NAME :- SANIYA KAZI

ROLLNO :- 29
CLASS:- M.COM -II SEM (IV)
SUBJECT :- INDUSTRIAL ECONOMIC ENVIRONMENT .
ASSIGNMENT -04
TOPIC :- A CASE STUDY ON SERVICE INDUSTRIES.
 ABSTRACT

The service sector is the largest and fastest growing sector in India and has the highest labor
productivity, but employment has not kept pace with the share of the sector in gross domestic
product and has not produced the number or quality of jobs needed. There is no policy leading to
inclusive growth, and multiple, uncoordinated governing bodies adversely affect the growth of
the sector. Many regulations are outdated, and there are restrictions and barriers on foreign direct
investment. While India is among the top 10 World Trade Organization members in service
exports and imports, the growth and export of services is less than that of the People’s Republic
of China, and exports are competitive in only a few services and are concentrated in a few
markets. Most of the poor in India do not have access to basic services such as healthcare and
education, and infrastructure is weak so the cost of service delivery is high. Although India wants
to be a knowledge hub, there is no uniformity in the quality and standards of education, and
formal education does not guarantee employability. Policy measures are suggested for inclusive
growth that will also enhance India’s global competitiveness in services.

OVERVIEW

In developing countries like India, the service sector can lead to inclusive growth through
backward and forward links (Banga 2005), by ensuring equitable access to basic services at low
prices (Deloitte 2011), by creating employment opportunities, and by developing human capital.
India is among the world’s rapidly growing economies. In 2010, the gross domestic product
(GDP) grew at 10.6% compared to an average growth rate of 7.5% in emerging and developing
economies. Although the growth rate decreased to 7.2% in 2011, it was still higher than the
average growth rate of emerging economies (6.2%).1 The service sector has been a major
contributor to India’s GDP and to its growth. It is the second largest employer after agriculture.
India’s trade in services has increased overtime, and services account for the largest share in
India’s foreign direct investment (FDI) inflows and outflows. The growth of India’s service
sector has drawn global attention. Unlike other countries where economic growth has led to a
shift from agriculture to industries, in India there has been a shift from agriculture to the service
sector. In this respect, India has been considered as an outlier among South Asia and other
emerging countries (Ansari 1995). Gordan and Gupta (2003) and Jain and Ninan (2010) have,
however, pointed out that with the rise in per capita income, the share of services in GDP
increases. Kochhar et al. (2006) argued that India was a negative outlier in 1981 compared to
other emerging markets as the share of services in value added and employment was below that
of other countries. After the 1990s, the service sector grew, and in 2000 India became a positive
outlier in terms of the share of services in value added but continued to be a negative outlier in
terms of its share in employment. The growth in the service sector in India has been linked to the
reforms of the 1990s. In the first 3 decades after independence in 1947, India was largely an
agrarian economy. The service sector started to grow in the mid-1980s, but growth accelerated in
the 1990s when India initiated a series of economic reforms after the country faced a severe
balance of payments crisis. Reforms in the service sector were a part of the overall reform
program which led to privatization, the removal of FDI restrictions, and streamlining of approval
procedures among others. Existing literature shows that liberalization and reforms have
contributed to the growth of the sector (Chanda 2002, Gordan and Gupta 2003, Jain and Ninan
2010). With economic growth and the rise in per capita income, demand changed from necessary
to discretionary consumption and propelled the growth of services (McKinsey & Company
2007), and the elasticity of demand for services at high incomes has contributed to the growth of
the sector (Bhattacharya and Mitra 1990, Gordan and Gupta 2003). Technological progress and
the availability of highly skilled manpower has led to the growth of services in information and
communication technology (ICT) and ICT-enabled services (Chanda 2002). Developed countries
now outsource services to developing countries like India, leading to a rise in demand for
services (Bhagwati 1984, Hansda 2001). Significant government expenditures on community,
social, and personal services have also accelerated growth in the sector (Ansari 1995). Some
studies have pointed out barriers to growth in services including lack of decent employment
(Basu and Maertens 2007), a poor business environment (Joshi 2008), lack of an integrated
service sector policy (Banga 2005), and a strong focus on skill-intensive services and higher
education while a majority of the population remains unskilled and poorly educated (Kochhar et
al 2006).

