and Media,
Manufacturing (Consumer Durables/Automobile), Aviation, Hospitality, and Retail are some of the
key verticals that primarily benefit from the ITES-BPO services in the domestic market in India.

BUSINESS SERVICES
Information technology, information technology enabled services, business process outsourcing) are among
the fastest growing sectors contributing to one third of the total output of services in 2000. The growth in
the IT sector is attributed to increased specialization, and an availability of a large pool of low cost, but
highly skilled, educated and fluent English-speaking workers, on the supply side, matched on the demand
side by an increased demand from foreign consumers interested in India's service exports, or those looking
to outsource their operations. The share of India's IT industry to the country's GDP increased from 4.8 % in
2005-06 to 7% in 2008. In 2009, seven Indian firms were listed among the top 15 technology outsourcing
companies in the world.] In March 2009, annual revenues from outsourcing operations in India amounted to
US$60 billion and this is expected to increase to US$225 billion by 2020.

MINING

It forms an important segment of the Indian economy, with the country producing 79 different minerals
(excluding fuel and atomic resources) in 2009-10, including iron ore, manganese, mica, bauxite, chromate,
limestone, asbestos, fluorite, gypsum, ochre, phosphorus and silica sand
ORGANIZED RETAIL
Such supermarkets accounts for 24% of the market as of 2008. Regulations prevent most foreign
investment in retailing. Moreover, over thirty regulations such as "signboard licenses" and "anti-hoarding
measures" may have to be complied before a store can open doors. There are taxes for moving goods to
states, from states, and even within states.

According to CII, recent data on specific service sector activities gives a mixed picture - while there has
been a sharp drop in indicators such as tourist arrivals or air freight and passenger movements, railway
traffic and cellular subscriber growth have been holding up.

Shares of Service Activities in Aggregate Service Sector GDP (%)

2000‐01 /
1970s 1980s 1990s 2004‐05
Trade 26.1 29.4 28.4 26.9
Other services 17.2 16.1 15.4 15.8
Real estate, ownership of dwellings &
business services 21.3 16.0 13.3 15.7
Public administration & defense 14.2 14.3 13.2 12.1
Banking & insurance 6.9 8.9 12.7 11.5
Transport by other means 7.2 8.2 9.4 9.9
Communication 1.7 1.9 2.9 3.3
Hotels & restaurants 1.6 1.8 1.9 2.6
Railways 3.4 3.1 2.6 2.0
Storage 0.2 0.3 0.2 0.1
GROWTH OF SERVICE SECTOR IN COMPARISION WITH OTHER SECTORS

REAL SECTOR
Last Updated: December 14,2010
SDDS Data Category Unit of Period of Latest Previous Percentage change
and Component Description latest data Data data @ from previous to
latest period
1 2 3 4 5 6
National Accounts
Gross Domestic Product (GDP) Rs. Crore Jul/10-
Sep/10 1664088 1401815 18.7
(at current prices)
1. Agriculture Rs. Crore Jul/10-
Sep/10 237743 189589 25.4
2. Industries Rs. Crore Jul/10-
Sep/10 468946 405934 15.5
3. Services Rs. Crore Jul/10-
Sep/10 957399 806291 18.7

National Accounts
Gross Domestic Product (GDP) Rs. Crore Jul/10-
Sep/10 1146637 1053057 8.9
[at Constant(2004-2005) prices]
1. Agriculture Rs. Crore Jul/10-
Sep/10 129704 124247 4.4
2. Industries Rs. Crore Jul/10-
Sep/10 334202 306814 8.9
3. Services Rs. Crore Jul/10-
Sep/10 682732 621995 9.8

National Accounts
Gross Domestic Product (GDP) (Implicit Price Index Jul/10- 145.1 133.1 9.0
Index) 2004-05 Sep/10
=100
1. Agriculture Index Jul/10-
2004-05 Sep/10
=100 183.3 152.6 20.1
2. Industries Index Jul/10-
2004-05 Sep/10
=100 140.3 132.3 6.1
3. Services Index Jul/10-
2004-05 Sep/10
=100 140.2 129.6 8.2

From the above data, if GDP at current prices is considered to be the indicator of economic growth, then it
can be clearly seen that it is the service sector which contributes the major portion towards the economic
growth. Approximately 57.5% of the GDP comes from service sector.

