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COUNTRY PAPER

SERVICE SECTOR IN INDIA’S ECONOMY: PERFORMANCE, PROBLEMS AND PROSPECTS

For
Asian Productivity Organization (APO) Project No. 08-RP-38-GE-STM-B: Study Meeting on Expansion and Development of the Service Industry in Asia

17-20 June, 2008
At

Seoul, Republic of Korea

Submitted By:
Mailing Address: Dr Seema Joshi Sir Ratan Tata Senior Fellow Institute of Economic Growth University of Delhi Enclave Delhi-110007. E-mail : seemajoshi143@hotmail.com : seemajoshi@iegindia.org 203, Kadambari Aptts Delhi University Staff CGHS Sector-9, Rohini, Delhi-110085. Ph.: 91-11-27553837 Mobile : 09811395234

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The remarkable performance of India’s economy is attributable in significant part to the spectacular dynamism shown by the services sector. 2 . along with other factors landed us into economic crisis of 1990-91 (Bhagwati. forthcoming). Background India continued to follow import substitution strategy (ISS) of growth during the period 1951-1980. what happened to service sector productivity in post 1980 period? Fourthly. Section III discusses the performance of services sector in India.1 per cent per annum during 1992-2000 (IDR. 1996). it would be every appropriate if we try to find out: i. As a consequence of the adoption of the New Economic Policy(NEP) of 1991. vi.0 percent per annum during 198091. the growth rate of the Indian economy which stood at 3. how this sector performed on growth and employment fronts? Thirdly. Against this background. permits and bureaucratic restrictions” (Parikh. what are the problems or challenges ahead in this sector? Lastly.org and seemajoshi143@hotmail. North Campus. Section II gives the composition of service sector in India. 5. 2002). what are the policies adopted by the government of India to promote the services sector? Fifthly.The economy has moved on from the ‘Hindu Rate of Growth’ of 3.com. what are the constituents of service sector in India? Secondly.It was expected that these policy measures would restore the health of the economy and put it on higher growth trajectory ((Jalan. “The ISS with heavy ‘industry’ first strategy with central planning created a plethora of controls. Firstly. in fact accelerated to 6. procedures. Section IV focuses in brief on promotional policies of * Sir Ratan Tata Fellow (Senior Fellow) with Institute of Economic Growth. Joshi and Little. 2002) . The New Economic Policy of July. University of Delhi Enclave. E-mail: seemajoshi@iegindia.SERVICE SECTOR IN INDIA’S ECONOMY: PERFORMANCE.5% per annum of yesteryears to ‘unstoppable India’ at 9 % per annum at present (Joshi.110007. The ISS. 1991. iv. 1991 heralded a new era for India by introducing comprehensive reforms in industrial sectors as well as in services sector . iii. what are the prospects /potential for growth in this sector? A modest attempt has been made to answer the above-referred questions in the present paper. India emerged as one of the fastest growing economies of the world during the 1990s . ii. The paper is organized into seven sections. 1993). v. PROBLEMS AND PROSPECTS Dr Seema Joshi * I. 1992. Delhi .5 per cent per annum during 1951-79.

the Indian economy has experienced a change in production structure with a shift away from agriculture towards industry and tertiary sector.3 2. hotels and restaurants (THR) 1.1 3.53% in the 1950’s to 28. storage and communication 2.2 Banking and Insurance Real Estate.Composition of Service Sector in India In India. Section V points out the problems/challenges a head in this sector Section VI briefs about the potential for growth in this sector and Section VII concludes.Government of India.2 Public Administration and defense (PA & D) Other services III. During the process of growth over the years 1950-51 to 1999-2000.66 % in 1990’s.1 1. The tertiary sector emerged as the major sector of the economy both in terms of 3 .71% per annum in the period 1990-91 to 1999-2000 (i.a Performance of Services Sector in India Sectoral Composition of GDP Growth The analysis of the sectoral composition of GDP and employment for the period 1950-2000 brings out the fact that there has taken place ‘tertiarization’ of the structure of production and employment in India. Financing. Community.4 Railways Transport by other means Storage Communication 3. But the whole scenario changed subsequently.09% to 44. The share of agricultural sector in real GDP at 1993-94 prices declined from 55. Insurance.12% and 28.e. II . The service sector output increased at a rate of 6.2 2. During the 1950’s it was the primary sector which was the dominant sector of the economy and accounted for the largest share in GDP.1 4.2 Trade Hotels and restaurants 2.1 2. Real Estate and Business Services 3. Ownership of Dwellings and Business Services 4. III. Transport. Trade.reform period).63% per annum in the period 198081 to 1989-90 (i. Social and Personal services 4. In the National Income Accounting in India. the national income classification given by Central Statistical Organization is followed. and especially in the 1980’s. pre-reform period) compared with 7.22% respectively during the same period.e. service sector includes the following: 1.The share of industry and services increased from 16%to 27. post.