A. Classification and Governance

The service sector can be classified either by using the country’s own definition or by
using the United Nations Central Product Classification (UNCPC). The UNCPC is used
as a basis for international negotiations like those of the World Trade Organization
(WTO). In India, the National Industrial Classification provides classifications for
services. Since the sector is evolving, both have undergone changes. At present, the
National Industrial Classification 2008 is used (Box 1) though there are differences
between it and the UNCPC, e.g., construction is not a part of the sector in India while it is
in the UNCPC.
 Services Included in the Service Sector in the National Industrial Classification 2008
 Wholesale and retail trade; repair of motor vehicles and motorcycles
 Transportation and storage
 Accommodation and food service activities
 Information and communication
 Financial and insurance activities
 Real estate activities
 Professional, scientific, and technical activities
 Administrative and support services
 Public administration and defense; compulsory social security
 Education
 Human health and social work activities
 Arts, entertainment, and recreation
 Other service activities
 Activities of households as employers; undifferentiated goods and services producing
activities of households for own use
 Activities of extraterritorial organizations and bodies

Disaggregated data for many services are not available. Government departments such as the
Central Statistical Organisation and the National Sample Survey Organisation under the Ministry
of Statistics and Programme Implementation and the Reserve Bank of India have been trying to
collect and collate disaggregated data; however, since services such as retailing and construction
are largely in the non-corporate (informal or unorganized) sector, there is both misreporting and
under-reporting. India has a quasi-federal governance structure; some services are under the
jurisdiction of the central government (Union List), some are under the state governments (State
List) and the remaining are under the joint administration of central and state governments
(Concurrent List) (Box 2). Multiple ministries and central government departments regulate
services such as energy and transport while others like construction and retail do not have nodal
ministries. Services like telecommunications have one independent regulator while others like
electricity have state regulators as well. Professional bodies regulate professions such as doctors,
architects, and accountants.

B. Contribution to Gross Domestic Product

Table 1 shows that over time, the share of services in GDP has increased while that of
agriculture has declined. In the last decade, the share of services surpassed the combined
share of agriculture and industry making it the most important contributor to the
country’s output. In fiscal year (FY) 2009, services accounted for 57.3% of India’s GDP2
which was less than that of countries such as the United Kingdom (UK) at78.4% and the
United States (US) at 78.2%, but higher than that of the People’s Republic of China
(PRC) at 41.8%.3

Table 1: Average by Decade of the Share of Sectors in India’s Gross Domestic Product
(%)

Sector 1950s 1960s 1970s 1980s 1990s 2000s

Agriculture 55.3 47.6 42.8 37.3 30.9 21.8
Industry 14.8 19.6 21.3 22.3 23.3 24.5
Services 29.8 32.8 35.9 40.3 45.7 53.7

Source: Author’s calculations from National Income Accounts

The growth of the service sector accelerated in the late 1980s, and in the late 1990s it
surpassed the growth of industries to become the fastest growing sector of the Indian
economy (Figure 1). In FY2009, the service sector grew at 9.96% compared to 8.81%
growth in the industry sector and 1.57% in agriculture. 4 The compound annual growth
rates (CAGR) of services in the PRC and India from 2001 to 2010 were 11.3% and 9.4%,
respectively.5 This implies that even though the present share of services in GDP for the
PRC is lower than that of India, in future the share of services will be higher and can
even surpass that of India since it is growing at a faster rate.
Figure 1: Growth of Economic Sectors in India Source: Author’s calculations from
National

Income Accounts.

There are variations in the growth and performance of different types of services.
Business services, communications, and trade have grown faster than the overall sector
has while others such as real estate, legal services, transport, storage, personal
administration, and defense have grown at the same rate (Gordon and Gupta 2003).
Domestic demand for services such as telecommunications and financial services along
with exports of ICT have contributed to the high growth of these services.

