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Role of Service Sector in Indian Economy

Compiled By:
Sandesh Gupta

Submitted To:
Prof. Sukhada Waknis



FYBMS (Sem - II) 1

Role of Service Sector in Indian Economy

“Project work is never an individual effort”

We would like to thank Prof: A.E.

Lakdawala for giving us the opportunity to do
BMS course in his college.
We would also like to Prof: Sukhada
Waknis for providing her guidance in completing
this project.
Lastly, we would also like to thank all
those persons who are directly or in directly related
to this project.
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Role of Service Sector in Indian Economy

" Introduction

" Economy of India : Analysis, Character & Structure

" Early Indian economy

" Indian capital market : An Overview

" Sectors share in national income

" National stock exchange

" Indian stock exchange : An umbrella growth

" Economic planning in India

" Service and Infrastructure sectors

" Indo – Chinese relationship

" Liberalisation

" Manufacturing sector – A comparative study

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Role of Service Sector in Indian Economy

The part of industry or business which deals with the
marketing and selling of intangible products rather than physical
The service sector has grown steadily in recent years
and now contributes the largest share of GDP. This sector
includes tourism. As of 2004, the largest numbers of foreign
visitors to Germany came from the Netherlands, followed by the
United States and the United Kingdom.
The tertiary sector of industry, also called the service
sector or the service industry, is one of the three main industrial
categories of a developed economy, the others being the
secondary industry (manufacturing and primary goods production
such as agriculture), and primary industry (extraction such as
mining and fishing).
Indian economy Salient Features:
Economy transformed from primarily agriculture,
forestry, fishing, and textile manufacturing in 1947 to major
heavy industry, transportation, and telecommunications industries
by late 1970s. Central government planning 1950 through late
1970s giving way to economic reforms and more private-sector
initiatives in 1980s and 1990s. Agriculture predominates and
benefits from infusion of modern technology by government.
World Bank Group and developed nations provide most aid; Japan
largest donor. Major trade partners United States, Japan,
European Union, and nations belonging to Organization of the
Petroleum Exporting Countries.
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India Currency and Exchange Rate:
Rupee; US$1 = Rs35.67 (July 1996).

Fiscal Year (FY):

April 1-March 31.

Gross Domestic Product (GDP):

Rs36.7 trillion (nearly US$1.2 trillion) in 1994
(estimated). GDP annual average growth rate 3.8 percent in 1994.

Indian Foreign Trade:

Principal export trade with European Union, United
States, and Japan. Main commodities agricultural and allied
products, gems and jewelry, and ready-made garments. Iron ore,
minerals, and leather and leather products also important. Exports
7.7 percent of GDP in FY 1992. Principal import trade with
European Union, United States, and Japan. Major imports (28
percent of total) oil products from Middle East. Other major
imports chemicals, dyes, plastics, pharmaceuticals, uncut precious
stones, iron and steel, fertilizers, nonferrous metals, and pulp
paper and paper products. Imports 9.3 percent of GDP in FY 1992.

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Role of Service Sector in Indian Economy
Balance of Payments:
Negative trade balance in late 1980s and early 1990s. In
1993 estimated exports US$22.7 billion versus US$23.9 billion

Foreign Aid:
Most aid provided by Aid-to-India Consortium,
consisting of World Bank Group and Austria, Belgium, Britain,
Canada, Denmark, Germany, France, Italy, Japan, Netherlands,
Norway, Sweden, and United States. Japan largest aid granter and
lender; US$337 million grants between 1984 and 1993, US$2.4
billion loans in same period. Indian aid program to Bhutan and
Nepal; smaller programs assist Bangladesh and Vietnam.

Increasing share (27.4 percent in FY 1991) of GDP, but
employed only about 9 percent of the work force in 1991. Basic
industries: textiles, steel and aluminum, fertilizers and
petrochemicals, and electronics and motor vehicles.

India importer of petroleum and natural gas but has
abundant coal, hydroelectric power (especially in parts of North
India), and burgeoning nuclear power industry.

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Role of Service Sector in Indian Economy
Less than 2 percent share of GDP in FY 1990 and 1
percent of labor force involved in mining and quarrying in 1991.
Basic minerals: iron, bauxite, copper, lead, zinc, mica, uranium ore,
rare earths.

Some 39.8 percent of GDP in FY 1991, then employing
about 13 percent of work force. Large and diverse transportation

Declining share (32.8 percent) of GDP but employed
majority of workers (67 percent of total labor force) in FY 1991.
Around 45 percent (136 million hectares) of total land cultivated,
27 percent double cropped, effectively giving India 173 million
hectares of cultivated land. Another 5 percent (15 million
hectares) permanent pastureland or planted in tree crops or
groves. Farming by smallholders; large landholders divested in
1970s. Rice, wheat, pulses, and oilseeds dominate production, but
millet, corn (maize), and sorghum important; commercial crops--
sugar (India world's largest producer), cotton, jute also important.
Green Revolution technological advances and improved high-
yielding variety seeds, and increased fertilizer production and
irrigation between mid-1960s and early 1980s. Dairy farming,
fishing, and forestry important parts of agricultural sector.
Agricultural products around 18 percent of total exports.

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Science and Technology:
Major government investment (80 percent of total) in
and control of science and technology sector; 200 national
laboratories, 200 government-sector research and development
institutions, and about 1,000 research and development units in
industrial sector supported by both public and private funds.
Substantial investments in research and development in defense,
nuclear science, space, and agriculture.

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Economy of India: analysis, Character and

Indian Economy has made great strides in the years
since independence. In 1947 the country was poor and shattered
by the violence and economic and physical disruption involved in
the partition from Pakistan. The economy had stagnated since the
late nineteenth century, and industrial development had been
restrained to preserve the area as a market for British
manufacturers. In fiscal year (FY--see Glossary) 1950,
agriculture, forestry, and fishing accounted for 58.9 percent of
the gross domestic product (GDP--see Glossary) and for a much
larger proportion of employment. Manufacturing, which was
dominated by the jute and cotton textile industries, accounted for
only 10.3 percent of GDP at that time.
India's new leaders sought to use the power of the
state to direct economic growth and reduce widespread poverty.
The public sector came to dominate heavy industry,
transportation, and telecommunications. The private sector
produced most consumer goods but was controlled directly by a
variety of government regulations and financial institutions that
provided major financing for large private-sector projects.
Government emphasized self-sufficiency rather than foreign
trade and imposed strict controls on imports and exports. In the
1950s, there was steady economic growth, but results in the
1960s and 1970s were less encouraging.
Beginning in the late 1970s, successive Indian governments
sought to reduce state control of the economy. Progress toward
that goal was slow but steady, and many analysts attributed the
stronger growth of the 1980s to those efforts. In the late 1980s,
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Role of Service Sector in Indian Economy
however, India relied on foreign borrowing to finance development
plans to a greater extent than before. As a result, when the price
of oil rose sharply in August 1990, the nation faced a balance of
payments crisis. The need for emergency loans led the government
to make a greater commitment to economic liberalization than it
had up to this time. In the early 1990s, India's post-independence
development pattern of strong centralized planning, regulation and
control of private enterprise, state ownership of many large units
of production, trade protectionism, and strict limits on foreign
capital was increasingly questioned not only by policy makers but
also by most of the intelligentsia.
India's population continues to grow at about 1.8% per
year and is estimated at one billion. While its GDP is low in dollar
terms, India has the world's 13th-largest GNP. About 62% of the
population depends directly on agriculture.
Industry and services sectors are growing in importance
and account for 26% and 48% of GDP, respectively, while
agriculture contributes about 25.6% of GDP. More than 35% of
the population lives below the poverty line, but a large and growing
middle class of 150-200 million has disposable income for
consumer goods.
India embarked on a series of economic reforms in 1991
in reaction to a severe foreign exchange crisis. Those reforms
have included liberalized foreign investment and exchange
regimes, significant reductions in tariffs and other trade barriers,
reform and modernization of the financial sector, and significant
adjustments in government monetary and fiscal policies.
The reform process has had some very beneficial
effects on the Indian economy, including higher growth rates,
lower inflation, and significant increases in foreign investment.

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Real GDP growth was 6.8% in 1998-99, up from 5% in the 1997-98
fiscal years. Growth in 1999-2000 is expected to be around 6%.
Foreign portfolio and direct investment flows have risen
significantly since reforms began in 1991 and have contributed to
healthy foreign currency reserves ($32 billion in February 2000)
and a moderate current account deficit of about 1% (1998-99).
India's economic growth is constrained, however, by inadequate
infrastructure, cumbersome bureaucratic procedures, and high
real interest rates. India will have to address these constraints in
formulating its economic policies and by pursuing the second
generation reforms to maintain recent trends in economic growth.
India's trade has increased significantly since reforms
began in 1991, largely as a result of staged tariff reductions and
elimination of non-tariff barriers. The outlook for further trade
liberalization is mixed. India has agreed to eliminate quantitative
restrictions on imports of about 1,420 consumer goods by April
2001 to meet its WTO commitments. On the other hand, the
government has imposed "additional" import duties of 5% on most
products plus a surcharge of 10% over the past 2 years. The U.S.
is India's largest trading partner; bilateral trade in 1998-99 was
about $10.9 billion. Principal U.S. exports to India are aircraft and
parts, advanced machinery, fertilizers, ferrous waste and scrap
metal, and computer hardware. Major U.S. imports from India
include textiles and ready-made garments, agricultural and related
products, gems and jewelry, leather products, and chemicals.
Significant liberalization of its investment regime since
1991 has made India an attractive place for foreign direct and
portfolio investment. The U.S. is India's largest investment
partner, with total inflow of U.S. direct investment estimated at
$2 billion (market value) in 1999. U.S. investors also have provided

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Role of Service Sector in Indian Economy
an estimated 11% of the $18 billion of foreign portfolio
investment that has entered India since 1992. Proposals for direct
foreign investment are considered by the Foreign Investment
Promotion Board and generally receive government approval.
Automatic approvals are available for investments involving up to
100% foreign equity, depending on the kind of industry. Foreign
investment is particularly sought after in power generation,
telecommunications, ports, roads, petroleum exploration and
processing, and mining.
As India moved into the mid-1990s, the economic
outlook was mixed. Most analysts believed that economic
liberalization would continue, although there was disagreement
about the speed and scale of the measures that would be
implemented. It seemed likely that India would come close to or
equal the relatively impressive rate of economic growth attained in
the 1980s, but that the poorest sections of the population might
not benefit.

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Role of Service Sector in Indian Economy

Early Indian Economy

Indian economy in the early period was a self sufficient
economy comprising of several villages. Indian villages produced
and met their requirement according to division of labour and
their economic activity was restricted to village economy. Barter
system prevailed as an exchange mechanism. Basically, the primary
activity was agriculture. Other services like carpentry, weaving,
hair dressing, etc. were offered by labourers who extended their
services based on hereditary. They received their wages as food
products. In short, Indian villages functioned as an independent
republics and the only interference was from the King for whom
they paid taxes in kind. Thus, India had happy villages.
Prior to the British rule, religion, system of the society
and king’s law influenced the economy to a great extent. There
prevailed caste system which decided the division of labour for
the benefit of the society’s economy. Further, the prevalence of
joint-family system helped them to pool their resources for their
individual family benefit and also for the benefit of the society.
Another advantage of the joint-family system was that the
cultivable lands were not fragmented, yielding to better economic
Another influencer of early Indian economy was the
Hindu religion. The religious centers also functioned as Indian
trade centres. For example, major pilgrimage spots like Nasik,
Allahabad, Varanasi, etc. also functioned as centres of commerce
and trade. Many trade and commerce activities were linked to the
religious festivals and functions. In short, the Hindu religion acted
as an indirect catalyst for the Indian economy.

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One of the major industries in early India was textile.
Handicrafts were also part of the Indian industrial activity. Indian
textile products like shawls, dhotis, dopattas, woolen products,
cotton goods, etc. and handicraft products were exported to
overseas markets, such as Egypt, South East Asia, Greece, etc. It
is worth noting that when Europe (birth place of modern
industrialism) was inhabited by uncivilized people, India was very
popular for its craftsmanship and rich economy.