Contribution of various sectors in the economic

growth (2010)

Agriculture 14%

Service 58% Industry 28%

Following the economic liberalization in India, the service sector has gained prominence in the economy as
it accounts for the largest share of GDP and, also that the hare of this sector in GDP has been growing very
rapidly. Empirical data reveal two significant trends in the service sector following liberalization in 1991:
• Growth in service sector productivity and;
• Growth in services' trade.
The objective is to build simple three sector quantitative model which can capture the increase in the share
of service sector in GDP after liberalization. Within the context of the model, there are two exogenous
changes that occur across the two steady states years, 1980 and 1999: growth in Sectoral total factor
productivity (TFP) and increase in the level of trade in industrial and service sectors. The results from a
counterfactual experiment reveal that shutting down Sectoral TFP affect the ability of the model to capture
the data trends whereas the absence of Sectoral trade negligibly affects the results. Hence it can be
concluded that services' productivity growth versus the increase in services' trade can better explain the
value added growth observed in the Indian service sector across the two steady states.

How can growth of the service sector help make development more
sustainable?
Service Sector Growth and Development Sustainability
The service sector produces “intangible” goods, some well known—government, health, education—and
some quite new—modern communications, information, and business services. Producing services tends to
require relatively less natural capital and more human capital than producing agricultural or industrial
goods. As a result demand has grown for more educated workers, prompting countries to invest more in
education—an overall benefit to their people. Another benefit of the growing service sector is that by using
fewer natural resources than agriculture or industry, it puts less pressure on the local, regional, and global
environment.

Conserving natural capital and building up human capital may help global development become more
environmentally and socially sustainable. Growth of the service sector will not, however, be a miracle
solution to the problem of sustainability, because agricultural and industrial growth is also necessary to
meet the needs of the growing population.
 ISSUES AND PROBLEMS
The potential of the services sector for India’s GDP growth, exports and employment being very high, there
is a need to address some issues which need the immediate attention of policy makers at the highest level.
This can facilitate further growth of the sector.

Data Issues in Services

One of the important issues in services sector is the issue of data. Unfortunately, while the importance of
services is growing, statistical data and other relevant information on services is abysmally low. The word
‘invisibles’ seems very relevant for this sector in the context of data, as data are invisible or partially
visible. Even where data are available, they are not qualitative and suffer from deficiencies related to
definition, method of collection, suitability for pricing and construction of indices. There are many sectors
within the services sector, and consequently the data collected are also diffused.
WTO negotiations are taking place in 151 services and negotiators need statistics as a guide to negotiate
specific commitments in services taking note of India’s export potential.
But unlike merchandise trade, in services, such data are not available. Leave alone price data, even
disaggregate value data, sector-wise and country-wise are not available. As a result of the recommendations
of the Committees on Services in the Reserve Bank of India (RBI) and
Department of Commerce, a much better set of data is being currently given by RBI. But this is also far
from adequate compared to our needs. Some of the important recommendations of the Services Committee
of the Dept of Commerce, for the National Statistical Commission
(Prasad Committee), related to international trade in services data (see Appendix 1) like sorting out
definitional issues in services, conducting mandatory benchmark and annual surveys, classifying available
data on services under different modes, collecting bilateral trade data on services, collecting export/import
prices of important services, etc, need to be implemented in a fixed time period. Some recommendations
like conducting benchmark surveys for software services by RBI and rationalizing the classification of
services which has made the share of ‘others’ in the business services smaller are being implemented by
RBI.
It is however a matter of concern, that we have a ‘miscellaneous services’ category which consists among
others the most dynamic services like ‘Business services’ which again has a subcategory of ‘others’. A lot
of work needs to be done in the balance of payments data particularly related to services both in India &
internationally, which includes basic definitional issues, classification issues and even verification of the
work done in the different countries.

