Performance of Indian

Service Sector
Dr. (Mrs.) Vijaya Katti
Dean, Administration (Academics)
Indian Institute of Foreign Trade
New Delhi

MBA Session 2018-20

 Services Sector in India
• India has pursued a services-led development path and has become one of the
major global exporters of business services, notably in the ICT sector. Today India is
the fastest growing large economy in the world and possibly one of the economies
with the greatest potential for sustained growth and development in the medium
term.
• India’s reliance on services as the engine of growth during the transition from a low
to a middle income country is unprecedented.
• The services sector is not only the dominant sector in India’s GDP, but has also
attracted significant foreign investment flows, contributed significantly to exports as
well as provided large-scale employment.
• India’s services sector covers a wide variety of activities such as trade, hotel and
restaurants, transport, storage and communication, financing, insurance, real
estate, business services, community, social and personal services, and services
associated with construction.
Services Sector in India

• India’s services sector expanded quickly with double-digit growth in the

second half of the 2000s.
• The services sector covers a wide array of activities ranging from
services provided by the most sophisticated sectors like
telecommunications, satellite mapping, and computer software to
simple services like those performed by the barber, the carpenter, and
the plumber; highly capital-intensive activities like civil aviation and
shipping to employment-oriented activities like tourism, real estate, and
housing; infrastructure-related activities like railways, roadways, and
ports to social sector- related activities like health and education.
Contd..
• The National Accounts classification of the services sector
incorporates trade, hotels, and restaurants; transport, storage,
and communication; financing, insurance, real estate, and
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.
The role of services in India’s economy

• Services have played a more important role in India’s

economic development than in any other major
economy.
• The literature describes economic development as a
shift from an agrarian economy dominated by
subsistence farming to an industrialised economy with
a rising share of services in GDP.
• This is a virtuous cycle starting with rising productivity
in farming, which releases labour to urban
manufacturing and services.
Contd…
• The services sector begins to gain ground as a share of GDP first during the early
phase of industrialisation, where traditional services such as transport,
distribution and public administration support and drive urbanisation and
complement the rise of manufacturing.
• A second wave of services growth tends to follow when the economy reaches a
per capita income level around USD 2000, when demand for modern services
such as finance, business services and telecommunications start rising faster than
GDP (Eichengreen and Gupta, 2011; 2013a).
Contd…
• Modern services, particularly the ICT sector have largely depended on
international demand for its growth. For example, about a third of
computer and related services produced in India is exported, while as
much as 80% of R&D and other business activities are exported.
• There is therefore ample scope for continued growth in these sectors
supported both by growth in demand from the local manufacturing
sector and exports of digitised professional services.
Contd...
Contd…
• Indian business services exporters have helped improve clients’
competitiveness around the world.
• India has a strong comparative advantage in ICT-related services.
Business process outsourcing and business process management
have been the most important services sectors in the past and still
account for the bulk of India’s IT-enabled services exports.
Market Size
• The services sector is the key driver of India’s economic growth.
• The sector has contributed 54.17 per cent of India’s Gross Value
Added at current price in 2018-19*.
• Net service exports stood at US$ 60.25 billion in April-December 2018
(P).
• Nikkei India Services Purchasing Managers' Index (PMI) stood at 52.5
in February 2019.
• The expansion in services activity was driven by boost in capacity and
demand along with favourable public policies.
 The role of services for trade in goods

• International trade within global value chains has been one of the major driving
forces behind the spurt in trade relative to GDP over the past two decades. The
trade in value added (TiVA) database has shed light on the deepening
international division of labour manifested in a rising share of intermediate inputs
in international trade flows. One of the most surprising findings from this work is
the prominence of services in international trade when the contribution of
services to value added is taken into account.
• The TiVA data enable us to identify the sources of value added at each stage of
production broken down by the country and by the industry where the value
adding activity came from.
• Most of the services value added in India’s exports comes from domestic services
providers, while foreign services value added accounts for less than 10% of Indian
exports.
Trade Performance of India’s Major Services
 Performance of India’s Services Sector: Some Indicators

Source : Economic Survey 2017-18

 Share and Growth of India's Services Sector (GVA at basic prices)