during 1999-2000 to 2004-05 period the employment elasticity of growth registered an increase from 0.1% in 2006-07 .communication (3. storage . The acceleration in growth rate of output per worker in PA &D and other community. trade .With the exception of one sub-sector of tertiary sector i. However. 2008a). It is important to point out that. reflecting the phenomenon of jobless growth.15 during post -reform period (1993-94 to 1999-2000) initially.4 percentage point increase in the rate of economic growth that took place in the post-1980 period. communication all other sub-sectors of services sector exhibited an increasing trend in employment elasticties and thereby overall elasticity of employment increased from 0.62% and 18.51.9%pa) and banking. the increase is more marked in case of services. within the services sector employment growth rate is highest in finance. 2008).15 to 0. Further.15 to 0. storage. insurance. transport. real estate and business services. about 40 percent is accounted for by a faster growth in TFP in services.b Employment Scenario The sectoral distribution of workforce in India during the period 1983 to 2004-05 reveals that the structural changes in terms of employment have been slow in India as the primary sector continued to absorb 56. The community social and personal services occupy the last rank in growth rates of employment.6% of the overall average growth in GDP in the last five years between 2002-03 and 2006-07(Economic Survey.70%) respectively. Partially the spurt in growth rate is attributable to productivity growth in certain sub-sectors of services sector.a). the tertiary sector has shown a uniform growth trend during the period 1950-51 to 1999-2000 (Joshi.e.growth rates as well as its share in GDP in 1990s.c Productivity Growth in Service Sector --Post-1980 Scenario Goldar and Mitra (G-M. insurance. It is to be noted here that while agriculture and manufacturing sectors have experienced phases of deceleration.This sector accounted for 68. It has been noticed by G-M (2008) that growth rate in output per man is highest in case of PA &D and other community social and personal services (4. III. III. social and personal services might have resulted from the downsizing of the public sector because of privatisation and hikes in the salaries of the central and state government employees from time to time (i. The share of this sector in GDP further increased to 55. as its share in employment has been far less when compared to its contribution to GDP. output per worker and total factor productivity (TFP) in the post -1980 period.2% p. there was a sharp drop in labour absorptive capacity of growth in the economy (employment elasticity of growth) from 0. and business services. agriculture.40 to 0. 2004. restaurants (2. followed by tertiary and industrial sectors (24.67% of the total workforce even in 2004-05.51 (Mitra. 2006-07).e due 4 . industry and services have witnessed acceleration in the growth rates of output. However. 2008) point out in their recent paper that the process of acceleration in growth started in 1980s rather than in 1990s “Of the 2. There has been disproportionate growth of tertiary sector. followed by trade. followed by transport. stagnation and growth. hotels. hotels and restaurants and transport etc.3 % pa).” The three sectors viz.