Table 2: Average by Decade of the Share of Service Types in the Sector Overall and in
Gross Domestic Product (%) 1950s 1970s 1990s 2000s Items Share in Services Share in
GDP Share in Services Share in GDP Share in Services Share in GDP Share in Services
Share in GDP Community, social, and personal services 35 10.4 35.1 12.6 30.3 13.9 26.1
14.0 Financing, insurance, real estate, and business services 25.2 7.5 20.3 7.3 26.2 12.0
27.3 14.7 Trade, hotels, and restaurants 28.5 8.5 30.2 10.8 28.5 13.0 29.4 15.8 Transport,
storage, and communication 11.3 3.4 14.5 5.2 15.0 6.9 17.3 9.3
C. Employment
There has been a lot of debate about the capacity of the service sector to generate
employment. It has been argued that employment growth has not kept pace with income
growth in the sector (Bosworth and Maertens 2010) or with the rise in its share of GDP
(Kochhar et al. 2006). Furthermore, the change in the production structure from
agriculture to services has not been reflected by a proportionate change in the
occupational structure (Bhattacharya and Mitra 1990). As a result, service-led growth has
been jobless growth (Banga 2005). Table 3 shows that in FY1993, close to 63% of the
population was engaged in agriculture while 22% worked in services (in both the formal
and informal sectors). Over time, the percentage of people employed in agriculture has
declined and employment in services has increased, although agriculture continues to
have the highest share. Within services, there has been a change in the pattern of
employment. The share of wholesale and retail trade ha d retail trade has increased while
the share of public administration and defense has declined.

Table 3: Employment in Different Sectors and Service Industries as a Percentage of Total

Employment by Fiscal Years Category 2009–2010 2004–2005 1999–2000 1993–1994
Agriculture 53.2 58.5 61.7 62.8 Industry 21.5 18.1 15.9 15.2 Services 25.3 23.4 22.4 22.0
Wholesale and retail trade; repair of motor vehicles, motorcycles, and personal and
household goods 9.5 9.0 8.7 7.7* Hotels and restaurants 1.3 1.3 1.1 Transport, storage,
and communications 4.3 3.8 1.1 3.4 Financial intermediation 0.8 0.6 0.5 1.0* Real estate,
renting, and business activities 1.3 0.9 0.6 Public administration and defense; compulsory
social security 2.1 1.8 2.5 9.5* Education 2.6 2.4 2.0 Healthcare and social work 0.8 0.8
0.6 Other community, social, and personal service activities 1.9 1.8 2.4 0.3*

n FY2009, services accounted for around 62% of total employment in the organized
(formal) sector;7 however, within the service sector, over 80% of the employment was in
the unorganized (informal) sector. Finance, insurance, real estate, and business services
and community, social, and personal services largely provide organized employment
while retail and wholesale trade largely provide unorganized employment. A large part of
the organized employment in services is concentrated in the public sector; in fact, in
FY1993, around 86% of the total was in the public sector, but by FY2009 it had declined
to 75%. Trade, hotels, and restaurants are the only activities in which the share of the
public sector is less than that of the private sector. Overall, employment in the service
sector in India is lower than its share in GDP, but it is growing. The sector has the largest
share of organized employment, but within services, the organized share is small with the
public sector dominating. The private sector has not been very successful in creating
organized service sector employment.

D. Labor Productivity
 It is difficult to do a productivity analysis in India since data on total employment are not
calculated on a yearly basis and a great deal of employment in services is informal.
Existing studies have, however, concluded that labor productivity has been the highest in
the service sector, particularly in the decades after 1980. Using output data from National
Accounts Statistics and employment data from other secondary sources, Bosworth and
Maertens (2010) found that total factor productivity (TFP) was highest in service sector