Indian Economy During Colonialism

Indian land had been invaded and ruled by many
outsiders, amongst which the British regime was considered very
important. British East India Company entered India in 1757
through the Battle of Plessey and the Crown took the complete
administration during 1858. Politically, India was under the British
rule for around two centuries and the Indian economy was
significantly influenced during their rule. Indian culture and
administration too underwent a major transition during British
Other invaders, prior to British, created a feeling of
differentiation between Indian citizens and themselves as a
separate class. However, British identified themselves as citizens
of India. Thanks to this attitude, British followed an
administrative set up in India to develop their motherland at the
expense of India.
Further, the spread of colonialism of the British in
South East Asia also led to another problem. They transported
Indians to other neighboring countries like Sri Lanka as labourers
to work in their plantations. However, when they left this sub-
continent, they left several of these issues unsolved. Still today,
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Role of Service Sector in Indian Economy
these Indian labourers in Sri Lanka face an identity crisis. In Sri
Lanka they are considered as Indians; and in India these labourers
are considered as Sri Lankans.
Economic activities of their colonies including India
were tuned to the interests of Great Britain. During British rule,
Indian handicrafts contribution declined and the economy was
ruralized. British also introduced new land mechanism to enable
them to gain more land revenue in order to suit their imperialistic
needs. They adopted an industrial process transition through
colonial capitalism.
The colonial imperialistic attitude of the British rule
has yielded India an unique economic problem, that is,
modernization with under-development. Though British provided
peace in this country, they failed to extend properity. The only
remarkable economic fruit British rulers left for India was in the
field of Indian transport system, especially that of railways and
roadways. However, this benefit was only incidental. The ultimate
motive of all the enterprise during British rule was to serve the
benefit of the Great Britain and not that of India. Thus, when
British left India in 1947, Indian economy depicted a paradoxical
dual picture of modernization and under-development; along with
several unsolved political issues, such as the fate of Indian
labourers in Sri Lanka.

Indian Economy After Independence

It is paradoxical that India is a rich country (in terms
of enormous natural and man power resources) with poor people.
India adopts a mixed economic model which is tending towards
economic liberalization in order to attain self-reliance.

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Indian economy is characterized by lower per capita
income, mass unemployment and under employment, over-
dependence of agriculture, over population, poor standard of
living, low level of capital formation, low levels of health and
education facilities, etc. Indian population, instead of being an
asset, has most often proved to be a liability and economic
distress. This calls for more attention by the Government in the
upliftment of the population. Thus, any economic policy treatment
in India will be viewed with a social mind frame.
During 1901, urban population which was at 10.8 per cent
of total population has increased to 25.7 per cent during 1991.
Further, almost the entire rural population of 1901 (213 million)
lives in urban India during 1991 (218 million). This indicates the
extent of migration.
Savings and capital formation are very important for a
country’s anomic development. The gross domestic savings which
was at Rs. 2544 crore in 1960-61 rose to Rs 157186 crore in 1992-
93. The contribution of household sector to savings is the largest
in India, followed by public sector and private corporate sector.
The rate of saving s in India to GDP is not satisfactory due to
several reasons, such as, low per Capitan income, poor performance
of public sector enterprises, poor contribution of private sector
players and untapped rural savings potential.
It is worth noting that the gross savings of corporate
sector, for the period 1960-61 to 1992-93, indicates an annual
average growth rate of 14.23 per cent. However, when the savings
and capital formation in the private corporate sector are
compared with the gross domestic savings and capital formation, it
has remained at more or less the same proportion around one-
eighth of the total domestic savings. This is an indication of the

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corporate sector’s dependence on household sector savings for its
long term capital requirements, which has led to a broad based
structure of share ownership pattern.
Indian economy has come a long way, especially after
independence. Since independence, the structure of the Indian
economy has gone through several changes, out of which sectoral
contribution to the economy is the most vital one. The agricultural
contribution to GDP is declining gradually as seen in the Table
below. While the contribution of industrial sector has not
improved to a great extend, the service sector’s contribution to
GDP has notably increased. One of the main reasons for this
change can be attributed to the economic policies of India.

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Indian Stock Markets are one of the oldest in Asia. Its
history dates back to nearly 200 years ago. The earliest records
of security dealings in India are meager and obscure. The East
India Company was the dominant institution in those days and
business in its loan securities used to be transacted towards the
close of the eighteenth century.
By 1830's business on corporate stocks and shares in
Bank and Cotton presses took place in Bombay. Though the trading
list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of
commercial enterprise and brokerage business attracted many
men into the field and by 1860 the number of brokers increased
into 60.
In 1860-61 the American Civil War broke out and cotton
supply from United States of Europe was stopped; thus, the
'Share Mania' in India begun. The number of brokers increased to
about 200 to 250. However, at the end of the American Civil War,
in 1865, a disastrous slump began (for example, Bank of Bombay
Share which had touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who
thrived out of Civil War in 1874, found a place in a street (now
appropriately called as Dalal Street) where they would
conveniently assemble and transact business. In 1887, they
formally established in Bombay, the "Native Share and Stock
Brokers' Association" (which is alternatively known as “The Stock

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Role of Service Sector in Indian Economy
Exchange "). In 1895, the Stock Exchange acquired a premise in
the same street and it was inaugurated in 1899. Thus, the Stock
Exchange at Bombay was consolidated.

Other leading cities in stock market operations

Ahmedabad gained importance next to Bombay with
respect to cotton textile industry. After 1880, many mills
originated from Ahmedabad and rapidly forged ahead. As new mills
were floated, the need for a Stock Exchange at Ahmedabad was
realised and in 1894 the brokers formed "The Ahmedabad Share
and Stock Brokers' Association".
What the cotton textile industry was to Bombay and
Ahmedabad, the jute industry was to Calcutta. Also tea and coal
industries were the other major industrial groups in Calcutta.
After the Share Mania in 1861-65, in the 1870's there was a
sharp boom in jute shares, which was followed by a boom in tea
shares in the 1880's and 1890's; and a coal boom between 1904
and 1908. On June 1908, some leading brokers formed "The
Calcutta Stock Exchange Association".
In the beginning of the twentieth century, the
industrial revolution was on the way in India with the Swadeshi
Movement; and with the inauguration of the Tata Iron and Steel
Company Limited in 1907, an important stage in industrial
advancement under Indian enterprise was reached.
Indian cotton and jute textiles, steel, sugar, paper and
flour mills and all companies generally enjoyed phenomenal
prosperity, due to the First World War.
In 1920, the then demure city of Madras had the
maiden thrill of a stock exchange functioning in its midst, under
the name and style of "The Madras Stock Exchange" with 100
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Role of Service Sector in Indian Economy
members. However, when boom faded, the number of members
stood reduced from 100 to 3, by 1923, and so it went out of
In 1935, the stock market activity improved, especially
in South India where there was a rapid increase in the number of
textile mills and many plantation companies were floated. In 1937,
a stock exchange was once again organized in Madras - Madras
Stock Exchange Association (Pvt) Limited. (In 1957 the name was
changed to Madras Stock Exchange Limited).
Lahore Stock Exchange was formed in 1934 and it had a
brief life. It was merged with the Punjab Stock Exchange Limited,
which was incorporated in 1936.

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Sector Share in National Income

Sector (figures in percentage)
Years 1970-71 1995-96
Agriculture 50 29
Industry 20 28
Service 30 43

It has to be noted that though the contribution of

agriculture to GDP has declined, still majority of the population
(around 67 per cent as per 1991 census) is depend on primary
sector. This is the reason for the failure of many multinationals in
India. They fail to notice this fact and over estimated the demand
potential of their products.

Therefore, India is not just another country. It has to

its credit its own socio-economic features.

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Agriculture is the back bone of Indian economy for
several centuries. The importance of agriculture in Indian economy
is prominently evident. Nearly 70 per cent of the population
depends on agriculture either directly or indirectly for their
According to 1991 Census Report, over 67 per cent of
the work force is still engaged in primary sector. However,
employment in this sector is not wide spread. In other words, only
0.78 per cent of rural population (or 1.97 per cent of the rural
work force) is employed in allied activities, such as, livestock,
forestry, etc. Considering India’s wide natural resource potential
(sea base, animal stock, etc.) this is a very negligible figure. Thus,
there can be found great untapped employment opportunities for
rural work force in the allied sector. Indian agriculture is
characterized by lack of technology, low productivity, under
employment, multiplicity of crops, unequal distribution of land,
predominance of small farmers, etc.
Indian agricultural crops can be broadly classified into
food and cash or commercial crops. In India, selection of crops
for farming depends on the nature of soil, climatic conditions
prices of crops, size of farms, availability of inputs (seeds,
fertilizers and pesticides), availability of irrigation facilities and
policies of the Government. The major food crops in India are
rice, wheat, bajra, maize, jowar and other pulses and cereals.
Important commercial crops of India are sugarcane, groundnut, oil
seeds, tea and coffee. India also farms non-food commercial crops
like cotton, jute etc.

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Wheat Production in India

Year Production in Million Tones

1991-92 55.6
1992-93 57.0
1993-94 59.1
1994-95 65
1995-96 62.6
1996-97 68.7
1997-98 66.4

Rice Production in India

Year Production in Million Tones

1991-92 74.7
1992-93 72.9
1993-94 79
1994-95 81
1995-96 79.6
1996-97 80.5
1997-98 83.5

Fertilizer consumption per hectare is very low in India,

even when compared to other low-income countries like Indonesia
and Bangladesh. Thus, higher consumption of fertilizer has to be

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Role of Service Sector in Indian Economy
induced in the Indian environment to achieve higher value addition
in agriculture.
Another major hurdle for the agricultural sector in
India is lack of water or proper irrigation policies by the rulers.
To improve agricultural production, in a country like India, where
net irrigated area (as percentage to net sown area) is only 35.1 per
cent, superior water management becomes vital. However, due to
political reasons Indian rulers are not able to unify water
India, if need to develop economically, can not ignore
agricultural sector. Agricultural productivity for higher food
supply has to be improved, which in turn will reduce the cost of
food, leading to better standard of living.

Giving thrust to agriculture has the following

) Higher production

) Improved productivity

) Greater employment

) No foreign technology required. Thus, no outflow of


) Will check migration. Thus, lesser urbanization problems.

) Agriculture produces no pollution. Thus, lesser expenses on

pollution control.

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Role of Service Sector in Indian Economy
Further, a thrust to allied rural activities like animal
husbandry, fishery, forestry, alternate energy, industries based
on rural resources will yield the following benefits:

) Additional income generation

) Generate jobs for the landless labourers

) Better nutrition to the masses

) Low gestation, high income vocation

) No pollution

) Added energy supply

) Reduce migration

) No overseas technology required

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Industrialization is vital for a country’s economic
development. Indian industrial sector is characterized by under-
utilization of resources, low capital formation, low level of
technology, and lack of skilled man power and social attitudes of
the population. Indian industrial development is also highly
influenced by the political climate of India, the political philosophy
of the ruling party, the attitude and culture of the political
administrators and Indian Industrial Policies. Indian industry also
depends highly on the attitudes and aspirations of the Indian man
power and Indian society.
The economic structure of India follows a mixed
economy. Thus, the functioning of duel sectors - public and private
- exists in India. Public sector includes both public utility
undertakings and public enterprises. Due to several factors, such
as, low returns, long time lag, defence requirements, public
utilities, large resource requirement, development of backward
regions, development of infrastructure, etc. the Government had
to invest in certain capital-intensive segments to share the burden
of industrialization and to generate employment opportunities.
However, most of the public sector undertakings do not perform
well from the angle of profitability and/or efficiency for many
reasons, like initial heavy costs, capital-intensive industries, large
capacities, heavy social costs, low priced products, labour
problems and high expense ratio, unprofessional manpower
planning, etc.