In the National Accounts Statistics also, constant prices for services are calculated and many-a-times
proxies like GDP deflators are used. In the absence of necessary published data for pricing services, these
estimates provide only a rough indication of the price movements of services.
In the case of inflation also, services are not accounted. While WPI by definition does not include services,
only Medical Care, Education & Recreation and Transport & Communication with only 15.61% weightage
are included under miscellaneous group in the CPI-IW. Similar is the case with CPI-UNME and in CPI-
AL&RL.

Need for a single nodal department/division/institution for services policy making

Different service sectors have their own special characteristics. Some are mainly in the public sector, some
mainly in the private sector and some others in both. For some, the policies can be at the central level, while
for some others, it is at the state level. For some, detailed commitments have been given by countries under
the negotiations at World Trade Organisation (WTO), while some others do not even find mention in these
commitments. In the case of supply of some services, consumption abroad and movement of natural
people’s mode are important, while for some others cross-border supply and commercial presence mode are
more important. Public policy in the services sector has to be seen by taking note of the diversities in the
services sector, the supply base for the services, domestic regulations in India and other countries, domestic
and external demand for services, market access barriers for these services in India and abroad and the
status of commitments, requests & offers under general and plurilateral negotiations in the WTO.
Lack of a single nodal department/division/institution is the biggest lacunae in the services sector. While
the Software sector has received encouragement and an Export
Promotion Council (EPC) was also formed; EPC for Services has just been formed and is yet to take off.
For domestic policy making, there is no single Ministry or Department for all services. State governments
are also involved in this sector and some services are in the state list. So a coordinated policy action is
lacking. There is a need for a nodal department or division, preferably in the Department of Economic
Affairs, Ministry of Finance which can look into all aspects related to services, while the individual
departments dealing with some services or some aspects of services can continue their usual work as is
being done by them at present. A National Commission for Services can also be set up on the lines of the
National Manufacturing Competitiveness Council and National Farmers Commission. All this is long
overdue with more than three-fifth of the GDP being accounted by services in India.
 Market Access for Services
Another issue is the market access for services which can be seen by the actual visible and invisible trade
barriers for services and trade barriers for services which continue to exist under WTO bindings of different
countries.

Actual Trade Barriers for Services

There are both visible and invisible barriers to services trade. The illustrative examples given here for US
and other countries show the major forms of trade barriers which are currently in operation or have the
potential to restrict exports of services of India and other countries.

In the case of Business Services, access to the US market, remains non-transparent and unsatisfactory as
licensing of professional service suppliers is generally regulated at State level. In addition, there are the
‘Buy American’ provisions and frequently changing visa provisions for work permits.

In the case of legal services, while some of the states, namely, New York, Texas,
Washington D.C., and California allow foreign lawyers to practice within the state, the system and
requirements are set by the concerned state bar associations and therefore differ from state to state. Most
states and districts require a minimum of five years work experience.

In the case of Communication Services, although due to the GATS negotiations, the
US has undertaken commitments on telecommunications services, it has still retained several restrictions.
For example, non-US firms and foreign-owned firms wishing to invest in radio telecommunications
infrastructure and to provide mobile and satellite services are virtually denied access due to stringent
legislation in US. The events of September 11, 2001 have added a new dimension to these market access
limitations with US law enforcement agencies imposing strict corporate governance requirement on
companies seeking FCC (Federal Communications Commission) approval of the foreign takeover of a US
communications firm in the form of network security arrangements.

