Introduction

The services sector is the most dominant sector of Indian economy in terms
of the GDP. It has also attracted significant foreign investment, and is
major contributor to India’s exports. It also provides employment to ~30%
of India’s workforce. Services sector in India 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 is poised to play a vital role in achieving the
goals of US$ 5 trillion economy in the medium term and a developed
economy status in the long term.
What is the importance of Services Sector to India’s
Economy?
Contribution in GVA: The services sector of India remains the engine of
growth for India’s economy and contributed 53% to India’s Gross Value
Added at current prices in FY21-22.
The sector has consistently grown at the annual rate of ~7% in the last few
year (barring 2020-21 due to pandemic).
Overall, the Services Sector grew by 10.8% Year on Year (YoY) in first half
(H1) 2021-22.The overall Services sector GVA is expected to grow by 8.2
per cent in 2021-22,

Contribution to Exports: According to the WTO, India’s services export

market share improved from 3% in 2010 to 3.5% in 2019 and 4% in 2020
and 2021. Despite the impact of COVID-19, there was an increase of ~25%
in net exports of services in 2021-22. The Government has set a target of
services export of US$ 350 billion in FY2022-23, 37% higher than ~US$
255 billion exports in 2021-22.

Helpful in FDI inflows: The Services Sector in India was the largest
recipient of FDI inflows worth US$ 94.19 billion between April 2000-
March 2022. The services category ranked 1st in FDI inflow as per data
released by the Department for Promotion of Industry and Internal Trade
(DPIIT).

Contribution in Start-ups and Patents: Start-ups in India have grown

remarkably over the last six years, most of which belonged to Services
Sector. More than 61,400 start-ups have been recognized in India as of
January 2022.
What are the future prospects of the Services Sector in India?
Upcoming sectors are expected to contribute to rapid expansion of services
sector in India: (a) By 2025, healthcare industry is expected to reach US$
372 billion; (b) India’s digital economy is estimated to reach US$ 1 trillion
by 2025; (c) By end of 2023, India’s IT and business services sector is
expected to reach US$ 14.3 billion with 8% growth; (d) Artificial
Intelligence (AI) is expected to boost India’s annual growth rate by 1.3%
by2035, according to a discussion paper by Niti Aayog
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. India’s
software service industry is expected to reach US$ 1 trillion by 2030.

What factors have contributed to growth of Services Sector in

India?
Rise in demand: The service sector bloomed when businesses were
outsourced from foreign countries (especially the developed countries) to
India for communication, advertisement, computer service, and banking.
Because of this high demand, there was high growth in the service sector.
Rise in domestic population increased demand for services. The necessity
for basic services like hospitals, educational institutions, post and telegraph
services, police stations, courts, transportation and banking services have
increased with increase in population.

Technology and Structural Changes: The Indian economy has

undergone several technological and structural changes. It comprises a
change in economic reliance from primary to tertiary industries. Technical
advancements have also led in a shift in outsourcing, leading in the
expansion of the service industry. Technology also aided growth in primary
and secondary sectors. The development in agriculture and industrial
sector has increased the need of services such as transportation, storage
and trade.

Economic Reforms in 1991: The growth in the service sector in India

has been linked to the reforms of the 1990s. The service sector started to
grow in the mid-1980s, but growth accelerated after the economic reforms
in 1991. Reforms in the service sector led to privatisation, the removal of
FDI restrictions, and streamlining of approval procedures among others.
With economic growth and the rise in per capita income, demand changed
from necessary to discretionary consumption and propelled the growth of
services. Elasticity of demand for services at high incomes has contributed
to the growth of the sector. As per income of the people increased the
demand for services like tourism, retailing, catering and elite education also
increased.

Attractive ecosystem: The Government’s move to launch ‘Start-up India’

aims to create an inclusive ecosystem for entrepreneurs and push for
innovation. Services are a big part of this system. The technology
infrastructure required for such an ecosystem has increased the potential
for the sector in India. Low setup cost make this sector an attractive
investment destination. India also has a reasonably well-developed
financial market.