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The role of private sector in Indian industrial
development can not be under stated. Private sector is also
sharing Government’s burden in certain heavy investment ventures
today, like infrastructure. This is due to the improved government
policy towards private sector.
The Indian Government has been form time to time
changing its industrial policies to suit the economic and global
environment in favour of industrial sector. Further, there can be
found a trend towards taking advantage of the liberalised
industrial policy frame work. This is vindicated by the various
indicators of investment intentions. However, the private sector in
India faces several obstacles: undue delay by the government
authorities, restrains on capacity, over-dependence of public
sector, price restrictions, small scale reservations, finance, etc.
Though private sector is facing many problems, its
contribution to Indian economy is remarkable. For instance, India
achieved a GDP growth rate of 7 per cent in 1995-96 for the first
time since 1950, despite a low agricultural growth rate of 2.4 per
cent. The major factor which contributed for this growth rate
was achievement by the industrial sector which registered a
growth rate of 12.1 per cent in 1995-96.
Further, besides the output aspect, there is an equally
important aspect relating to the pattern of industrial
development. There can be found substantial changes in the
pattern of Indian industrial development which can be viewed
from two dimensions:
" There is a fast growth of basic and capital goods industries;
" There is a large diversification of industries.

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Role of Service Sector in Indian Economy
During independence, industrial production was confined
to select industry categories. Progress of industrial sector in
India has been a striking feature of Indian economy. Industrial
production has gone up by about seven times, registering a
compound rate of growth of 6 per cent per annum during Plan
period. This is certainly impressive compared to 2.0 per cent rate
of industrial growth per annum during pre-independence period -
1900-91 to 1945-46. The contribution of industry to GDP has
substantially increased from 14.9 per cent in 1950-51 to 28 per
cent in 1995-96. Apart from the rise in the quantity of
production, the industrial structure has been widely diversified,
covering the entire spectrum of consumer, intermediate and
capital goods.
There has been an acceleration of the production of
basic and capital goods industries, particularly since Second Five
Year Plan which had a heavy-industry strategy. this has resulted in
a larger contribution of these industries to the economy. As a
result of the swifter growth of investment goods industries,
there has been a big shift in their status in the economy. Prior to
Planning in India, industries manufacturing machines, tools etc.
were almost non-existent. Currently, these industries account for
around 50 per cent of total value added by the industries. (Their
importance is also vindicated by the large weight age assigned to
them in the index of industrial production.)
No less important is the change that has taken place in
the composition of industries. The number of industries producing
a large variety of goods has increased. And there can be found a
change in the relative significance of traditional and new
industries. During independence, India inherited an industrial
structure which was restricted to a few industries, such as sugar,

FYBMS (Sem - II) 28

Role of Service Sector in Indian Economy
steel and textiles. However, the structure underwent a major
transformation during mid 1950’s when industrialization drive was
launched; and self reliance became one of the vital objectives of
Planning. Thanks to the Second Plan, in particular, India has a large
variety of industries today producing goods of varied nature.
This change in Indian industrial structure has yielded
many fruits to Indian economy. It has strengthened the base of
the economy which helps the economy to move towards self

FYBMS (Sem - II) 29

Role of Service Sector in Indian Economy

National Stock Exchange (NSE)

With the liberalization of the Indian economy, it was
found inevitable to lift the Indian stock market trading system on
par with the international standards. On the basis of the
recommendations of high powered Pherwani Committee, the
National Stock Exchange was incorporated in 1992 by Industrial
Development Bank of India, Industrial Credit and Investment
Corporation of India, Industrial Finance Corporation of India, all
Insurance Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money

market operations - institutions and corporate bodies enter into
high value transactions in financial instruments such as
government securities, treasury bills, public sector unit bonds,
commercial paper, certificate of deposit, etc.
There are two kinds of players in NSE:
(a) trading members and
(b) participants.
Recognized members of NSE are called trading
members who trade on behalf of themselves and their clients.
Participants include trading members and large players like banks
who take direct settlement responsibility.
Trading at NSE takes place through a fully automated
screen-based trading mechanism which adopts the principle of an

FYBMS (Sem - II) 30

Role of Service Sector in Indian Economy
order-driven market. Trading members can stay at their offices
and execute the trading, since they are linked through a
communication network. The prices at which the buyer and seller
are willing to transact will appear on the screen. When the prices
match the transaction will be completed and a confirmation slip
will be printed at the office of the trading member.
NSE has several advantages over the traditional trading
exchanges. They are as follows:

) NSE brings an integrated stock market trading network across

the nation.
) Investors can trade at the same price from anywhere in the
country since inter-market operations are streamlined coupled
with the countrywide access to the securities.
) Delays in communication, late payments and the malpractice’s
prevailing in the traditional trading mechanism can be done away
with greater operational efficiency and informational
transparency in the stock market operations, with the support
of total computerized network.

Unless stock markets provide professionalised service,

small investors and foreign investors will not be interested in
capital market operations. And capital market being one of the
major sources of long-term finance for industrial projects, India
cannot afford to damage the capital market path. In this regard
NSE gains vital importance in the Indian capital market system.

FYBMS (Sem - II) 31

Role of Service Sector in Indian Economy

Indian Stock Exchanges - An Umbrella

The Second World War broke out in 1939. It gave a
sharp boom which was followed by a slump. But, in 1943, the
situation changed radically, when India was fully mobilized as a
supply base.
On account of the restrictive controls on cotton, bullion,
seeds and other commodities, those dealing in them found in the
stock market as the only outlet for their activities. They were
anxious to join the trade and their number was swelled by
numerous others. Many new associations were constituted for the
purpose and Stock Exchanges in all parts of the country were
The Uttar Pradesh Stock Exchange Limited (1940),
Nagpur Stock Exchange Limited (1940) and Hyderabad Stock
Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share
Brokers' Association Limited and the Delhi Stocks and Shares
Exchange Limited - were floated and later in June 1947,
amalgamated into the Delhi Stock Exchange Association Limited.

Post-independence Scenario
Most of the exchanges suffered almost a total eclipse
during depression. Lahore Exchange was closed during partition of
the country and later migrated to Delhi and merged with Delhi
Stock Exchange.
Bangalore Stock Exchange Limited was registered in
1957 and recognized in 1963.

FYBMS (Sem - II) 32

Role of Service Sector in Indian Economy
Most of the other exchanges languished till 1957 when
they applied to the Central Government for recognition under the
Securities Contracts (Regulation) Act, 1956. Only Bombay,
Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the
well established exchanges, were recognized under the Act. Some
of the members of the other Associations were required to be
admitted by the recognized stock exchanges on a concessional
basis, but acting on the principle of unitary control, all these
pseudo stock exchanges were refused recognition by the
Government of India and they thereupon ceased to function.
Thus, during early sixties there were eight recognized
stock exchanges in India (mentioned above). The number virtually
remained unchanged, for nearly two decades. During eighties,
however, many stock exchanges were established: Cochin Stock
Exchange (1980), Uttar Pradesh Stock Exchange Association
Limited (at Kanpur, 1982), and Pune Stock Exchange Limited
(1982), Ludhiana Stock Exchange Association Limited (1983),
Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange
Limited (at Mangalore, 1985), Magadh Stock Exchange Association
(at Patna, 1986), Jaipur Stock Exchange Limited (1989),
Bhubaneswar Stock Exchange Association Limited (1989),
Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989),
Vadodara Stock Exchange Limited (at Baroda, 1990) and recently
established exchanges - Coimbatore and Meerut. Thus, at present,
there are totally twenty one recognized stock exchanges in India
excluding the Over The Counter Exchange of India Limited
(OTCEI) and the National Stock Exchange of India Limited
The Table given below portrays the overall growth
pattern of Indian stock markets since independence. It is quite

FYBMS (Sem - II) 33

Role of Service Sector in Indian Economy
evident from the Table that Indian stock markets have not only
grown just in number of exchanges, but also in number of listed
companies and in capital of listed companies. The remarkable
growth after 1985 can be clearly seen from the Table, and this
was due to the favoring government policies towards security
market industry.

Growth Pattern of the Indian Stock Market

Sr. As on 31st December
1946 1961 1971 1975 1980 1985 1991 1995
No. of Stock
1 7 7 8 8 9 14 20 22
2 No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8593
No. of Stock Issues of
3 1506 2111 2838 3230 3697 6174 8967 11784
Listed Cos.
Capital of Listed Cos.
4 270 753 1812 2614 3973 9723 32041 59583
(Cr. Rs.)
Market value of Capital
5 971 1292 2675 3273 6750 25302 110279 478121
of Listed Cos. (Cr. Rs.)
Capital per Listed Cos.
6 24 63 113 168 175 224 514 693
(4/2) (Lakh Rs.)
Market Value of Capital
7 per Listed Cos. (Lakh 86 107 167 211 298 582 1770 5564
Rs.) (5/2)
Appreciated value of
8 Capital per Listed Cos. 358 170 148 126 170 260 344 803
(Lakh Rs.)

Source: Various issues of the Stock Exchange Official Directory, Vol.2 (9) (iii),
Bombay Stock Exchange, Bombay.

Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges are limited to listed
securities of public limited companies. They are broadly divided

FYBMS (Sem - II) 34

Role of Service Sector in Indian Economy
into two categories, namely, specified securities (forward list) and
non-specified securities (cash list). Equity shares of dividend
paying, growth-oriented companies with a paid-up capital of
atleast Rs.50 million and a market capitalization of atleast Rs.100
million and having more than 20,000 shareholders are, normally,
put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the
Indian stock exchanges: (a) spot delivery transactions "for
delivery and payment within the time or on the date stipulated
when entering into the contract which shall not be more than 14
days following the date of the contract”: and (b) forward
transactions "delivery and payment can be extended by further
period of 14 days each so that the overall period does not exceed
90 days from the date of the contract". The latter is permitted
only in the case of specified shares. The brokers who carry over
the outstanding pay carry over charges (cantango or
backwardation) which are usually determined by the rates of
interest prevailing.
A member broker in an Indian stock exchange can act as
an agent, buy and sell securities for his clients on a commission
basis and also can act as a trader or dealer as a principal, buy and
sell securities on his own account and risk, in contrast with the
practice prevailing on New York and London Stock Exchanges,
where a member can act as a jobber or a broker only.
The nature of trading on Indian Stock Exchanges are
that of age old conventional style of face-to-face trading with
bids and offers being made by open outcry. However, there is a
great amount of effort to modernize the Indian stock exchanges
in the very recent times.

Over The Counter Exchange of India (OTCEI)

FYBMS (Sem - II) 35
Role of Service Sector in Indian Economy
The traditional trading mechanism prevailed in the
Indian stock markets gave way to many functional inefficiencies,
such as, absence of liquidity, lack of transparency, unduly long
settlement periods and benami transactions, which affected the
small investors to a great extent. To provide improved services to
investors, the country's first ring less, scrip less, electronic stock
exchange - OTCEI - was created in 1992 by country's premier
financial institutions - Unit Trust of India, Industrial Credit and
Investment Corporation of India, Industrial Development Bank of
India, SBI Capital Markets, Industrial Finance Corporation of
India, General Insurance Corporation and its subsidiaries and Bank
Financial Services.
Trading at OTCEI is done over the centres spread
across the country. Securities traded on the OTCEI are classified

) Listed Securities - The shares and debentures of the

companies listed on the OTC can be bought or sold at any OTC
counter all over the country and they should not be listed
anywhere else
) Permitted Securities - Certain shares and debentures listed on
other exchanges and units of mutual funds are allowed to be
) Initiated debentures - Any equity holding atleast one lakh
debentures of a particular scrip can offer them for trading on
the OTC.

OTC has a unique feature of trading compared to other

traditional exchanges. That is, certificates of listed securities
and initiated debentures are not traded at OTC. The original
certificate will be safely with the custodian. But, a counter
FYBMS (Sem - II) 36
Role of Service Sector in Indian Economy
receipt is generated out at the counter which substitutes the
share certificate and is used for all transactions.
In the case of permitted securities, the system is
similar to a traditional stock exchange. The difference is that the
delivery and payment procedure will be completed within 14 days.
Compared to the traditional Exchanges, OTC Exchange
network has the following advantages:

) OTCEI has widely dispersed trading mechanism across the

country which provides greater liquidity and lesser risk of
intermediary charges.
) Greater transparency and accuracy of prices is obtained due to
the screen-based scrip less trading.
) Since the exact price of the transaction is shown on the
computer screen, the investor gets to know the exact price at
which s/he is trading.
) Faster settlement and transfer process compared to other
) In the case of an OTC issue (new issue), the allotment
procedure is completed in a month and trading commences after
a month of the issue closure, whereas it takes a longer period
for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with

information transparency investors are gradually becoming aware
of the manifold advantages of the OTCEI.