E. Future Growth
India’s economic growth slowed to 6.9% in 2012; nevertheless, it is projected to grow at
7.3% in 2013 which is higher than the 6% average projected growth rate for emerging
and developing economies.11 In the past decade with the rise in GDP and per capita
incomes, the number of people below the poverty line has declined. McKinsey &
Company (2007) forecast that if the Indian economy grows at the rate of 7.3% between
2005 and 2025, then by 2025, 583 million Indians will be in the middle class which is the
equivalent of the current population of Australia. The share of the middle class in the total
population will increase from around 5% in 2005 to 41% in 2025, and they will account
for 59% of the country’s total consumption. With the increase in incomes, there has also
been an increase in the literacy rate which is expected to improve further.12 Moreover,
India has one of the youngest populations in the world with 54% below 25 years of
age.13 All this is leading to a change in consumption patterns with an increase in demand
for discretionary services like education, private healthcare providers, personal care, and
hotels and restaurants. The Indian market is large and unsaturated, and most services have
been opened up for foreign investment. India wants to be a knowledge-based hub, and the
government is promoting exports of services. All these factors will drive the future
growth of the service sector. Indian government projections show that the sector will
grow at a fast pace. The Planning Commission estimates that the economy will grow at
9.5% in the 12th Five Year Plan (2012–2017), and the service sector is projected to grow
at the rate of 10%. Certain services like trade, hotels and restaurants, transport, storage,
communications, financing, insurance, and real estate are expected to grow faster than the
sector

ASSESSING THE OPENNESS OF THE SERVICE SECTOR

Reforms and liberalization along with technological developments; the growth of
multinationals; new delivery models; and a large, unsaturated domestic market have
enhanced India’s trade and investment in services. A. Trade In the post-reform period
(1991–2008), India’s trade in services recorded substantial growth as the country became
globally competitive in ICT services which increased exports many fold and led to an
increase in India’s trade surplus (Alejandro et al. 2010). Service exports have contributed
to inclusive economic growth by increasing the number of well-paid jobs and by
reallocating labor to a high-productivity sector. Service exports have also increased tax
revenues and have stimulated domestic demand, including demand for infrastructure.
Existing literature shows that there have been changes in the composition of trade from
traditional services such as travel and transport toward knowledge-based and business
services (Chanda 2002) and that India has export potential in skill-based and labor-
intensive services (Ministry of Finance 2007). Trade in services has been growing rapidly
in the past 2 decades. In the 1980s it was valued at $6 billion and in 2010, it reached $240
billion. India’s service exports not only grew more rapidly than the country’s
merchandise exports, they also grew faster than global service exports. From 1980 to
2010, India’s service exports grew at a CAGR of 13.2% while world exports of services
grew at the rate of 7.84%. A substantial part of this growth (21.7%) was in the post-
reform period (1991–2010).14 In the 1980s and 1990s, India had a negative trade balance
in services, but from 2004 on, the balance has been positive. In the 1980s, trade in
services contributed to 20% of India’s total trade. In 2010, the share increased to 30.4%
compared with the global average of 24%. Trade in services as a percentage of GDP
increased from 3.2% in 1980 to 13.9% in 2010;15 however, this is still low compared to
the contribution of the service sector to India’s GDP. India’s share in world trade in
services increased from less than 1% to over 3% between 1980 and 2010, while its share
in goods trade remained constant at 1%. While world trade in services is still dominated
by the developed countries, emerging economies like the PRC and India are now among
the top 10 exporters and importers of services among WTO members. In 2011, India was
the eighth largest exporter while its rank in importing services remained seventh. The
PRC was the fourth largest exporter of services.16 India has both export and import
interests in services. With a huge English-speaking, skilled work force available at
competitive prices, the country has created a niche for itself in exporting knowledge-
based services but needs foreign investment and best management practices in
infrastructure services. Developed countries are the major trading partners for India in
services. By country, the US is the largest export destination followed by the UK and
other European countries and other English speaking countries like Canada. India imports
the bulk of its services from Australia, France, Germany, Japan, the Republic of Korea,
the UK, and the US. Export and import trends in different types of services show that
from 2000 to 2010, financial services grew at an average annual rate of 34.6% followed
by computer and information services at 22.6% and insurance services at 20.2%. From
1980 to 2010, exports of business services grew at an average annual rate of 12.6%
compared to 12% in transport and 7.6% in travel services. In 2010, computer and
information services were 48.5% of India’s total service exports followed by other
business services (23.4%), travel (11.4%), transportation (10.7%) and financial services
(4.9%). Transportation services accounted for around 37.5% of India’s total imports in
2010. From 1980 to 2010, imports of transportation services grew at an average annual
rate of 11.5%.