In the case of Financial Services, the restrictions are the requirement of the Office of the Comptroller of the
Currency (OCC) and some State banking supervisors to maintain “asset pledges” in addition to the paid up
capital they maintain in their home country. While an asset pledge reform by the New York State Banking
Department has significantly reduced the regulatory burden for New-York-state-licensed branches of
foreign banks (though further
risk-sensitivity seems desirable), this legislation still has to enable the OCC to set its asset pledge (“capital
equivalency deposit”) requirement for federally-licensed branches of foreign banks in a risk-sensitive way.
Further, there are access issues under state law for insurance as foreign insurance companies seeking to
operate in the US market face the fragmentation of the market into 56 different jurisdictions, almost each of
which is having different licensing, solvency, operating requirements and own insurance regulatory
structure with direct discrimination on a number of fronts, such as need for foreign insurance companies to
first be licensed in another state before seeking a license in the first state to underwrite risks in one state,
need in some states of US for foreign insurers to buy reinsurance from state-licensed companies before
allowing re-insurance premiums to leave the state, white listing of bigger foreign companies to operate on a
cross border basis in the US wherein companies have to name a US attorney and lodge a trust fund in a US
bank of up to US $ 60 million to receive approval, etc.

In the case of Transport & Travel Services, there are barriers in the Computer
Reservation system; restrictions in foreign ownership of air carriers as foreign investors are prohibited from
taking more than 49% stake in a US carrier and the holding of voting stock is restricted to 25%; restrictions
related to foreign repair stations; application of security measures to foreign carriers under the Hatch
Amendment 1996; various forms of assistance in US to its domestic shipping industry such as the
reservation of a minimum of 50% of government cargo for US registered ships all cargo provided with
loans from the US Exim.
Bank to be reserved for US registered ships though a 50% waiver may be granted, all military and strategic
cargo for US registered ships, all personal property of government employees who are transferred to be sent
in US registered ships; retaliatory measures against discriminatory actions by foreign governments that
violate the interests of US shipping; restrictions in domestic commercial shipping where the US requires
shippers operating in internal waters to use ships that were built in the US; subsidy program providing an
operating cost subsidy of $ 100 million a year for a period of ten years for US registered ships meeting
certain requirements; discrimination by the Federal Maritime Commission (FMC) between foreign shipping
companies and US ships by unilaterally regulating the shipping fees charged by foreign shipping
companies; significant restrictions on the use of foreign built vessels in the US coastal trade under Jones
Act which stipulates that all coastal shipping in the country should be carried on vessels built and registered
in the US and in relation to access to certain international cargoes from which non-US vessels are excluded;
prohibition on foreign built vessels for documentation and registration for dredging, towing or salvaging in
the US; issue of US ensuring terms of shipment, favorable to US, while not being liberal in allowing
foreign ships to operate in US; the application of restrictive measures to US public procurement contracts
which introduces uncertainty for those businesses whose tenders include shipping goods to the US, as they
are required to ship the goods on US flagged vessels, which charge significantly higher freight rates than
other vessels; etc.

In the case of IT, Software and Business Services related to IT, there are also many and new restrictions.
Some US States are passing laws to limit business outsourcing. The
New Jersey law is one such example. This phenomenon has not only spread to other states of US, but also
to the federal level. This along with restrictions on H1B visas are the new market access barriers in US for
these services. These restrictions deny non-US competitors market access to a very sizeable pool of US
business and trade, while providing protection for domestic companies.

Policy issues for export promotion of services:

Services exports have been promoted consciously in many countries. The US actively supported services
negotiations under GATS & WTO after studies in US revealed that this was the potential sector for USA in
the future.
In the case of Hong Kong, services like financial services and port services have developed due to the
policies of the government to develop Hong Kong as an off-shore financial centre and free port, while
setting up of joint office with common facilities has helped professional services and a low tax policy has
helped printing services. Singapore with a range of technology intensive services, port related and financial
services is actively promoting exhibition management services, franchising services and even legal services
by facilitating
Singaporean law firms to go regional and to carve a niche with the opening up of legal markets around the
world.