Skilled Manpower: A large pool of skilled IT manpower has made India

into a global outsourcing hub. It now commands a 55% share in the global
sourcing market.
Improved Productivity: An other factor behind development of service
sector is increase in productivity of labour. Due to better technology and
improved labour productivity there is a increase in output of manufacturing
goods and agriculture with less labour.
Global Technology Hub: India is the digital capabilities hub of the
world, with the presence of 75% of global digital talent. In the next five
years, the Ministry of Electronics and Information Technology is working to
increase the contribution of the digital economy to 20% of GDP The
government is working to build cloud-based infrastructure for collaborative
networks that can be used for the creation of innovative solutions by
entrepreneurs and startups. In the past five years (until July 2021),India
filed >4000 artificial intelligence (Al) patents.

What are the challenges faced by the Services Sector in India?

Lack of Government Incentives: Many experts feel that Government
have not provided incentives to the services sector on the same lines as the
manufacturing sector e.g., under the export promotion scheme for
manufacturing, MEIS (Merchandise Exports Incentive Scheme),
merchandise exporters benefited to the extent of over INR 40,000 crore in
2018-19. The corresponding benefit for service exporters under SEIS
(Services Exports Incentive Scheme) was ~INR 4,000 (10% of merchandise
exporters).
Similarly, the Government provides incentives like tax exemptions for
green-field manufacturing projects. Such incentives are missing for creating
infrastructure for services sectors like tourism, building of hotels, hospitals
and universities etc. There is lack of PLI schemes for services sector.

Trade Restrictions: Services sector is hampered by restrictions placed by

foreign governments like restrictions on movement of service professionals,
domestic certification requirements for foreign service providers tax on
offshore income of Indian service firms etc. These restrictions limit the
export potential of India’s Services Sector. Similarly, India also performs
poorly on OECD’s Services Trade Restrictiveness Index (STRI) e.g., out of
50 sample countries, only Thailand and Indonesia were more restrictive
than India.

Skilled Manpower: While there is a large pool of talented professional, it

is not enough to support the growth of the sector. Industry experts lament
that many graduates lack employable skills and considerable effort is
required to train them.
Infrastructure: Lack of infrastructure (like transportation, connectivity,
communication) limit the potential of services sectors like tourism and
hospitality etc.

Access to Finance: Many small services firms lack access to affordable

finance to scale up their operations. Lack of finance hampers access to
technology, up-skilling of people, up-gradation of systems and processes
that impacts their competitiveness.

How can the challenges be addressed?

First, the Services Sector in India requires structured policy interventions
by the Government. The Government should launch a ‘Services from India’
initiative on the lines of Make in India. Government should consider
greater tax incentives, and PLI like scheme for Services Sector to support an
increase in services exports.
Second, Services need to be accorded a greater priority in trade
negotiations. Focus of India’s FTAs has been on merchandise trade.
Although the trend is changing, the India-Australia ECTA has several
measures to facilitate India’s service exports (like mutual recognition of
professional services, avoiding double taxation on offshore income of
Indian service firms in Australia etc.). This should be ensured in India’s
upcoming FTAs.
Third, India should also push for setting standards for global data
governance. Resolving data and privacy barriers will provide a big impetus
to outsourcing of consultation services. India’s services sector can be the
biggest beneficiary.
Fourth, IT Sector contributes ~55% of total services sector. The
Government should make a comprehensive roadmap for further
diversification of the services sector. Sub-Sectors like Healthcare, Tourism
(including medical tourism), Banking/Financial Services,
Telecommunication need to be supported for further expansion.
Conclusion
The service sector is India’s largest and fastest expanding industry. It has
the highest labour productivity and is expected to increase rapidly in the
future. The proportion of services in overall commerce in India is greater
than the worldwide average. By increasing investment, creating jobs and
human capital, and improving infrastructure, the service sector will be able
to contribute to inclusive growth. It is critical for a developing country like
India, which has a huge, young population, to create quality jobs and climb
up the value chain.