Economic Planning in India

Often, in the economic literature we find the terms
‘development’ and ‘growth’ are used interchangeably. However,

FYBMS (Sem - II) 37

Role of Service Sector in Indian Economy
there is a difference. Economic growth refers to the sustained
increase in per capita or total income, while the term economic
development implies sustained structural change, including all the
complex effects of economic growth. In other words, growth is
associated with free enterprise, where as development requires
some sort of control and regulation of the forces affecting
development. Thus, economic development is a process and growth
is a phenomenon.
Economic planning is very critical for a nation, especially
a developing country like India to take the country in the path of
economic development to attain economic growth.

Why Economic Planning for India?

One of the major objective of planning in India is to
increase the rate of economic development, implying that
increasing the rate of capital formation by raising the levels of
income, saving and investment. However, increasing the rate of
capital formation in India is beset with a number of difficulties.
People are poverty ridden. Their capacity to save is extremely low
due to low levels of income and high propensity to consume.
Therefore, the rate of investment is low which leads to capital
deficiency and low productivity. Low productivity means low income
and the vicious circle continues. Thus, to break this vicious
economic circle, planning is inevitable for India.
The market mechanism works imperfectly in developing
nations due to the ignorance and unfamiliarity with it. Therefore,
to improve and strengthen market mechanism planning is very
vital. In India, a large portion of the economy is non-monitised;
the product, factors of production, money and capital markets are
not organized properly. Thus the prevailing price mechanism fails
FYBMS (Sem - II) 38
Role of Service Sector in Indian Economy
to bring about adjustments between aggregate demand and supply
of goods and services. Thus, to improve the economy, market
imperfections has to be removed; available resources has to be
mobilized and utilized efficiently; and structural rigidities has to
be overcome. These can be attained only through planning.
In India, capital is scarce; and unemployment and
disguised unemployment is prevalent. Thus, where capital being
scarce and labour being abundant, providing useful employment
opportunities to an increasing labour force is a difficult exercise.
Only a centralized planning model can solve this macro problem of
Further, in a country like India where agricultural
dependence is very high, one can not ignore this segment in the
process of economic development. Therefore, an economic
development model has to consider a balanced approach to link
both agriculture and industry and lead for a paralleled growth.
Not to mention, both agriculture and industry can not develop with
out adequate infrastructural facilities which only a the state can
provide and this is possible only through a well carved out planning
strategy. The government’s role in providing infrastructure is
unavoidable due to the fact that the role of private sector in
infrastructural development of India is very minimal since these
infrastructure projects are considered as unprofitable by the
private sector.
Further, India is a clear case of income disparity. Thus,
it is the duty of the state to reduce the prevailing income
inequalities. This is possible only through planning.

Planning History of India

FYBMS (Sem - II) 39

Role of Service Sector in Indian Economy
The development of planning in India began prior to the
first Five Year Plan of independent India, long before
independence even. The idea of central directions of resources to
overcome persistent poverty gradually, because one of the main
policies advocated by nationalists early in the century. The
Congress Party worked out a program for economic advancement
during the 1920’s, and 1930’s and by the 1938 they formed a
National Planning Committee under the chairmanship of future
Prime Minister Nehru. The Committee had little time to do
anything but prepare programs and reports before the Second
World War which put an end to it. But it was already more than an
academic exercise remote from administration. Provisional
government had been elected in 1938, and the Congress Party
leaders held positions of responsibility. After the war, the
Interim government of the pre-independence years appointed an
Advisory Planning Board. The Board produced a number of some
what disconnected Plans itself. But, more important in the long
run, it recommended the appointment of a Planning Commission.
The Planning Commission did not start work properly
until 1950. During the first three years of independent India, the
state and economy scarcely had a stable structure at all, while
millions of refugees crossed the newly established borders of
India and Pakistan, and while ex-princely states (over 500 of
them) were being merged into India or Pakistan. The Planning
Commission as it now exists was not set up until the new India had
adopted its Constitution in January 1950.

Objectives of Indian Planning

The Planning Commission was set up him following Directive
FYBMS (Sem - II) 40
Role of Service Sector in Indian Economy
) To make an assessment of the material, capital and human
resources of the country, including technical personnel, and
investigate the possibilities of augmenting such of these
resources as are found to be deficient in relation to the nation’s
) To formulate a plan for the most effective and balanced use of
the country’s resources.
) Having determined the priorities, to define the stages in which
the plan should be carried out, and propose the allocation of
resources for the completion of each stage.
) To indicate the factors which are tending to retard economic
development, and determine the conditions which, in view of the
current social and political situation, should be established for
the successful execution of the Plan.
) To determine the nature of the machinery which will be
necessary for securing the successful implementation of each
stage of Plan in all its aspects.
) To appraise from time to time the progress achieved in the
execution of each stage of the Plan and recommend the
adjustments of policy and measures that such appraisals may
show to be necessary.
) To make such interim or auxiliary recommendations as appear to
it to be appropriate either for facilitating the discharge of the
duties assigned to it or on a consideration of the prevailing
economic conditions, current policies, measures and
development programs; or on an examination of such specific
problems as may be referred to it for advice by Central or
State Governments.

The long-term general objectives of Indian Planning are as follows:

FYBMS (Sem - II) 41

Role of Service Sector in Indian Economy
) Increasing National Income
) Reducing inequalities in the distribution of income and wealth
) Elimination of poverty
) Providing additional employment; and
) Alleviating bottlenecks in the areas of: agricultural production,
manufacturing capacity for producer’s goods and balance of

Economic growth, as the primary objective has remained

in focus in all Five Year Plans. Approximately, economic growth has
been targeted at a rate of five per cent per annum. High priority
to economic growth in Indian Plans looks very much justified in
view of long period of stagnation during the British rule.


For any developing nation development of service and
infrastructure segment is very important to reach its economic
goals. India is successful in improving its service and
infrastructure areas. It is very evident that the role of service
FYBMS (Sem - II) 42
Role of Service Sector in Indian Economy
sector in Indian economic development has increased by several
notches from the fact that this sector which was contributing
only around 20 per cent during independence is contributing over
43 per cent currently to India’s GDP.
Service and infrastructure sector is comprised of the
following segments: Banking, Insurance, Transport, Telecom and

Performance of the banking sector is considered as a
proxy for the economy as a whole, due to banks' wide spectrum of
exposure across industries. Unfortunately for India, the banking
sector has historically remained under the impact of non-
competitiveness, poor technology integration, high NPAs and
grossly under productive manpower.
Banking sector in India has a wide mix, comprising of
joint sector (scheduled and non-scheduled banks), nationalised
sector (Reserve Bank of India, State Bank of India and all other
nationalized commercial banks and post office savings bank),
specialized corporate financial institutions (specific industrial
finance corporations and state finance corporations), co-operative
sector (co-operative banks and land development banks) and
foreign sector (foreign commercial banks and exchange banks).
Keeping in mind the socio-economic goals of the country,
banks were under strict control of the regulatory bank - Reserve
Bank of India. For instance, during mid-1969, 14 major Indian
commercial banks were nationalised. One of the major criticism
against nationalisation of commercial banks was with respect to
efficiency. And the critics were right. Since nationalisation, the
operational efficiency of the commercial banks have come down,
FYBMS (Sem - II) 43
Role of Service Sector in Indian Economy
thanks to the ‘public-sector working’ attitude of the bank work
force. Since, their pay is not linked to performance; there is no
inducement for the banking staff to perform well. This has been
further, deteriorated by the poor quality to man power planning
which is linked to selection of inefficient staff on the basis of
social reservations.
Earlier profitability gained only secondary importance,
since banks lived in the comfort of a controlled environment.
However, today banks cannot survive only with government
support. They have to set goals of profitability along with service
and set targets and evolve strategies to reach them.
There is certainly a paradigm shift in banking in India in
the recent past. At present profitability, capital restructuring and
transparency are considered important and significant for banks.
Also, banks in India have started realising the need to be
`customer focused' that in turn leads to `customer appreciation'
which is imperative for survival and growth.
The first change along this line was brought in by the
foreign banks with their emphasis on high quality and efficient
service combined with the technological advantages like satellite
banking and tele-banking manned by skeletal staff and lesser
number of branches.
Further, development of special manpower, innovative
products, technology exploitation and personalized services play a
crucial role in the banking industry today, since the customer has
more options in choosing a bank. Thus leading to consumerism in
the banking sector. Also, since customers are becoming more
sophisticated and educated, their expectations from the
neighborhood bank are increasing.

FYBMS (Sem - II) 44

Role of Service Sector in Indian Economy
The private banks wisely chose to use this opportunity
to prepare for the future rather than scramble for current
business. Many of them refocused their activities, seeking clearly
defined identities in terms of services and customer segments.
To sum, the new private sector banks are poised to
redefine banking in India. Though they do not pose a threat to the
existing private banks they will certainly force them to gear up
their strategies to remain in the field. This will lead to intense
competition among the new banks, which would also serve as a
challenge to the foreign banks.
The last five years saw a sea-change in banking
strategies, with more focus on quality.
The adoption of a specialised customer-oriented focus
is fast getting wider acceptability. In a market that keeps growing
in depth and diversity, niche banking is the new mantra adopted by
all. Thus, instead of targeting an entire market segment, banks
have adopted a specific business focus to clearly reach their
target audience.

The best banks' strategies:

(1) Increase volumes to compensate for declining interest rate

(2) Trim expenditure on provisions and contingencies, thus
narrowing the gap between operating profits and net profits;
(3) Pare down operating expenses through organisational
restructuring; and
(4) Adopt a clearly focused communication plan.
FYBMS (Sem - II) 45
Role of Service Sector in Indian Economy
Thus, today focus is more important than size in
achieving success in the banking industry. The latest in technology,
innovative retail products and personalized services are vital to
carve out a niche in banking sector. Over the last few years, the
communication style too has changed with respect to the banking
industry. Communication has shifted from branding the bank to
branding banking products, highlighting service commitment,
convenience, etc. Further, branding of banking products, such as
home loans, consumer durable loans, tele banking, ATM's, net
banking, etc. have started taking place, especially after the entry
of foreign banks and private sector banks which had the
advantage of the latest technology.

Insurance sector in India has been enjoying a state-
monopoly status in India for decades. Under Indian conditions
there is only two broad classification of insurance companies: life
and non-life insurance. The life insurance activities are solely
managed by Life Insurance Corporation of India and the rest is
handled by General Insurance Corporation of India.
Life insurance business was started in India during
British rule. Prior to independence, there were several insurance
companies: Oriental Life Insurance Company, Bombay Life
Assurance, The Madras Equitable Life Insurance Society, Oriental
Government Security Life Assurance Company, etc. Most of the
insurance companies were charging a very high extra premium of
15 to 20 per cent, since they considered Indian lives as sub-
These insurance companies prevailed during the time of
independence failed to sustain on a long term basis. As many as 25
FYBMS (Sem - II) 46
Role of Service Sector in Indian Economy
companies were liquidated and another 25 companies had to merge
with other companies at a lost to the policy holders. This has
forced the Government of India in 1956 to nationalise all the 245
life insurance companies (154 Indian and 16 foreign), and form the
Life Insurance Corporation of India.

Financial Performance of Life Insurance Corporation

of India, 1997
(figures in Rs crore)

Total premium 16240

Investment income 9396
Total income 25921
Management expenses 3504
Total outgo 10843
Total assets 91448
Life fund 87760
Till December 1972, the Indian general insurance
market was overcrowded with as many as 107 companies. However,
as in the case of commercial banks, all these insurance companies
were nationalised under an act in 1972 which has yielded the
state-monopoly General Insurance Corporation of India. General
Insurance Corporation of India operates through four of its
subsidiary companies which are spread geographically. They are:
National Insurance Company (Calcutta-based), New India
Assurance Company (Mumbai-based), Oriental Insurance Company
(New Delhi-based) and United India Insurance Company (Chennai-
based). The paid up capital of General Insurance Company is fully
subscribed by the Indian Government.