Source : Economic Survey 2017-18

 Government Initiatives
• The Government of India (GoI) recognises the importance of
promoting growth in services sectors and provides several incentives
in wide variety of sectors such as health care, tourism, education,
engineering, communications, transportation, information technology,
banking, finance, management, among others.
• Under the Mid-Term Review of Foreign Trade Policy (2015-20), the
Central Government increased incentives provided under Services
Exports from India Scheme (SEIS) by two per cent.
• Government of India is working to remove many trade barriers to
services and tabled a draft legal text on Trade Facilitation in Services
to the WTO in 2017.
 Major investments by companies in the
services sector in the recent past
• Leisure and business travel and tourism spending are expected to
increase to US$ 234.4 billion and US$ 12.9 billion in 2018,
respectively.
• India’s earnings from medical tourism could exceed US$ 9 billion by
2020.
• Indian healthcare companies are entering into merger and
acquisitions with domestic and foreign companies to drive growth
and gain new markets.
 FDI in India’s Services Sector
• The share of the services is 56.6 per cent of the cumulative FDI equity
inflows during the period April 2000-October 2017 and 65.8 per cent of
FDI equity inflows during 2017-18 (April-October).
• In 2016-17, FDI equity inflows to the services sector (top 10 sectors
including construction) declined by 0.9 per cent to US$ 26.4 billion,
though the overall FDI equity inflows grew by 8.7 per cent. However,
during 2017-18 (April-October), the FDI equity inflows to these services
sector grew by 15.0 per cent, as compared to 0.8 per cent growth in
total FDI equity inflows.

Source : Economic Survey 2017-18

Contd..

• After the successful implementation of the e-filing and online

processing of FDI applications by the Foreign Investment Promotion
Board (FIPB), the Government announced to phase out the FIPB in
the Union Budget 2017-18.
• Union Cabinet approved amendments in FDI policy allowing 100 per
cent 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.
 FDI Equity Inflows to the Services Sector

Source : Economic Survey 2017-18

 SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

Source : FDI Factsheet, DIPP

 Sector-wise (top 5) FDI equity inflows from
April 2000 to march 2019

Source : FDI Factsheet, DIPP

 Government Reforms
• 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 that resulted in
improving India’s ranking.
• The scale of reforms can be gauged from the fact that during this period, 25
sectors also including services activities and covering 100 areas of FDI policy
have undergone reforms. FDI policy provisions were radically overhauled
across sectors such as construction development, broadcasting, retail
trading, air transport, insurance and pension.
 Achievements of the government in the
past four years
• India’s rank jumped to 24 in 2018 from 137 in 2014 on World Bank’s Ease
of doing business - "Getting Electricity" ranking.
• Five times more growth in major ports’ traffic between 2014-18,
compared to 2010-14.
• Six-fold increase in Government spending on telecommunications
infrastructure and services in the country – from Rs 9,900 crores (US$
1.41 billion) during 2009-14 to Rs 60,000 crores (US$ 8.55 billion) (actual
+ planned) during 2014-19.
• A total of 11 projects worth Rs 824.80 crore (US$ 127.98 million) were
sanctioned under the Swadesh Darshan scheme.
• Highest ever revenue was generated by Indian IT firms at US$ 167 billion
in 2017-18.
 INTERNATIONAL COMPARISON
• India’s ranking improved from 14th position in 2006 to 7th position in
2016, among the world’s 15 largest economies in terms of overall GDP.
• In 2016, services Gross Value Added (GVA) growth rate (at constant
prices), was highest in India at 7.8 per cent followed by China at 7.4 per
cent.
• Services export growth, both for World and India, which had dipped to
negative territory in 2015 after an interregnum of 6 years from 2009,
returned to positive territory in 2016.
• As per the WTO data for first half of 2017, services export growth for the
World was 4.3 per cent (average of Q1 and Q2) and robust at 9.9 per cent
for India, though the highest growth was registered by Russia at 18.4 per
cent. China’s growth was at 0.2 per cent.
Source : Economic Survey 2017-18
 Road Ahead
• Services sector growth is governed by both domestic and global factors.
• The Indian facilities management market is expected to grow at 17 per
cent 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.
 Select cases
Case: Sh. Mukesh Ambani
Introduction: Indian Economy through the Ages
The narrative about a new, emerging India creating and nurturing
businesses having a global scale and reach is not new. It is in fact, the
reassertion of a forgotten tale in the history of this country and of its
intrepid entrepreneurs.
Economic Reforms and Changes to the Corporate Sector