BARRIERS AND REFORMS

 The analysis in the previous sections shows that the service sector has increasingly
contributed to India’s GDP, GDP growth, employment, trade, and investment; however,
there are some concerns that are preventing the sector from contributing to inclusive
growth. First, GDP growth has slowed down which has affected growth in the service
sector. Second, the sector has not been able to create enough employment either in terms
of numbers or quality of jobs. Third, although India has been portrayed as a major
exporter of services, the country’s ranking among WTO members in service exports is
lower than that of the PRC, and India is globally competitive in only one industry:
computer and information services. Fourth, India has the potential to attract FDI, but it
has not been successful in doing so. This section discusses some of these key barriers and
suggests reforms that will enhance productivity and efficiency and help to attain inclusive
growth.

 Service sector focus in policymaking. There is no government policy on how the sector
can lead to inclusive growth. This is partly because the focus is on agriculture and
manufacturing, and the service sector has largely been left to grow on its own. There is
no nodal ministry for services like retailing while for others like transport and energy
there are multiple ministries with conflicting interests. The quasi-federal governance
structure has led to multiple regulatory bodies, numerous regulations, and multiple
clearance requirements. For example, there are around 13 regulatory bodies for higher
education, and each of them functions in isolation.24 There is an urgent need to focus on
the service sector and to identify the key barriers faced by different types of services and
then to undertake specific reforms. For instance, in road transport, reforms should focus
on establishing a seamless supply chain by removing barriers to the interstate movements
of goods. This can be done with the help of technology such as computerizing check
posts at state borders and with regulations such as implementing single goods and service
taxes. In the case of industries like energy, various government departments should work
together to design a policy that will facilitate equitable access at affordable prices. The
policy should lay down a short-term strategy (5 years coinciding with the 5-year plans)
and a long-term strategy (10–15 years) for development. A nodal agency can be identified
for each service and given the responsibility to see that the strategies are implemented. To
standardize policies across states, the central government can come up with model
regulations that the state governments can implement. It is important to note that there are
disparities in performance across states and that poor states seem to do badly in service
infrastructure and in delivering public services like healthcare and education. For
inclusive growth, policies have to focus on state-specific requirements.

 Regulatory reforms.
Some regulations do not take into account technological developments while others are
outdated or do not follow international best practices. In areas like transportation, there is
a lack of comprehensive regulations enabling integrated door-to-door service which
increases waste in the supply chain. In addition, existing regulations do not take into
account the characteristics of new services such as
direct selling and express delivery. Lack of prescribed standards and common
accreditation also adversely affect services like construction and education. While
deregulation and removing regulatory barriers are often necessary for service sector
growth (Hoekman and Mattoo 2011, Jain and Ninan 2010), in India it may not
necessarily be true. For example, the privatization of Indian airports led to an arbitrary
increase in tariffs prior to the appointment of the Airport Economic Regulatory Authority.
Since many services have erstwhile been public monopolies, the vested interests of the
government and of public sector units adversely affect performance as they get
preferential prices in commodities like energy. Moreover, government procurement is not
always transparent, e.g., private companies working for the railways have to procure
materials from vendors selected by the railways. In many services, especially
infrastructure, it is often difficult for the private sector to enter and operate due to a lack
of third party access and of transparent procedures for sharing scare resources among
other problems. Thus, a lack of regulation is restricting the competition and efficient
service provision necessary for inclusive growth. Privatization should be accompanied by
appropriate regulations based on global best practices. Regulations should be transparent
and non-discriminatory, should take into account the evolving nature of the service sector
and its links with other sectors, and should support its growth. Procedural hurdles can be
removed by implementing one-stop clearances for projects and FDI. Monopolies in
sectors such as railways and the post should be gradually phased out and at a minimum,
commercially delivered services should be privatized. Public Procurement Bill 2011
should be implemented.25 The need for regulators in specific areas should be examined
and if required, independent regulators should be appointed.