FYBMS (Sem - II) 47

Role of Service Sector in Indian Economy
Financial Performance of General Insurance
Corporation of India, 1996-97
(figures in Rs crore)

Total gross direct premium 7347.86

Total investment income 1755.07
Profit before tax 1084.08
Paid up capital and free reserves 4812.58
Total assets (March 1997) 18705.89
Total of technical reserves 11400.25
Dividend to Government
(on an original investment of Rs 21.50 crore)
However, the Government is planning to open this sector
for private and overseas players. Towards this end, the
Government is planning for a formation of an Insurance Regulatory

A well developed transport system will support an
economy in several ways : supports the industry by increasing the
efficiency of production, rises the demand through movement of
products, facilitates the location of an industry, helps the
development of urbanization, movement of man power, better
standard of living, better education, etc. Contribution of
transport to Indian economy is very significant.

FYBMS (Sem - II) 48

Role of Service Sector in Indian Economy
Indian transport sector comprises of all forms of
transports: railways, roadways, water and air transport.
Indian Railways, largest Indian public sector
undertaking and largest railway system in Asia run 12000 trains a
day, with over 63000 route kms of track. Indian Railways has
around 7000 railway stations. The total distance covered by the
12000 trains every day equals three and half times the distance to
moon. It takes a gigantic task of carrying nearly 11 million
passengers and 1.2 million tonnes of cargo per day. Indian Railways
function as a major employment generator in India. Of the 27
million people employed in the organised sector, Indian Railways
accounts for 6 per cent directly and an additional 2.5 per cent
indirectly. Totally about 1.6 million people are employed by Indian
The importance of road transport to Indian economy
can not be neglected. Road transport is vital for the movement of
agricultural products and also for industrial development. Thus,
roads quicken the rate of growth. Further, road transport
functions as a supportive system to railways. Railways can reach
only certain locations, and the rest of the link is taken care by
road transport. At the time of independence India had only
388000 kms of roads. Today, India has 2178008 km of road
length, thanks to Planning efforts.
The cheapest mode of transport is water transport,
since water-ways provide ready made routes and thus no
infrastructure costs involved in developing journey routes,
compared to railway or road transport. India has both inland water
and marine or shipping transport facilities. India possesses about
14150 kms. of navigable inland water-ways. Notable Indian water-
ways are: Ganga, Brahmaputra, Godavari, Krishna, Delta Canals,

FYBMS (Sem - II) 49

Role of Service Sector in Indian Economy
Mandovi, Zuari, Buckingham Canal and back-waters and the west
coast canals of Kerala. Considering the geographical sea-base
benefits of India, there is much scope to improve this mode of
transport in the country, especially the coast line transport.
The costliest mode of transport is by air, since airline
industry is highly capital-intensive. In India, most passengers are
infrequent air travelers due to the cost aspect of this mode of
transport. They are broadly classified into business and leisure
travelers. Air transport was nationalised in India in the year 1953.
Since then, for a long time, air transport was monopolized by the
government players - Air India operates international flights and
Indian Airlines operates domestic flights. However, in the recent
past India has allowed private players also to participate in the
domestic aviation segment, with adequate restrictions imposed
upon them. One of the major hurdles in the aviation industry is
the lack of adequate airport infrastructure. Inspite of the low
airport infrastructure, there are over 25 international airlines
operating from India. International services to India are guided
by bilateral air services agreement with around 80 countries.
Aviation industry in India is fragmented with relatively
less interdependence with other similar agencies within the
country and outside. Thus they face global competition from mega
airline operators. About 50 to 60 per cent of India’s air space is
controlled by defence and the balance by civil. The lack of co-
ordination and in the grab of security, civil aircraft have at times
followed very circuitous routes, to avoid defence installations,
thus causing immense loss of time and fuel, which can be to the
tune of several hundred crores in a year.
India needs a comprehensive aviation policy which will
facilitate improvement of airport infrastructure and assure

FYBMS (Sem - II) 50

Role of Service Sector in Indian Economy
smooth flying in India and overseas for the betterment of Indian

In an economic policy frame work where the role of
markets and incentives based on the price system is emphasized,
infrastructural goods and services, such as telecommunications
are generally characterized by high fixed investments, long
gestation lags and relatively low profits, especially during the
initial phases of operation. For a long period, almost all the
infrastructural projects in India were Government’s responsibility.
However, as India moved along the path of economic
development, the process of liberalization began and private
sector’s supportive role was recognized. Telecom sector was
opened up for private sector participation into basic services and
value added services with the policy announcement in May 1994. In
order to meet the rising demand in the telecom sector, Indian
Government decided to invite private players to supplant the
government supported agencies in rendering basic as well as value
added telecom services. Though opened up, barring a few areas
like pagers and mobile phones, Indian telecommunication sector is
dominated by Department of Telecom (DOT) and two government
companies - VSNL and MTNL.
Telecommunication sector in India is characterized by a
fundamental failure on the following accounts:

" The number of per capita telephone connections in India is

around one-sixth of that found in countries with a comparable
per capita GDP. The ratio is even more adverse, in the area of
data communication. (In India there are only 13 connections per

FYBMS (Sem - II) 51

Role of Service Sector in Indian Economy
1000 persons; India has 10 million telephones with a density of
one per 100, where the global standard is 10 per 100.)
" In India, the current players are not able to meet the demand.
The registered demand during 1996-97 was 17430 thousand
connections out of which the unmet demand (waiting list) was
around 2887 thousand lines.
" Telecom facilities in India are noisy and unreliable as compared
with what is easily attainable using contemporary technology.
" In India, telecom facilities are often hundreds of per cent
costlier than the fair price of these services.

The usage of modern telecom technology is a vital

factor for the rapid growth of Indian economy, since :

" The application of modern telecom coupled with computer

technology has the potential of yielding order of magnitude
gains in productivity in a large variety of industries.
" Modern telecom and computer networks allows India gain access
to ideas from all over the world.
" Telecom is special, because, as an alternative, it is substantially
cheaper as compared with roads or railways.
" Improving the telecom infrastructure will help to boost trading
activities of India.
" Superior telecom facilities are a must for India today, because
many Indian states are focusing on information technology for
export earnings. Only a proper telecom facility can assure the
industry players a swift data transfer mechanism which will
help them to compete with the global players in the information
technology field.

FYBMS (Sem - II) 52

Role of Service Sector in Indian Economy
Telecom sector in India lacks a clear Government policy
directive. There are several issues, such as incoming call fee in the
case of cellular, which are not solved. The Government has to
announce a proper stable and long-term telecom policy for the
benefit of the economy, since the development of this sector is a
crutial indirect input for the development of the nation.

Power is a vital input for the growth of industrial
development of any nation - higher the power, higher the
industrial growth and higher the employment. Since independence
most of the projects in this sector has been financed and
managed by government agencies - Center or State (nearly 90
per cent or more investment required for the power sector came
from the public sector through Five Year/Annual Plans).
However, since liberalisation, the role of private sector,
inclusive of foreign players were recognized in the power
Power projects involve huge investments and overseas
support in terms of financing as well as managing power projects
become inevitable for a developing nation like India, since
electricity can not be easily imported or stored and hence,
creation of generation capacity domestically is critical for
meeting the country's demand for power. If the capacity
additions are not done in time, power shortages result in the
system which leads to inefficient operations and management,
decelerate investment in other sectors of the economy and
hamper the growth process of the country in general. In
India, the endemic power shortages and cuts lead to inadequate
capacity utilization, unproductive expenditure such as in back-up
FYBMS (Sem - II) 53
Role of Service Sector in Indian Economy
generators and much waste, all of which impose a major
constraint on economic growth.

Shortage of Power: Demand and Supply

In India there is a significant short-fall in the
availability of power. With the present installed capacity of
about 84000MW, there is a peak shortage of about 15 per cent
and an energy shortage of about 5 per cent.
The per capita electricity consumption in the country,
in spite of a rise to a level of 314KWH in the last four
decades, is one of the lowest in the world. In fact, this is in
sharp contrast with the average consumption in the developed
countries which is over 5000KWH per annum.
Over the years, sectoral consumption of electricity in
India has changed considerably. The shares of the agricultural
and domestic sectors have increased, while the share of the
industrial sector has declined. This can be attributed to the
setting up of captive power plants by the industry, due to the
increasing tariffs and unreliable supply from SEBs.
The 15th Electric Power Survey has forecast an
energy demand of 570 billion kwh and a peak demand of 957,000
MW in 2001-02. This forecast is less than that forecasted
in the 14th EPS for the same year. This is probably due to the
enlarging base and the increase in the share of the services
sector in the GDP.
In order to optimise the utilization of the existing
capacity, the Government is planning to initiate steps for the
conservation of energy and to reduce the difference in the
peak and base loads, through measures such as energy audits
and tariff incentives.
FYBMS (Sem - II) 54
Role of Service Sector in Indian Economy
Power: Demand and Supply: All India
(figures in billion KWH)

Demand Supply Deficit per-cent

1980-81 120.1 104.9 -15.2 12.7
1981-82 129.2 115.3 -13.9 10.8
1982-83 136.8 124.2 -12.6 9.2
1983-84 145.3 129.7 -15.6 10.7
1984-85 155.4 145.0 -10.4 6.7
1985-86 170.7 157.3 -13.4 7.9
1986-87 192.4 174.3 -18.1 9.4
1987-88 211.0 188.0 -23.0 10.9
1988-89 223.0 205.9 -17.1 7.7
1989-90 247.8 228.2 -19.6 7.9
1990-91 267.6 246.6 -21.0 7.8
1991-92 289.0 266.4 -22.6 7.8
1992-93 305.3 279.8 -25.5 8.4
1993-94 322.8 299.0 -23.8 7.4
1994-95 352.3 327.3 -25.0 7.1
1995-96 389.7 354.0 -35.7 9.2

(Source: Central Electricity Authority)

The future projections made by CEA, the 15th Annual

Power Survey and similar other institutions have estimated a
growth requirement of about 6-7 per cent per annum. According

FYBMS (Sem - II) 55

Role of Service Sector in Indian Economy
to the Fifteenth Electric Power Survey of July 1995, energy
demand in 1999-2000 is projected at 502254 million KWH. And
the Power Survey is reported to have recorded a peak power
requirement of 95000MW at the end of the Ninth Five Year
Plan (2001-2002) and 130900MW at the end of the Tenth Plan
(2006-2007), which corresponds to an installed capacity of
160000MW and 280000MW respectively. In other words,
requirement of additional installed capacity during the ninth Plan
is 57000MW and 67000MW in the Tenth Plan. To meet the
power needs of India by 2005-2006, the country needs
Rs.67900 crores of investment.
Power Line has projected the loss to the economy due to
power shortages in the country as follows :

" The loss in GDP growth is at least 2 per cent per annum and
perhaps as much as 2.5 per cent
" GDP loss over the last five years amounted to at least
Rs.65000 crore (assuming a 2 per cent loss per annum)
" GDP loss in the year - 1996-97 - is close to Rs.18000 crore.
Assumes 6 per cent growth with shortages and 8 per cent
growth without shortages.
" The total projected GDP loss over the next ten years will be
at least Rs.1800000 crore. Assumes 6 per cent growth with
shortages and 8 per cent growth without shortages.
" Every 1000MW project delayed is costing the economy over
Rs.1300 crore per year. This is based on the following
assumptions : 20 per cent more peak power needed; 16 per cent
more capacity needed; 13500MW needed this year; and 18000
crore lost attributable to the above shortfall.

FYBMS (Sem - II) 56

Role of Service Sector in Indian Economy
Thus, to attain considerable industrial growth, India
needs swift power.