non-availability of data or availability of data after a time lag are other problems confronted with in case of services .) has been permitted . physical infrastructure. The remaining 90% (worth $300 billion) remains to be tapped as per An Approach to the 11th Five Year Plan (Joshi.e-commerce activities. For example. 2008a. There are several other promotional measures taken by the government to sustain the growth of the services sector. Despite increase in growth rate of labour productivity in service sector. Broad Band Policy 2004 etc were undertaken. economic. Further. 2008c). a large number of steps like launching of National Telecom Policy 1994. 2007). 2006b. business process outsourcing (BPOs). especially through deregulation of some sub –sectors of services sector. productivity . a number of promotional measures have been taken up in IT and ITES (Information Technology Enabled Services) segment. having realized that in knowledge. Besides. agricultural and industrial sector reforms. Whereas productivity growth in THR has derived stimuli from surge in demand for such services with a subsequent expansion in these activities. rupee appreciation and US sub-prime crisis. Problems/Challenges Ahead The sustainability of impressive growth of Indian economy has been questioned in the wake of some challenges in the form of lack of social infrastructure. integration with global economy cannot take place without making quality telecom services accessible at affordable prices . 2008). Foreign direct investment (FDI) varying between 26 per cent (in print media) to 100% in information technology (IT) sector. rapid growth in demand for talented manpower/quality staff. V. measurement of service sector output and productivity are still debatable issues. Part of the productivity growth in the services sector might be an outcome of application of IT services (Goldar and Mitra. there were several measures undertaken by the government to develop services sector.to accounting reasons). It is also important to point out here that the measurement of output . high attrition rate. trade. delay in the promotion of conducive business environment and good governance will unable us to catch up with the global giants in terms of world –wide presence and scale. outsourcing backlash etc are some other limiting factors (Joshi. New Telecom Policy 1999. 2006a). The 5 . IV. health. India has emerged as a top destination for off shoring as per Global Services Location Index 2007. challenges in the field of IT and ITES like rising labour costs. 2008b. Policy Measures for the Development of the Services Sector In post-1991 period. tourism. banking and insurance and real estate sectors (For details see Joshi.intensive world driven by IT . infrastructure etc. The growth of IT and ITES is having social. forthcoming). There is a lot of scope for future expansion as only 10 % of the potentially addressable global IT/ ITES market has been realized. etc. IT infrastructure (Joshi. 2006). In addition to this. ethical and environmental implications also (Joshi.

“…. ITES. In addition. entertainment and financial services sectors.’ and emergence of a wide array of unconventional /new services like IT. prospects and problems encountered by the services sector in India’s economy. That is why. organised retail. That optimism is well reflected in the following words of Mr Kamal Nath.credit cards) and tourism services (eco-tourism.5 million indirect / induced jobs says NASSCOM. the futurists are very optimistic regarding the bright future and performance a head of the sector. there is a huge potential for growth in the services sector because of increase in disposable income. increasing urbanization. ‘snake charmers’ and ‘cyber –coolies’ of yesteryears to a ‘land of knowledge workers’ ---Thanks to IT and ITES(Joshi.problem gets further compounded because of the entry of new species of services (like IT. as oil is for Saudi Arabia and electronics and engineering are for Taiwan. p. but on the economic front. quality improvements stemming from the application of new technologies are extremely hard to measure. new financial services (ATMs. A number of sector specific measures have been taken up by the government of India to promote IT and ITES and other sun-rise sectors like telecom. hospitality. That is why NASSCOM (2005) says that. Saudi Arabia’s oil exports accounted for 46% of GDP in 2004. 2. VII. Therefore. Prospects for Growth in the Services Sector One of the major drivers of service sector growth in the post globalization era in India is the IT and ITES sector. It is heartening to note that India is called the ‘services hub’ of the world. Minister of Commerce and Industry which were a part of his speech at World Economic Forum. Telecom and ITES-BPO revolution have already hit the shores of India. According to NASSCOM (2005). Conclusion To sum up. India’s IT and BPO industries could account for 10-12% of India’s GDP by 2015” (NASSCOM. quality of each unit of the same service varies from the other. “The IT and BPO industries can become major growth engines for India. Further. The revenue generation from total software and services segment is likely to touch $ 60-billion mark by 2010 as per NASSCOM estimates. 2006b). India’s offshore IT and BPO industries hold the potential to create over 9 million jobs by 2010. Further. Taiwan’s electronics and engineering exports accounted for 17% of GDP in the same year. growing middle class. but rather “can my company afford not to be in India?” . it is Incredible India. The traditional perception of India stands changed today from a ‘land of beggars’ .80). the present paper provides a brief overview of performance. health tourism) etc.” 6 . a population “bulge” in the working age groups providing ‘demographic window of opportunity. 2005.3 million direct jobs and 6. ITES etc ) and lack of development of concepts on the one hand and non-inclusion of unpaid households on the other. it is too difficult to achieve the same level of output in terms of quality as has been pointed out in Cowell (1984). …. VI. The question for CEOs the world over is no longer “should my company go to India?”.On the tourism front. it is clearly Opportunity India….