 Removal of FDI restrictions.

According to the Organisation for Economic Co-operation and Development’s (OECD)
FDI Restrictive Index 2010, India is considered more restrictive than the Republic of
Korea and less so than the PRC and Japan (Figure 3) but is one of the few countries that
has FDI restrictions on services that are hampering its ability to attract investment and
best management practices. Since the government does not have adequate resources, it is
important to encourage private and foreign investment in the service sector to facilitate
inclusive growth. To attract FDI, the policy should be transparent, technology neutral,
and should not distinguish between domestic and foreign companies. To counter any
adverse impacts, regulations can be in place to monitor the sector.

Service sector employment and education.

Employment opportunities and quality education are both necessary for inclusive
growth. There is a skill shortage in ICT and organized retail. According to the Electronic
and Computer Software Export Promotion Council, approximately 5,000 people are
needed every year to meet the demand of the ICT industry, but the total available from
educational and training institutes is only a third of this number. This is leading to a rise
in salaries (average salary increase was 11% in 2012),26 high attrition rates, and a high
cost of operations. Studies (Mukherjee and Goyal 2012) have shown that although
employees prefer to work in the formal sector for better salaries and job security, skill
requirements are different, and it is not easy for employees to shift from the informal to
the formal sector. In India, the gross educational enrollment ratio is low, and there are
wide variations in quality across institutions. Degrees granted by some private
universities are not recognized even within India thus further affecting employability. 27
In many cases companies have to invest substantially in training employees. Critics have
argued that the government’s education policy and funding have focused on higher
education and have neglected primary education (Kochhar et al. 2006). There are
reserved seats for the so-called backward classes in higher education but not in primary
education; this is not based on income. Also, labor productivity is lower in social services
like healthcare and education which affects inclusive growth.
To create quality employment in the service sector, it is important to encourage growth in
the formal sector. The government can work with industries and with educational
institutions in public–private partnerships to identify skill requirements and design
appropriate courses and training programs to facilitate their development. Today, private
organizations can operate only as not-for-profit institutions in education. The government
may consider allowing for-profit education while putting in place a regulatory framework
to ensure that participants meet a required standard. This will facilitate private
investment. Focusing on vocational training and developing appropriate curricula will
increase the employability of students in the service sector. The quality of education can
be improved through proper accreditation at international standards.

CONCLUSIONS

The service sector is the largest and fastest growing sector in India, it has the highest
labor productivity, and it is projected to continue to grow at a fast pace. The share of
services in India’s total trade is higher than the global average, and India is among the top
10 WTO members in service exports and imports. There are, however, a number of
concerns. India does not have a policy that can lead to inclusive growth, and numerous
governing bodies and a lack of coordination among them adversely affect the growth of
the sector. In many types of services, the regulations are outdated, and there are FDI
restrictions and regulatory barriers. The sector has not been able to create sufficient
employment either in terms of number or quality of jobs. India’s service sector growth
and exports of services are lower than that of competing countries like the PRC, and
exports are competitive in a few services only and are concentrated in a few markets.
There are wide variations in the growth of different types of services and great disparities
in access to services; a major proportion of the poor in India do not have access to basic
services such as healthcare and education. Infrastructure is weak, so the cost of service
delivery is high. Although India wants to develop as a knowledge hub, there is no
uniformity in the quality and standards of education, and formal education does not
guarantee employability.
The service sector will be able to contribute to inclusive growth by enhancing investment,
creating employment and human capital, and developing infrastructure. It is important for
a developing country like India with a large, young population to generate quality
employment and to move up the value chain. India needs private investments in key
infrastructure services such as transport, energy, and telecommunications. It can attract
FDI and private investment only with a stable, transparent, non-discriminatory,
competitive policy environment. If the reforms suggested here are implemented, they will
enhance the productivity and efficiency of the service sector and lead to inclusive growth.