Power Finance
During post-independence era, power - one of the major
core sector - has been funded by the government/government
agencies, when private participation was almost nil in power
sector, thanks to government policies. However, with
liberalisation, this core sector was opened to private sector
and consequently to the foreign players.
Further, due to constraints of funds with the
Government of India, the public sector would suffer from
inadequacy of funds. With present levels of finances, only
20000MW in each plan period could be built in the public sector.
Thus, the rest (84000MW) is expected to be financed through
private sector, both Indian and foreign.
Since the cost outlay in power projects are huge,
financing the projects through internal accruals alone becomes
inevitable; and further, the government is also slowly changing
withdrawing itself from the role of producer and trying to stick-
on only as a regulator in the long run. Thus, power producers has
to look in for alternate source of financing such as, term loans
from financial institutions (internally and internationally) like
World Bank, ADB, ICICI, etc. and debt market in India and
Some 70 per cent of the finance required by the
power sector over the next decade - total estimated at about
Rs.5000 billion (US $143 billion) - has to be found through
debt. While the sector could expect special consideration in
the allocation of foreign debt entitlement, the bulk of the
FYBMS (Sem - II) 57
Role of Service Sector in Indian Economy
debt finance will have to be raised in rupees. Identified level of
rupee debt at present is about 75 billion per annum. This would
need stepping up significantly.
The center has decided to allocate about Rs.14000
crore for nuclear energy to generate an additional 1000MW
during the Ninth Plan period. This is a Rs.1000 crore increase
over the Eight Plan period allocation which was Rs.13000
crore. Further, according to the estimation of Finance
Minister, around 22.5 per cent of the proposed voluntary
disclosure scheme for harnessing black money, would be used for
financing infrastructure projects and basic minimum services
The power sector so far in 1996-97 has accessed $2
billion in ECB sanctions. Compared to the previous year ECB
sanctions of $0.61 billion, this is a considerable increase.
Allocations in power sector have largely been made to non fast-
track projects and captive power projects.
Financial institutions have told the Power Ministry
that they will not be able to provide funds for additional
power generation beyond 5000MW during the Ninth plan. This
falls woefully short of the power ministry's target of adding
57000MW during the Plan.
The service sector now accounts for more than half of
India's GDP: 51.16 per cent in 1998-99. This sector has gained at
the expense of both the agricultural and industrial sectors
through the 1990s. The rise in the service sector's share in GDP
marks a structural shift in the Indian economy and takes it closer
to the fundamentals of a developed economy (in the developed
economies, the industrial and service sectors contribute a major

FYBMS (Sem - II) 58

Role of Service Sector in Indian Economy
share in GDP while agriculture accounts for a relatively lower
The service sector's share has grown from 43.69 per
cent in 1990-91 to 51.16 per cent in 1998-99. In contrast, the
industrial sector's share in GDP has declined from 25.38 per cent
to 22.01 per cent in 1990-91 and 1998-99 respectively. The
agricultural sector's share has fallen from 30.93 per cent to
26.83 per cent in the respective years.
Some economists caution that if the service sector
bypasses the industrial sector, economic growth can be distorted.
They say that service sector growth must be supported by
proportionate growth of the industrial sector; otherwise the
service sector grown will not be sustainable. It is true that, in
India, the service sector's contribution in GDP has sharply risen
and that of industry has fallen (as shown above). But, it is equally
true that the industrial sector too has grown, and grown quite
impressively through the 1990s (except in 1998-99). Three times
between 1993-94 and 1998-99, industry surpassed the growth
rate of GDP. Thus, the service sector has grown at a higher rate
than industry which too has grown more or less in tandem. The
rise of the service sector therefore does not distort the
Within the services sector, the share of trade, hotels
and restaurants increased from 12.52 per cent in 1990-91 to 15.68
per cent in 1998-99. The share of transport, storage and
communications has grown from 5.26 per cent to 7.61 per cent in
the years under reference. The share of construction has
remained nearly the same during the period while that of
financing, insurance, real estate and business services has risen
from 10.22 per cent to 11.44 per cent.

FYBMS (Sem - II) 59

Role of Service Sector in Indian Economy
The fact that the service sector now accounts for more
than half the GDP probably marks a watershed in the evolution of
the Indian economy.

Share of the service sector in India's GDP

Share of the service sector in India's GDP (in Rs. crore).
Figures in brackets indicate percentage share of different sectors and subsectors.
Figures for 1994-95 onwards are on a changed base (1993-94=100), so they show huge increases compared
to the preceding period.
1998- 1997- 1996- 1995- 1994- 1993- 1992- 1991- 1990- 1985- 1980-
99 98 97 96 95* 94 93 92 91 86 81
Services 569005 537642 498572 463980 423200 108974 102142 97045 92733 66306 50177
of which (51.16) (51.24) (49.91) (50.08) (49.15) (45.62) (45.34) (45.35) (43.69) (42.25) (40.99)
50328 49313 47382 46054 42560 10517 10386 10047 9833 7183 6114
(4.53) (4.70) (4.74) (4.97) (4.94) (4.40) (4.61) (4.70) (4.63) (4.59) (4.99)
Trade, hotels &
164355 155954 143858 127532 31057 28650 26827 26580 19649 14713
restaurants ....
(15.68) (15.61) (15.53) (14.81) (13.00) (12.72) (12.54) (12.52) (12.55) (12.02)
of which
155120 147305 136087 121546 29082 26866 25147 24933 18498 13839
i) Trade ....
(14.78) (14.75) (14.69) (14.12) (12.18) (11.93) (11.75) (11.75) (11.81) (11.30)
ii) Hotels & 9235 8649 7771 5986 1975 1784 1680 1647 1151 874
restaurants (0.88) (0.87) (0.84) (0.70) (0.83) (0.79) (0.79) (0.78) (0.74) (0.71)

FYBMS (Sem - II) 60

Role of Service Sector in Indian Economy
storage & 79819 74956 68788 63118 13057 12398 11785 11164 7951 5724
communications (7.61) (7.50) (7.43) (7.33) (5.47) (5.50) (5.51) (5.26) (5.08) (4.68)
of which
11521 11189 10647 9846 1746 1758 1778 1677 1404 1124
i) Railways ....
(1.10) (1.12) (1.15) (1.14) (0.73) (0.78) (0.83) (0.79) (0.90) (0.92)
ii) Transport by 50144 47895 44513 41706 9209 8735 8275 7853 5309 3680
other means (4.78) (4.79) (4.80) (4.84) (3.86) (3.88) (3.87) (3.70) (3.39) (3.01)
655 646 652 621 188 180 175 177 163 122
iii) Storage ....
(0.06) (0.06) (0.07) (0.07) (0.08) (0.08) (0.08) (0.08) (0.10) (0.10)
17499 15226 12976 10945 1914 1725 1557 1457 1075 798
iv)Communication ....
(1.67) (1.52) (1.40) (1.27) (0.80) (0.77) (0.73) (0.69) (0.69) (0.65)
insurance, real 127205 119814 110575 102438 94609 27711 25084 23972 21700 14708 10791
estate (11.44) (11.42) (11.07) (11.06) (10.99) (11.06) (11.14) (11.20) (10.22) (9.39) (8.81)
of which
i) Banking & 65814 58034 51343 45190 16111 13861 13107 11169 5828 3408
insurance (6.27) (5.81) (5.54) (5.25) (6.74) (6.15) (6.13) (5.26) (3.72) (2.78)
ii) Real estate, 54000 52481 51095 49419 11600 11223 10865 10531 8880 7383
dwelling business (5.15) (5.25) (5.52) (5.74) (4.86) (4.98) (5.08) (4.96) (5.67) (6.03)
131047 124341 109705 102842 95381 26632 25624 24414 23456 16815 12835
social, personal
(11.78) (11.85) (10.98) (11.10) (11.08) (11.15) (11.37) (11.41) (11.05) (10.74) (10.48)
of which
i) Public admin. & 58631 48736 46635 43620 12483 12170 11570 11328 8016 5794
defence (5.59) (4.88) (5.03) (5.07) (5.23) (5.40) (5.41) (5.34) (5.12) (4.73)
65710 60969 56207 51761 14149 13454 12844 12128 8799 7041
ii) Other services ....
(6.26) (6.10) (6.07) (6.01) (5.92) (5.97) (6.00) (5.71) (5.62) (5.75)
Total GDP: 1112206 1049191 998978 926412 861064 238864 225268 213983 212253 156566 122427
* Figures for 1994-95 onwards are on a changed base (1993-94=100), so they show huge increases compared to
the preceding period.
Source: Studies by Reserve Bank of India

Service sector is India is booming. Experts say that in
the of shoring world, India could be the hub and other Asian
nations, the spokes. But, china is now catching up with the Indian
of shoring industry… at the same time, its manufacturing sector in
full fledges. China seems to have realized that any sector, no
matter how profitable will slump into recession once it reaches the
peak. However, in India, the service sector is still being milked

FYBMS (Sem - II) 61

Role of Service Sector in Indian Economy
dry, while we actually need to shift our focus toward the
manufacturing sectors.
The point however, to be considered, is that china need
not be a replacement market for Indian talent but a
complementary market for growing business in japan and servicing
the local Chinese businesses. But setting up a development centre
in china is not that simple. Now, the exit options at the moment
are not clear. Even though the cost of a Chinese programmer may
be less than that of an Indian programmer, there are other
overhead costs which bring the cost of development in china
almost on par or above India.






On comparison of all the above costs, India is the best

alternative. The Indian firms will have to look at these centers as
strategic resources to de-risk.
As far as the English speaking talent is concerned, India
will continue to be the base. At the moment, the Indian talent
supply looks sufficient. So much so, that there has been no
increase of salaries at the entry level for the last 2-3 years. This
is probably an indicator of the soon-to-come recession in the
service sector.

FYBMS (Sem - II) 62

Role of Service Sector in Indian Economy
An attempt has been made in this project to identify
the various needs as to why India has to concentrate on industrial
development and propel the manufacturing sector that is not being
exploited to its fullest potential.

Service sector: India Vs. China

Service Sector in India
The growth of the service sector in both the developed
and developing world has been phenomenal. As economies become
progressively service driven, greater wealth and employment is
being generated in this sector. Before we begin, what exactly are
the different types of services?
FYBMS (Sem - II) 63
Role of Service Sector in Indian Economy
Services can be classified into four categories on the
basis of the service customization and customer contact, and we
would look at the categories as follow.
First of all would be the Service Factory, with such
examples as airlines, hotels/resorts and trucking. This is the type
where there is low customer contact and low degree of
customization. The services offered need to be warm and exciting,
and attention must be paid to ambience and physical surroundings.
Secondly, the Service Shops, where there is high
degree of customization. The management must deal with skilled
labour and the key challenges would be keeping cost down and
quality up. Examples are hospital and auto repair.
The third type of service would be the Mass Service,
where there is high level of customer contact and low level of
customization. Managing and controlling the workforce would be
the key and examples are retailing, wholesale trade and school.
Lastly, the Professional Service Firms, with a high
degree of customer contact and customization. The key to this
type of services is the managing and controlling of people,
management's ability to deal with skilled workforce as well as
keeping cost down and quality up. Some examples are doctors,
lawyers, consulting firms and so on. Due to the growing importance
of the service sector, academics and consultants worldwide have
make efforts towards improving the management of service
Similarly, in India, the service sector has been growing
rapidly over the last decade or so and the trend is likely to
continue. If one describes an economy based on its major
economic sector, then India made the transition from an
agricultural economy to a service economy in 1979.

FYBMS (Sem - II) 64

Role of Service Sector in Indian Economy

In 1985, the service sector accounted for 47 per cent

of GDP, having expanded at an average annual growth rate of 7 per
cent between 1980 and 1985 The share of services sector in the
real GDP in India has surpassed that of agriculture and industry at
a relatively faster pace as compared to other industrialized
Service sector has become the main contributor to the
GDP not merely in developed economies like U.S.A.(71%),
Japan(60%) & U.K.(67%) but also in developing economies like
China(33%), Indonesia(41%), Pakistan(50%) & Brazil(56%).