Oxford University Press. Oxford. Economic Survey. Vol XLI (4). ‘Tertiary Sector. accepted for presentation in the 9th Annual Sir Arthur Lewis Conference held at University of West Indies. New Delhi. Joshi. Rao Centenary Conference on National Income and Other Macro-Economic Aggregates in a Growing Economy being organized by the Delhi School of Economics and the Institute of Economic Growth. Devi Ahilya University. (1984). from March 26-28. Economic and Political Weekly. Parikh. Indian Services Sector and Trade Potential in Health Services”. pp.Driven Growth in India ----. NASSCOM (2005). paper Presented at the V. Vijay and I. pp. Heinemann. April-June. India’s Economic Reforms 1991-2001. Hazratbal. W.4..“Growth and Structure of Tertiary Sector in Developing Economies”. --.D.W. Haryana. 2008. Goldar. Vol.4178. India Development Report 2002. 2008. Conference Proceedings. 7 . “Extending India’s Leadership of the Global IT and BPO Industries”. “From the’Hindu Rate of Growth’ to ‘Unstoppable India’: Has Service Sector Played a Role?” accepted for publication. 4175. D. Clarendon Press. Kirit. “Overview: Ten Years of Reforms. ‘Balance of Payments: 1956 to 1991’. “GATS. Jamaica. “The Main Drivers of Services Growth in India in Post Globalization Period”. March.(2008c). (25th -27th October) held at University of Kashmir. 943-951. New Delhi.K. --. “From Conventional to New Services: Broadened Scope of Tertiary Sector”. Jan 28--Feb 3. Sept 11-17. 49(2). Mitra. Tertiary Sector Growth: Issues and Facts”. 39 (37). (2002). 192-200.M.(2007). in International Conference on Services Management. Srinagar.(2006a) “Impact of Economic Reforms on Social Sector Expenditure in India”. --.(2008a). “ Productivity Increase and Changing Sectoral Composition : Contribution to Economic Growth in India”. Conference Volume –Part-II of 90th Annual Conference of Indian Economic Association. Economic and Political Weekly. 2008 at School of Economics. Bimal (1992). Arup (2008). India in Transition: Freeing the Economy.). No.V. in The Indian Economy: Problems and Prospects. ---(2008b)“Who will be the ‘Services Hub’ of the World : India or China?”. Delhi. Artha Beekshan. Academic Foundation. Jagdish (1993).I.16.(2006b). Delhi. India. Oxford University Press. --. London. Joshi. --. Jalan. Bishwanath and Mitra. Penguin Books India(P) Ltd. Indore --. Government of India (2006-07).pp. What Next?” in Kirit Parikh and R Radhakrishna (eds.Vol.References Cowell.Impact on Employment and Poverty’. Seema (2004). Indian Journal of labour Economics.(2005).R. Bhagwati. NASSCOMMcKinsey Report 2005. Vol. The Marketing of Services. I I M T (Institute for International Management and Technology). Arup (2008). Mona. Delhi on April 2830. 2008. pp.321-335.(forthcoming). Kingston 7. --. “Is ‘Services Hub’ of the World becoming an e-Junkyard?” presented a paper in National Seminar on WTO Provisions on Trade and Environment held on 15th and 16th February. Little (1996).

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