Some General Policies for India to promote Services exports

While services sector has had an almost natural growth in India with the Government facilitating in some
sectors, there has been no comprehensive strategy for services. Some of the ways in which the Indian
government or export promotion agencies can support service exporters are the following.
• Helping service exporters to become known suppliers of quality services and providing relevant export
market information.
• Providing appropriate export financing with reduced transaction costs, reviewing the common practice of
collateral in the case of services, considering extension of specific dedicated lines of credit focusing on
promotion of service exports like construction services, IT related services and education services.
• Following the Silicon Valley example where Banks securitize the CEOs of companies.
• Marketing of services with the help of Indian Embassies/Industry associations, etc; anchoring people,
particularly, committed specialists for promoting services and focusing on services in some SEZs.
• Leveraging India's potential purchasing power in services negotiations at multilateral and bilateral levels.
• Concluding tantalization agreements with target countries to resolve the social security benefits issue.
• Including appropriately issues related to services in Regional Trade Agreements (RTAs), Free Trade
Agreements (FTAs) and Comprehensive Economic Cooperation Agreement (CECAs).
• Developing front yard technology, in different services instead of focusing merely on the Business
Process Outsourcing (BPO) segment.

In short the strategy for the services sector should include the following major issues
mentioned below:
• Identifying the burdensome domestic regulations in India and reforming them which also include many
fiscal issues. Since different services differ in nature, the issues are varied as given in the indicative
examples and involve different institutions, departments and even governments (central & states), the
policy responses will also differ.

• Identifying the different market access barriers to India’s exports of services and focusing on the
important ones for negotiations at bilateral and multilateral levels taking note of India’s domestic growth,
export potential of services and import basket analysis of trading partners. Greater synergy is needed not
only between trade strategies and multilateral/bilateral negotiations, but also between growth and
development strategies and multilateral/bilateral negotiations.

• Focus should be on export of untapped services and markets and services with high linkage effects with
manufacturing, growth of the economy and employment.

• Resolving in a fixed time period, the data and definitional issues in services both in the national accounts
and external sector including balance of payments. This will also involve issues related to prices for
services.

• Including services in the inflation index to give a realistic picture of inflation and also in domestic terms
of trade to reflect the actual change in distribution of income between all the three sectors.

• All this would involve coordinated strategy and policy making for which a single nodal
department/division/institution for services is needed.
 CURRENT HAPPENINGS IN THE SERVICE SECTOR
If we look at the current scenario, among the various sectors, it is prominently the service sector which has
shown a tremendous growth and thus contributes largest to the Gross Domestic Product of the country. The
eminent sectors that have grown in the service industry include mainly financial services, trade and
transportation, telecom, hotel, social services, insurance and real estate. To know deeper about the current
happenings in this vibrant and growing service sector, we have enumerated further on some of the recent
and important news based on the sector.

Service sector corners 24% of total FDI inflows in ’08

6 Apr, 2009, Economic Times

This article reported that despite of the global financial crisis, the inflow of foreign capital to the country
has increased sharply in 2008. The aggregate inflow of foreign direct investment (FDI) has almost doubled
in 2008 as compared to 2007. It could be very well seen that the Corporate India’s dependence on foreign
funds has increased steadily in recent years because of the easing of norms for FDI, especially; external
commercial borrowings (ECB), over the years had led to rise in the inflow of foreign capital in India.

In fact, RBI’s recent data showed that the inflow of ECB and foreign currency convertible bonds (FCCBs)
has slowed down considerably in 2009 — down 73% from $1,702 million in November 2008 to $453
million in February 2009.

As a large number of companies use these funds to import capital goods, this decline in ECB may adversely
affect the investment plans of those companies. In fact, of the 32 companies which raised funds through
ECB and FCCBs in February, 09; 15 did so for import of capital goods for expansion of capacity or for
modernization of their plants.