33% JA P A N
U .K

In the Indian context, it can be safely said that the

service sector now accounts for more than half of India's GDP
FYBMS (Sem - II) 65
Role of Service Sector in Indian Economy
This sector has gained at the expense of both the agricultural and
industrial sectors through the 1990s. The rise in the service
sector's share in GDP marks a structural shift in the Indian
economy and takes it closer to the fundamentals of a developed
economy (in the developed economies, the industrial and service
sectors contribute a major share in GDP while agriculture
accounts for a relatively lower share).
The service sector's share has grown from 43.69 per
cent in 1990-91to 51.16 per cent in 1998-99. In contrast, the
industrial sector's share in GDP has declined from 25.38 per cent
to 22.01 per cent in 1990-91 and 1998-99 respectively. The
agricultural sector's share has fallen from 30.93 per cent to
26.83 per cent in the respective years. It is true that the
industrial sector too has grown, 1990s (except in 1998-99). But
the service sector has grown at a higher rate than industry.
Some economists caution that if the service sector
bypasses the industrial sector, economic growth can be distorted.
Service sector growth must be supported by proportionate growth
of the industrial sector; otherwise the service sector grown will
not be sustainable. This project is a comprehensive study of the
two important sectors, namely manufacturing and service of China
and India.

FYBMS (Sem - II) 66

Role of Service Sector in Indian Economy

In China, banks continue to be keen on providing support

to larger players and are playing a relatively small role in financing
the private firms who are rewriting its history. While its banking
system made good progress in divorcing itself from interference
by government, it still has a long way to go. There is evidence that
the government still encourages lending to ailing State
Enterprises. Again one gets to see the same moral hazard that is
omnipresent. Banks still don't consider bad loans given to State
Enterprises a serious problem.
At the basic level the problems are similar to those
faced by any banking system that grows under the socialist legacy.
Competition is very much limited. Profit motive is largely absent.
The state ownership of banks and private ownership of business is
big mismatch. Unless banks are also privatized, they are unlikely
to develop profit motive. the banking sector needs to be opened
up for foreign competition and foreign ownership. Deregulation of
interest rates will be another area of big change. The change is
already visible with many banks gearing up for listing of their
The state-owned banks saddled with about $150 bn of
NPAs are considered technically bankrupt. Though the bad debts
have been transferred to AMCs, it merely transfers the burden
from one to another. The bottom line is that the system has to
bear the cost of these NPAs. With lack of alternative avenues of
investment in the market place, banks are still flush with deposits
and the state guarantee is also construed as risk free investment.
The need of the hour is to totally liberate the banking system.

FYBMS (Sem - II) 67

Role of Service Sector in Indian Economy

China and India each have a population of over 1 billion

people. Their collective population amounts to more than 33% of
the world population. Their countries are geographically large and
their population is composed of a wide range of ethnicity, each
speaking their own language or dialect. Yet, over the last 20 years,
China's GDP growth, GDP per capita growth and labour
productivity have been significantly higher than that of India.
Why is this? What should India do to compete with China and
establish itself as the world's workshop, factory and supplier of
quality goods and services? Although India has the major human
resource, it has failed to utilise its potential to create a vibrant
manufacturing sector like that of China There was not much
difference in the economic performance roughly until 1980, when
the per capita incomes were also similar. Over the last quarter
century, both instituted economic reforms and economic growth
As the history goes, in 1947 India achieved
independence and it is in the year 1949 that in China communists
assumed power. Both the economies made modest beginning
toward industrialization. In the early 1950s, China was better
placed than India to extract resources from agriculture to finance
the planned industrialization program. India didn't pay attention
to agriculture until the food crisis of the 1966-67.
China's current account balance stands at a huge plus,
at nearly $30 billions, while for India it has been a minus
throughout the last four decades.

FYBMS (Sem - II) 68

Role of Service Sector in Indian Economy
China's FDI strength stands apart. Over 75 percent of
FDI that China received went to new enterprises. In India, about
65 percent of the little FDI went into M&A.
Another area where India failed and China achieved
immensely is the area of labor reform. India succeeded in
overprotecting the interests of workmen making the restructuring
of the industry impossible
China embraced globalization and trade enthusiastically,
welcoming foreign direct investment with no inhibitions, and
gradually gaining control of world markets for low-tech labor-
intensive manufactures.
China initiated reforms a decade earlier than India's
reform. China's economy grew at double the rate of India's during
the '80s and early '90s. While successive Indian governments
restricted the import of technology from the West and Japan,
the Chinese governments encouraged them.
As a result, the gap widened considerably. While
reforms in India are supposed to have been initiated in 1991, the
doctrinaire socialist policy had begun to be diluted in the second
innings of Indira Gandhi.
The process of liberalization continued under Rajiv
Gandhi, and more dramatically after 1991. The growth rate
doubled from the previous rate, but still lagged that of China.
The result has been that starting with more or less the
same per capita incomes 25 years back, Chinese incomes today are
double that of India's -- a result not only of faster GDP growth,
but also of a lower population increase.
Today, apart from higher incomes and lower poverty,
the areas in which China is far ahead of us are literacy, FDI, labor

FYBMS (Sem - II) 69

Role of Service Sector in Indian Economy
rationalization in the public sector and infrastructure
Thus, the post-reform China has successfully created
manufacturing conditions that have redefined the concept of
productivity. With interest rates being relatively low at around 4-
6 percent, high productivity of labor, enabling infrastructure,
lower input costs, Chinese private firms have evolved themselves
into mighty price warriors.

FYBMS (Sem - II) 70

Role of Service Sector in Indian Economy

Causes of liberalisation in China
In the early 1990s was that after Tiananmen Square in
1989, the conservative economic planners took control of the
country. At that time the State Owned Enterprises (SOEs) i.e.
China’s PSUs were virtually bankrupt because of the tight
economic controls that the central planners imposed on the
In the 1980s, there was some private sector activity,
but when these activities became politically and ideologically
problematic for the leadership after Tiananmen, they cracked
down on private firms. So in 1991 there was a substantial
reduction of economic growth and the Chinese external sector ran
into difficulty. It was this difficulty that prompted the leadership
to open up the Chinese economy to FDIs.

Liberalisation – One step at a Time

This liberalization strategy of the Chinese government

can be broadly classified into two stages:

Stage one: Restructuring SOEs, rather than privatizing them.

Stage Two: Attracting FDI.

In the first fifteen years of liberalization, China

concentrated on aforesaid two areas.

FYBMS (Sem - II) 71

Role of Service Sector in Indian Economy
Then in 1992, they substantially liberalised FDI
controls. This strategy has proved successful FDI came in
response to the weaknesses in the SOEs, as foreign firms didn't
think the SOEs could compete with them and to add to that, the
economic prospects of the country looked good.
In 1998, Chinese Government also allowed privatisation,
especially of smaller SOEs. They allowed the banks to lend capital
to private entrepreneurs. They also improved legal and political
treatment of private entrepreneurs. Also, they began to liberalise
the policies toward the domestic private sector. Reforms focused
on bringing an element of micro autonomy. These efforts set in
motion a self-propelling mechanism that led to the emergence of
new class of private enterprises who changed the economic
scenario considerably.

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Role of Service Sector in Indian Economy
The TVE Phenomenon:
The real force behind China's economic achievement
appears to be the country's ability to take the industry to rural
China as against the common model of industry concentration in
urban cities.
Harbingers of this revolution are something called
'Town and Village Enterprises (TVEs). The TVE phenomenon that
led to worldwide spread of China's standard and cheap products.
By the 1980s the State Enterprises (the public sector companies)
were losing steam. This led to displacement of many skilled
workers. They had the choice of returning to their native places.
About the same time the Non-Resident Chinese became
wealthy and were willing to play venture capitalists. They provided
funds to the homeland's businesses, which promised a good return.
They found that the rural entrepreneurship coupled with the
skilled worker from the big industry was an ideal combination to
unleash a revolution. They not only funded these businesses but
also acted as buyback agents of the production.

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Role of Service Sector in Indian Economy

Special thrust was given to light and medium

enterprises where investments required are limited. This strategy
delivered results. Smaller private enterprises emerged as a force
to reckon with. It led to rapid economic growth. Production of
consumer goods increased. A consequent rise in exports and
foreign currency earnings led to a general rise in personal incomes.

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Liberalisation of Indian economy
Since the start of liberalization of its economy in 1991,
India has been going through an epochal transformation into one
of the world’s fastest growing economies. Its gross domestic
product rate was picked up from 1.3 % in 1191 to 1992 to 7.8 % in
119-1997 and despite a global slowdown, moved up from 4.4% in
2000-01 to 5.6% in 2001-2002. Its GDP for 2002-2007 is
currently targeted at 8%. New investment opportunities for
2002-2007 total sum of $1.5 trillion spread over the various
sectors such as agriculture, bio-technology, communications,
electricity, financial services, manufacturing, mining, trade and



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Financial liberalization consists of 4 sets of measures:

" To open up a country to the free flow of international finance.

" To remove controls and restrictions on the functioning of

domestic banks and other financial institutions so that they get

properly integrated as participants in the world financial


" To provide autonomy from the government to the central bank

so that its supervisory and regulatory role vis-à-vis the banking

sector is associated from the political process of the country

and hence from any accountability to the people.

" To ensure that not all these measures are immediately

contemplated or demanded but they represent the ultimate goal

of financial liberalization which may be ushered in by stages.

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The pre-liberalisation period visualized a subordination
of the financial system to the perceived needs of economic
development. To this end, the interest rates were kept low. Banks
and financial institutions were required to hold government
securities upto a certain percent of their total liabilities,
permitting the easy sale and cheap servicing of public debt, credit
was directed to priority sectors , especially agriculture, the RBI
was retained as a part of the government and hence accountable
to the parliament for its actions. There were problems with this
regime arising from the fact that the economy was experiencing
capitalist development and hence the credit needs of vast masses
of small producers and even small capitalist could not be met
cheaply from institutional sources. But within this overall
constrain the logic of the regime was to make the financial sector
serve the needs of development, which, it was believed,
necessitated its four features, namely:

" Its being anchored to the national economy

" Detached from world’s financial flows

" It’s being obliged to give precedence to production over

speculation for which it also had to observe control on the price

and direction of credit.

" It’s being accountable to the people via the government.

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The purpose of financial liberalization is to reverse all these

" To detach the in financial sector from its anchorage in the

domestic economy and to make it a part of the international

financial sector

" To make it operate according to the dictates of the market

which means the end of cheap interest rates of the regime of

directed credit and of the distinction between productive and

speculative credit needs.

" To remove it from the ambit of accountability to the people.

In short, the purpose of financial sector reforms is to

make the financial sector an aliquot part of globalised finance.
An economy that has undertaken financial liberalization
also becomes vulnerable to crisis. When short term funds flow in
they tend to cause an appreciation of the exchange rate, the
consequence of which is to make imports cheaper relative to home
production and hence need to deindustrialization. But if this is
avoided through the central bank intervention that supports the
exchange rate by holding foreign exchange reserves, then that in
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Role of Service Sector in Indian Economy
turn enlarges liquidity in the economy which is typically used
either for an expansion of luxury consumption or for an expansion
of investment in the domestic non-tradable sector such as real
estate, or for financing speculative booms in asset markets
especially the stock market. When short funds begin to flow out,
there is both a downward pressure on the exchange rate and a
collapse of asset prices, which reinforce one another and cause an
avalance of outflow. Efforts by the central bank to manage the
forex market by raising the interest rate to induce short term
funds to say or to come back, have very little effect or even have
the opposite effect of further enhancing outflows by aggravating
the asset market to collapse.
On the other hand, interest rate increases which leads
to a contraction of the real economy. Thus, while the inflow of
short term funds, generally, has little impact by way of increasing
the growth rate of the real economy, the withdrawal of short
term funds does affect the real economy adversely.

Effect of liberalization on the various cross-sections of the

Indian society:

" Trade liberalization led to an increase in the poverty gap in the

rural districts where industries more exposed to liberalization

were concentrated.

" Whatever the India-wide effects, of trade liberalization were,

rural areas with high concentration of industries that were

disproportionately affected by tariff reductions, experienced

slower progress in poverty reduction

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Role of Service Sector in Indian Economy
" The regionally disparate effects of liberalization are not

consistent with standard trade theory predicting labour

migration in response to wage and price shocks, equalizing the

incidents of poverty across regions.