• The process of reform, once initiated, was bound to result in a major

shake-up in the highest echelons of the Indian private corporate
sector.
• A wave of new entrepreneurship soon transformed the way of doing
businesses, allowing many new and hitherto-unknown companies to
come up rapidly.
• Access to newer markets, along with enhanced competition in these
markets, implied that to survive and thrive in the new environment,
companies needed to invest and innovate continuously on a large
scale.
Reforms Powered Reliance’s Growth into a Global-
scale Conglomerate
• Reliance is India’s largest exporter, contributing nearly
8 per cent of the country’s total exports.
• Reliance ambitiously seized the opportunities created
by the post-1991 reforms, expanding the
competencies of our group.
• Post reforms, Reliance became one of the leaders in
the private corporate investment cycle, envisioning
and creating the world’s largest Greenfield refinery.
Contd…
• In 1992, Reliance raised $ 150 million by venturing into the overseas
capital markets with the first-ever international global depository
receipt (GDR) offering by an Indian company.
• The year 1997 saw yet another first as Reliance became the first Asian
company to issue fifty and 100 year bonds in the US debt market,
raising more than $600 million.
The growth Trajectory of India and Prospects
for Businesses of the Future
• The trajectory of an economy as it develops has so far
consisted of its transformation from being an agrarian
economy through an industrialization led manufacturing cycle
to a services-led economy.
• India stepped forward as the first outlier along this well known
path of economic transformation.
• Reforms led by deregulations, the liberalization of FDI and
divestment of government owned enterprises, particularly in
telecommunications, have aided to the rapid growth of the
services sector in India.
• Since the 1991 reforms, private consumption has grown at
around 6 per cent annually – far higher than the under 4 per
cent rate of the preceding twenty years.
JIO Mission: Global Digital Leadership and Empowerment of Aspirational
India

• Reliance could not have embarked upon this transformative journey but for the
continuous broadening and deepening of economic reforms in India.
• Liberalization and globalization enabled to adopt a growth trajectory that
integrated both organic and disruptive growth opportunities.
• In the explosive growth of mobile telephony in the country, Reliance has already
seen the fruits of reform transform the lives of the common man and woman.
• India ranks 156th in the world for mobile broadland internet access, out of 195
countries in 2016.
Jio Institute to Government
• Process to set up Global Advisory Council
• Council to advice on designing strategy, partnerships, curricula,
programmes, research agenda, recruitment and
 How digitization will transform India

• Digital progress is expected to remove impediments to growth.

• Research suggests that a 10-point increase in a country’s digital score
leads to a 50-60 basis points increase in GDP per capita for an
economy.
• And a 10-point increase in the digitalization score leads to an increase
of approximately 0.13 points in the human development index score
of a country.
 2. Case
Information Technology

Global Industry
• The worldwide IT services market will reach $938 billion
in 2017
• The global IT spending is expected to reach $3.5 trillion
in 2017
• 26 billion internet connected devices and over 4 billion
internet users by 2020
• In 2016, IP traffic 1.1 Zeta Bytes (over 1 trillion GB), by
2020 IP traffic is expected to touch 2.3 ZB

Source: India Services Sector - A Multi-trillion Dollar Opportunity for Global Symbiotic Growth, April 2017
Demand Drivers
• Digital transformation across industries
• Growing Internet penetration and smart devices ($4.3
trillion connected life opportunity)
• Mainstream adoption of frontier technologies such as
artificial intelligence, machine learning, robotics,
automation, virtual reality
• The cost of key technologies such as 3D printing, DNA,
solar power, sensors, drones, etc. is falling rapidly
• Rising demand of cost effective IT services in the
emerging economies (Africa, ASEAN countries)

Source: India Services Sector - A Multi-trillion Dollar Opportunity for Global Symbiotic Growth, April 2017
 Contd..

Source: India Services Sector - A Multi-trillion Dollar Opportunity for Global Symbiotic Growth, April 2017
 Linkages

• Make in India
• Engineering R&D services – major player in telecom &
semiconductors
• Leveraging domestic manufacturing industry for next gen
services
• Digital India
• Digital delivery of governance and citizen services
• Technology infrastructure for digital economy
National e-Governance plan 2.0

Source: India Services Sector - A Multi-trillion Dollar Opportunity for Global Symbiotic Growth, April 2017
 Growth Enablers

• To transform India into a knowledge empowered economy

• Rising domestic demand
• Digital India ($1 trillion dollar opportunity)
• India Stack: Technology for 1.2 billion (Aadhaar, UPI, e-KYC,
eSign, DigiLocker)
• Rising popularity of ICT enabled services
• Tech savvy young demography Upgradation of talent with new
and emerging skills
• Moving to full transparency in online procurement by
Government e-market place
• Programming of chatbots and robotic process automation along
with applications of machine learning
Source: India Services Sector - A Multi-trillion Dollar Opportunity for Global Symbiotic Growth, April 2017
Recent policy changes
• In 2015 India lifted foreign equity limits from 26% to 49% in the insurance
sector and foreign branches were permitted in reinsurance.
• Further investment liberalisation took place in 2016 when foreign equity
limits were removed for airport services and cable and satellite
broadcasting and foreign equity limits were eased in civil aviation.
• Minimum capital requirements for establishing a company were eliminated
in most sectors in 2016.
• On the other hand, India introduced an equalization levy of 6% on
purchases of advertising services from non-resident companies in 2017.
• India lifted a number of restrictions on cabotage in maritime transport in
2018.
Thank you…