So the sharp rise in FDI inflows indicate that India’s investment activities in recent years have largely been
financed by foreign sources. Aggregate inflow of FDI has increased more than nine times during the past
five years, from Rs 14,781 crore in 2004 to Rs 139725 crore in 2008.
As the service sector has been the prime contributor of India’s gross domestic product in recent years and
so the foreign investors never had doubts about its potential. However, policy restrictions in the past did not
allow them to invest in this industry. But now as the restrictions have been eased, FDI has flowed in to this
industry as never before. It accounted for a huge 24.3% of the total FDI inflow in 2008, which means that
the FDI inflow to this sector has grown 32 times in the past five years from a mere Rs 1,074 crore in 2004
to Rs 33,947 crore in 2008.

The second most important destination of FDI in 2008 was telecommunication. It accounted for about 8.3%
of the total FDI flowing into the country in 2007.

On one hand the service sector and the telecommunication industry have increased their share in total FDI
inflows in the country in 2008, but on the other hand the software industry has gone down the ladder. The
poor performance of the software companies kept the foreign investors away and thus FDI inflow to
software sector has fallen sharply. The sector received only Rs 7,810 crore FDI in 2008 against Rs 10,214
crore in 2007. Its share in total FDI inflow has fallen to only 5.6% in 2008 against 16% in 2007. But as the
financial crisis continues, the question is: Will FDI inflow to India grow at the same rate in the coming
months?

After all, the service sector, which has been the main contributor to GDP growth, was the biggest gainer of
the rise in FDI inflow in recent years. Now if the FDI inflow slows down, it will be affecting the growth of
the service sector and thereby, the GDP growth.
Service sector M&As call for new skills
13 Mar, 2010, Economic Times

This article reported that Fortis Healthcare's had acquired a 23.9% stake in the Singapore-based Parkway
Holdings, one of Asia’s largest healthcare service providers, for $685 million. This acquisition had marked
a new trend for service sector cross-border mergers and acquisitions. This Fortis deal is another landmark
after Bharti Airtel's $10.7 billion bid for the African operations of Kuwait-based Zain.

These two deals have little in common. Together, the two deals are an affirmation of India's emerging
strength in the global services arena, apart from the IT sector where Indian companies have already shown
a sustainable growth. Consequently, these acquisitions mark a new maturing of Indian service-sector
companies and are an inevitable outcome of our services-led growth story.

Although services have been contributing close to 60% of India's GDP, as against 23% coming from
manufacturing, huge cross-border mergers and acquisitions have, somehow, been reserved to
manufacturing companies only: Tata Steel took over Corus, Tata Motors , Jaguar; Hindalco, Novelis and so
on. However, Not any longer! Fortis and Bharti deals witness the beginning of such M&As even in service
sector. But the issue underlying this is that, unlike manufacturing, delivery of services is a personalized
activity involving the crucial aspects like difference of culture.

Therefore, it would be immature on our part to imagine that the low cost model of service delivery that
Indian companies have perfected can simply be transplanted to other countries and be expected to fetch as
good results. The short point, of course, is that greater managerial ingenuity and efficiency is required.

India's service sector growth at two-year high in June

5 Jul, 2010, Economic Times

This article reported that India's services sector had expanded at its fastest pace in last two years in the
previous month, mainly due to the increases in business expectations and new orders. After drooping down
slightly in May, the HSBC Market Business Activity Index, which is based on a survey of 400 firms, again
rose to 64.0 in June from 58.2 last month, pointing to a substantial rate of growth and thus expansion in the
economy.

The survey also showed that “Indian services raised their charges for the seventh month running but that
charge inflation rate was still weaker than the 20-month peak in April. The Reserve Bank of India raised its
key short-term lending and borrowing rates by 25 basis points each after the market close on Friday, citing
worries over inflation. The move came almost a month ahead of its scheduled review”.

The official data of the last month indicated that the wholesale price index had raised an annual 10.16
percent in May up from 9.59 percent in April, mainly due to the higher food and energy prices.