" There is little evidence of high levels of free allocation with

districts across industries.

" Especially rigid labour markets fostered by labour market

regulations in parts of India prevented the reallocation of

factors in the face of trade liberalization in many areas.

" As those employed in traded industries were not at the top of

the income distribution before trade reforms, the reduction in

income caused some to cross the poverty line or fall even

deeper into poverty.

" This effect was aggravated by the slower overall growth in

registered manufacturing employment areas with inflexible

labour laws which retarded the pull out of poverty of the

poorest subsistence farmers.

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Role of Service Sector in Indian Economy
Liberalization has greatly benefited the external
sector. The balance of payments, positions is quite comfortable.
The current account deficit is far from significant, and foreign
exchange reserves are growing steadily. The current level is well
above what we need for our developmental purposes. The
exchange rate has remained steady equally encouraging is a
decline in the size of external debt and the debt servicing burden.
All these should boost confidence of the foreign investors in the
long term prospect of the economy and one can expect them to
continue investing in India.

The economic reform continues to remain focused on

facilitating foreign investment and liberalization of trade. Policy
liberalization has been significant in this respect. The domestic
market is exposed to external competition. However, the economic
reform still lacks its focus on the imperative of restructuring and
competitiveness building of the indigenous industry that continues
to suffer from inherent disadvantages of high capital costs, poor
infrastructure, irrational duty structure, strangulating labour
laws, cumbersome procedures and numerous systematic

The basic objectives behind liberalization of the FDI

policy namely:

" Access to latest technology

" Management skills

" Exports

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Have not been achieved so far. But in many sectors it
has destabilized the indigenous enterprises and in certain hi-tech
sectors, the foreign companies have secured total control of the
markets, even as they have brought little by way of investment. In
other words, foreign companies are gaining control of the
domestic market at a relatively lower cost and without developing
significant stake in the economy.

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Manufacturing Sector – A comparative

China’s emphasis on manufacturing is confirmed by the
fact that among the three sectors in China, manufacturing takes
the largest slice of the pie, while in India; it is third behind
services and agriculture. Apart from this, the Chinese are so
competitive on a global basis that most nations, including India,
find them as a force to reckon with in textiles, consumer durables,
and so on. An essential offshoot of this is the huge trade surplus
China enjoys. Its exports race ahead despite global slow down and
its foreign investment figures are much higher than India
Most people associate China's economy with over
investment in singular and unprofitable pursuit of export products,
low quality goods and marginal pricing. The truth is that China's
growth is the result of not only significant investment, foreign and
domestic, but by a sharp increase in labour productivity, a growing
export based on foreign investment, strong domestic demand fed
by low prices and improved quality of products. The price
competitiveness of China's products is unmatched. China's
businesses seem to operate on the principle of sales maximization.
The strategy of sales maximization calls for setting of prices at
very low levels so as to create markets. The focus being
maximization of sales the resultant business model necessitated
concentration on such products that are amenable to mass
production and mass consumption. With pricing set at rates
unimaginable to competitors abroad, the product offers
tremendous value for money.
That must explain why Nike produces 40% of its
footwear in China while Galanz has 30% of the global market for
FYBMS (Sem - II) 83
Role of Service Sector in Indian Economy
microwave ovens because of quality enhancements in Chinese
China's lower prices are not just due to cheaper wages -
Indian wages are comparable - but to lower taxes, lower cost of
capital, higher productivity of workers and shorter delivery time.
Productivity of Chinese workers can be 10 to 300%
higher than those of Indian workers, depending on the product.
Chinese shipments reach the US less than a month after they
leave the factory gate compared to six to 12 weeks for Indian
exports. Delays in India are due to bureaucracy in customs, loading
and unloading in ports and long transit times. China has attracted
£216bn in foreign investment (1980-2000) compared with £120bn
in India. China's manufacturing sector in the 1990s expanded at a
rate of 12% per year, double the increase in India. Whilst it is
true that many Chinese state-owned companies receive loans from
state banks at very low interest rates with long repayment
periods, about 70% of China's industrial output comes from the
private sector, including multinational companies that have
prudent cost accounting.
Lower taxes, import duties and raw material costs are
important factors but a competitive environment and a higher
level of component manufacturers also help.

1. China produces more than 25% of the world's televisions and

easily surpasses India in both domestic sales and exports.

2. China is planning to increase its textile exports to $ 50 billion in

2006. It is already preparing for the global textile market

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Role of Service Sector in Indian Economy
opening up totally. And in India we tax polyester fibre and

other raw materials at the highest possible rate.

3. China produces eight times more ceiling fans than India and half

the price advantage is because of India's high indirect taxes

that affect domestic and export sales.


Contributes one-fourth of total

7 7.1
Employs 30% of non-agricultural
6 6.1 workforce
5 Industrial output valued at US$
4.2 65 billion
3.4 Rise in growth from 2.7% in
1998-99 to 6.1% in 2002-03
Significant rise in index of
growth for the manufacturing

sector from 6.5 % in February
1998-99 1999-00 2000-01 2001-02 2002-03

Growth of manufacturing(%)
2003 as compared to 2.9% in
February 2002

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Role of Service Sector in Indian Economy





FOOD & 30275 TRANSPORT 5043








Manufacturing sector exports

15.4 15.6
have grown from –3.0 % in 1998-
15.0 99 to 14.8% in 2002-03
10.0 Transition from largely agro-
based raw materials to
processed items

0.0 Need to increase high value-

added component
1998-99 1999-00 2000-01 2001-02 2002-03
-3.0 -2.6

Growth of manufactured exports (%)

FYBMS (Sem - II) 86

Role of Service Sector in Indian Economy


Gems & jewellery 8877

Engineering goods 8384

Textiles 5753

Ready made garments 5387

Chemicals 4994

Leather goods 1792

Total manufactured exports 38452

India is one of only three countries in the world to have

indigenously designed and manufactured Super Computers. It
is one of only six countries that can build and launch its own
Base for export to third countries - Hyundai Motors using
India as export base for foreign markets, currently
exporting to 8 countries and looking at expanding exports to
markets in the European Union and Latin America. The
company has also set up an R & D center at its Chennai plant
World class R & D facilities

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Role of Service Sector in Indian Economy
Emergence as global manufacturing hub with presence of
MNCs such as LG, Samsung, Hyundai, Pepsi, GE, General
Motors, Ford, Suzuki etc
Increased implementation of state-of-the-art IT
technologies – current IT usage of 15%
Segments showing high potential: automobiles, steel,
aluminum, cement, auto ancillaries, forging and

Causes of stagnation of India’s Manufacturing sector: -


speed with which infrastructure projects get implemented in
China is commendable. Financial Times rightly commented
(January 21, 2004) "if thousands of villagers have to be moved
to make way for roads or power stations, so is it: investment in
infrastructure underpins China's success."

Eg. The way the giant Three Gorges Dam has come up in China,
in contrast to the Narmada Dam project is an example of how
the infrastructure projects in India are frustrated by
misguided individuals going to court. This is how democracy has
been used in India to hinder growth.

Agitation, endless court cases, environmentalists, and

other manifestations of a democratic, rule-of-law society have
not only delayed implementation perhaps by a decade, but also
added enormously to the costs while direct cost escalation is
perhaps only a small part of the total cost to the economy. One
can only imagine the output lost because of the delays in the
starting of the project.
FYBMS (Sem - II) 88
Role of Service Sector in Indian Economy

2. OUTDATED LAWS: -China is ahead of India, in labour-

intensive manufacture. Indian labour laws, which protect
existing employment, but at the cost of creating new jobs, have
created a bias in favour of capital-intensive investments.
An Ambani prefers a refinery, in which the only
comparative advantage comes out of the duty structure, to
manufacturing, say, toys in billions and exporting them to the
China does not seem to be treating its PSUs that are the state
owned enterprises (SOEs) protectively. Millions of jobs in
state-owned enterprises have been lost in preparation for world
competition. But new ones keep getting created in larger
numbers. In contrast, India not only condones over-manning, but
also keep thousands employed in factories that haven't
produced anything for decades. As a result, resources are short
for the much-needed investments.
SECTOR: - Wherever there is a tug-of-war between
agriculture and manufacturing, the government always takes the
side of agriculture. The prices of cotton, sugar cane, fertiliser
policy are only a few examples of this short sighted approach.
5. DEPLETION OF RESOURCES: - India consumes almost thrice
as much energy as any average rich developed country produces.
Generally, the rich countries use less oil per unit of output than
the developing countries. This is because of variety of reasons
like better capital stock and modern infrastructure.

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Role of Service Sector in Indian Economy
For Example, the fact that the rich countries are less dependent
on manufacturing also helps them to conserve energy. This is
where India’s energy-inefficient ways stand out. China, whose
economy is powered by manufacturing, is less energy-intensive
than India. India’s energy intensity is almost 24% higher than
china’s despite the fact that both the countries are at around the
same level of development.








India needs to immediately set right this situation and

give primacy to manufacturing as China has done. In the process,
the following steps may have to be taken:

1. REDUCE INTEREST RATES: At real interest rates of 7 or 8

per cent, manufacturing companies will never be able to
compete globally because these interest costs, as a percentage
of total cost, become high.
2. ENSURE MOBILITY OF LABOUR. There has to be the will to
put through a modern labour policy, which will ensure that
industry has the right to move labour in and out. The only way
FYBMS (Sem - II) 90
Role of Service Sector in Indian Economy
employment will increase in the manufacturing sector is if we
give the comfort to the owner that his labour is a variable cost.
3. TAX CUTS: The indirect taxes are way too high and need to be
brought down to international levels. By having high excise
duties, we are killing domestic demand, the key component of
our growth.
4. REDUCE RED TAPE: Indian Government must free the Indian
entrepreneur from the shackles of state and federal
bureaucracy and release the savings through lower direct and
indirect taxes.
5. ENCOURAGE COMPETITION: The government must make
"competition" India's national password and allow the Indian
flair for invention and application to take root.
6. SECTOR REGULATOR: Develop infrastructure regulatory
bodies funded from outside the government budget. Establish
multi-sector regulatory agencies at the state level.
7. DEVELOP LONG TERM DEBT MARKET: Mobilise long term
insurance money in the sector and Institute pension reforms.
Establish a fully funded pension scheme to increase national
savings and the demand for long term debt, making more funds
available for infrastructure.
single body for contracting, clearances and interacting with
private developers and investors. India should have one public
sector agency undertake the project design and contracting,
negotiation and documentation on the reasons why award
decisions were made.
9. PORTS: Develop a new institutional structure for the sector by
separating policy, regulatory and commercial functions.

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Role of Service Sector in Indian Economy
10. AIRPORTS: The focus of the airport authority of India has to
be shifted from operations to policy planning and statutory
functions. A separate independent authority needs to be
created to handle economic regulation for the sector such as
the leases and concessions.
11. ROADS: The money collected from petrol and diesel must be
used only for road development. Monitor and gradually reduce
public support for private road projects.
12. RAILWAYS: Corporatise Indian railways into Indian Railways
Corporation and focus on the core business and spin off the
rest. Railways must get separate institutions for policy
regulation and management.

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Role of Service Sector in Indian Economy
Complications faced by China due to increased FDI
On the competitiveness side, it is seen that increasingly,
the gains of Chinese economic growth have gone to foreign firms.
The Chinese balance of payments statistics indicates that in the
mid-1990s, the foreign income repatriations were only about $6
billion. Today, they are about $30 billion. This is a capital outflow
from the current account. Some of that money comes back in the
capital account through reinvestment, but, over the long run, the
trend of increasing capital repatriations has been dramatic. A lot
of the gains from economic growth have gone to foreigners rather
than Chinese entrepreneurs.
Today, with the FDIs on a constant rise, India is not too
far away from facing a similar problem as China in this regards.

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Role of Service Sector in Indian Economy



The Role of Technological Progress in Indian Economy

AUTHOR: - Debesh Bhattacharya,

A Public Role for the Private Sector

AUTHOR: - Virginia Haufler

FYBMS (Sem - II) 94