Session 1: Role of Service in an Economy & Society

Economic Structure & Development of Service Economy

Developed economy Underdeveloped economy

What is a Service?
The global trade framework does not provide clear
definitions on what is a good or a service

Limited help: When you can drop it on your foot,

it is not a service! (The Economist)

Service Definitions
A service:
is an activity or series of activities more or less intangible nature, and Mostly takes place in interaction between customer and service employee (but not necessarily) With/without physical resources/ goods/ systems of the service provider, With an aim to provide solutions to customer problems.

Services can be defined as economic activities that

produce time, place, form or psychological utilities. They are intangible acts deeds or performances

Characteristics of Goods & Services

GOODS Tangible product Consistent product definition Production usually separate from consumption Can be inventoried Low customer interaction Can be resold Quality measurement possible Goods are transportable Site of facility important for cost

SERVICES Intangible in nature Inconsistent product definition Produced & consumed at same time Cannot be inventoried High customer interaction Reselling is unusual Quality difficult to measure Provider/customer, not product is transportable Site of facility important for customer contact.

Definition of Service Firms

Service enterprises are organizations that:

facilitate the production & distribution of goods,

support other firms in meeting their goals, and

add value to our personal lives.
James Fitzsimmons

Categories of Service Mix

Pure Tangible Good

Tangible Good With services

Hybrid

Major Service With Goods

Pure Service

Proportion of Goods and Services in Purchase Bundle

Automobile Computer Installed Carpeting Fast-food & Restaurant Meal Auto Repair Hospital Care Advertising Agency Investment Management Consulting Service Counseling 75 100 50 25 Percent of Product that is a Good 0 75 25 50 100 Percent of Product that is a Service

Role of Services in an Economy

Impact of Service Sector on Economy (Emphasis on Indian Economy)

- Health of the country (GDP): GDP is the market - Employment - Manufacturing sector - International Trade

value of all the final goods and services produced within the country in a given period of time.

The contribution of the services sector to the Indian economy has been manifold: a 55.2% share (excluding construction) in GDP, growing by 10 per cent annually, contributing to about 25% of total employment, accounting for a high share in FDI inflows and over onethird of total exports, and recording very fast (27.4 per cent) export growth through the first half of 2010-11.

Service Sector Impact on

GDP

Output Shares in Developed (non-Asian) Countries (as per 2002)

Country Agriculture UK USA France Japan Germany Italy Australia 1 2 2 1 1 3 4 Share in Output (%) Industry 26 23 22 31 30 29 26 Service (2002) 73 75 76 68 69 69 69 Service (2003) 72 75 71

Contribution of Service Sector to GDP

Contribution of Service Sector to GDP

Output Shares in Asian Countries
Country Agriculture 1960 China Indonesia Thailand Philippines Malaysia 30 50 40 26 36 2002 15 18 9 14 9 Industry 1960 49 25 19 28 18 2002 51 45 43 33 47 1960 21 25 41 46 46 Services 2002 34 38 48 53 54

Rep. of Korea
Pakistan

37
46

4
23

20
16

41
23

43
38

55
54

India

55

24

16

25

29

51

2006-07: Services: 55.1%, Industry: 26.4%, Agriculture: 18.5% of GDP 30.5 per cent in 1950-51 to 55.2 per cent in 2009-10. If construction is also included, then the share increases to 63.4 per cent in 2009-10.

Size of Specific Services in India (% of GDP)

Service Sector Impact on

Employment

Contribution of Services to Employment

Employment % in Developed (non-Asian) Countries (as per 2002)
Country
UK USA France Japan

Share in Employment (%) Agriculture Industry Service

1 2 3 5 25 24 25 31 74 74 72 64

Germany Italy Australia

3 5 5

33 32 21

64 63 74

90% of All Jobs by 2020 is expected from the service sector

Contribution of Services to Employment

Employment Share in Asian Countries (2002)
Share (%)
Country China Indonesia Thailand Philippines In GDP 34 38 48 53 In Employment 31 39 33 47

Malaysia Rep. of Korea Pakistan

54 55 54

50 62 34

India

51

22

Substantial employment in fragmented services sectors-India

Sector-wise Employement in service sector 1999/00

Road Transport 14% Rest all sector 31% Construction 22%

Retail Trade 33%

World Bank, 2004

Service Sector Contribution to

Manufacturing

Contribution of Services to Manufacturing

Input to the manufacturing Sector The contribution of services to growth of

manufacturing output went up considerably, from about 1% (1980) to about 25% (in 1990s).

Reasons for demand of services as intermediate input:

- Splintering - Globalization
Sustainability Issue of Service sector growth?

Service Sector Impact on

International Trade

Contribution of Services to International Trade

Share of Service Export Over Total Export (World Bank (2005))

Country United States 28.4

Share of service export

U.K
Australia Japan China India

32.4
22.4 13.9 9.6 (it is net importer of services) 30.9

WORLD

18.6

India's total merchandize export in world 31st rank Indias service export 20th rank

Composition of World Service Trade

WTO International Trade Statistics,2005
(Excluding Intra-EU trade)

5%

5% 6%
Com m unication Services

11% 49%

Construction Services Insurance Services Financial Services Com puter and Inform ation services

8%

Royalties and License fees Personal, Cultural and Recreational Services Other business services

13% 3%

Dynamism of Indias Services Sector

World Bank, 2004

CAGR of the Indian economy from 5.7% (1990s) to 8.6% during the period 2004-05 to 2009-10 was to a large measure due to the acceleration of CAGR in the services sector from 7.5% (1990s) to 10.3% in 2004-05 to 2009-10. The services sector growth was significantly faster than the 6.6 per cent for the combined agriculture and industry sectors annual output growth during the same period. In 2009-10, services growth was 10.1 per cent and in 2010-11

Significant unilateral liberalization in services has led to increased FDI

World Bank, 2004

Openness has been associated with higher growth World Bank, 2004

Determinants of growth in service sector

Income elasticity of demand Scope of work

Technological development related to industrial

development

Participation of women in workforce

Urbanization
Regulatory Policies

External demand
Increase in life expectancy Innovation

How Can Services Boom (IT-ITES) Lead To Sustainable Growth?