HSBC said, “ our input prices index fell further to a three-month low in June from a 20-month high in
April, signaling an easing of price pressures”. All six sub-sectors covered by the survey recorded a rise in
new business since May, with post and telecommunications registering the fastest expansion. Indian
industrialist Mukesh Ambani's Reliance Industries made a dramatic return to the telecom business in June
by buying Infotel Broadband, being the only company to win a nationwide license in the broadband
wireless spectrum auction.
India services PMI rises moderately, employment up
3 Nov, 2010, Economic Times

This article reported that India's services sector has expanded last month at a faster rate than in September,
bringing an end to a 3-month decline in the key business activity index.

The seasonally adjusted HSBC Market Business Activity Index, based on a survey of 400 firms, rose to
56.2 in October from 55.6 in September, remaining above the 50 mark thus signifying expansion in the
economy, for the 18th consecutive month.

This slight upswing in the index was mainly because of the new business that has remained robust over the
last 18 months but is likely to moderate as the pace of growth slowed for the second straight month.

"India's service sector picked up steam in October, with firms continuing to add jobs. The details, however,
suggest that services might cool in the coming months, with new business growth decelerating slightly and
backlogs contracting," said Frederic Neumann, Co-Head of Asian Economics Research at HSBC.

Besides this, even the employment in the service sector rose for the 19th successive month in October and
was the alone sub-index among the six to record a rise. Companies said they were aiming to increase
capacity with a sustained rise in workloads.

However the input prices faced in the service sector also increased in the last month, but at a slower pace
than in September, mainly due to higher wage costs.

A separate study by The Associated Chambers of Commerce and Industry quoted that “attrition levels
faced by the service sector in India had edged up to 35 percent in the first half of this year, adding training
and recruitment costs to budgets”.
 Service sector – At a glance (2009-10)
The Indian economy is the second fastest major growing economy in the whole world with the growing rate
of the GDP at in 2009- 2010. The economy of India is the twelfth biggest in the world for it has the
GDP of US$ in 2010.

Service Sector in India

India ranks fifteenth in the services output and it provides employment to around 23% of the total
workforce in the country. The various important sectors under the Services Sector in India are
construction, trade, hotels, transport, restaurant, communication and storage, social and personal
services, community, insurance, financing, business services, and real estate.

Services Sector contribution to the Indian Economy

The Services Sector contributes the most to the Indian GDP. The Sector of Services in India has the biggest
share in the country's GDP as it accounts for around 65.9% in 2009 (4th quarter). The contribution of the
Services Sector in India GDP has increased a lot in the last few years. The Services Sector contributed only
15% to the Indian GDP in 1950. Further the Indian Services Sector's share in the country's GDP has
increased from 43.695 in 1990- 1991 to around 51.16% in 1998- 1999. This shows that the Services Sector
in India accounts for over half of the country's GDP. Thus it is the most important sector in our country.

The Reasons for the growth of the Service Sector contribution to the India GDP
The contribution of the Services Sector has increased very rapidly in the India GDP as many foreign
consumers have shown interest in the country's service exports. This is due to the fact that India has a large
pool of highly skilled, low cost, and educated workers in the country. This has made sure that the
services that are available in the country are of the best quality. The foreign companies seeing this have
started outsourcing their work to India especially in the area of business services which includes business
process outsourcing and information technology services. This has given a major boost to the Services
Sector in India, which in its turn has made the sector contribute more to the India GDP.

The Service Sector in India must be given boost

Services Sector Growth Rate in India GDP registered a significant growth over the past few years. The
Indian government must take steps in order to ensure that Services Sector Growth Rate in India GDP
continues to rise so as to ensure the growth and prosperity of the country's economy.
Services Sector Growth Rate in India GDP has been very rapid in the last few years. The Services Sector
contributes the most to the Indian GDP. The Growth Rate of the Services Sector in India GDP has risen due
to several reasons and it has also given a major boost to the Indian economy. Therefore this sector must be
their in the priority list of the government to sustain and thus increase its growth rate.

Note: The above interpretation about the Indian service sector has been made in light of the statistical data
gathered from the official site of RBI.