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Rajesh Marwaha*, Neha Mahajan**& Vidhu Mahajan *** Abstract
―Service is India’s new economy‖. The service sector dominates the Indian economy today, contributing more than half of our national income. Service has maintained a steady growth pattern since 1996-97. Trade hotels, transport and communication have witnessed the highest growth of level 10.8% in 2004, followed by financial services (with the overall growth rate of 6.4%) and social and personal services (5.9) of all the three sectors. The share of services in total GDP has grown phenomenally and has been the highest contributor to the total GDP growth rate. From an agro-based economy, it has emerged as a service oriented one. Service providing industries like IT services, IT enabled services, health care, tourism and hotels, communication, media and entertainment, trade and retail, banking financial services, transportation and logistics etc. from the main stay of the Indian economy today. In addition there is the most popular segment of its service sector, the entertainment industry while in most parts of the developed world, the service sector share of employment rose faster than its share of output in India there has been relatively slow growth of jobs in service sector. This is primarily because the rise in labor productivity in sectors such as information technology that is dependent on skilled labor. Growth of services such as hotels holds a large potential for employment generation. IT enabled services, such as business process outsourcing have been growing rapidly in the recent past and will continue to rise. India is on the fast track of becoming an important economic force. According to Frank G.Wisner, former U.S ambassador to India and America international group external affairs wise president; ―the center of gravity is moving east wards to Asia, away from Europe and North America, and India will be the major force in globalization.‖ With this backdrop paper attempts to highlight the role of service sector in growth of Indian economy.
* Professor Kamla Lotia Sanatan Dharam College, Daresi Ludhiana **Faculty Guru Nanak Institute Of Management &Technology (GNIMT) Gujjarkhan Campus, Model Town, Ludhiana. ***Faculty Quest Infosys, Ludhiana.
The rise in service sector. With the integration of Indian Economy with the global network many new sectors has grown and has taken an edge over the traditional sectors of Indian Economy.01% in 1990-91 and 1998-99 respectively. the industrial sector’s share inGDP has declined from 25.5% in 1991-2000 up from 4. The process of globalization. Faced with stiffening competition. In fact. which accounts for more than half of India’s Gross Domestic Product (GDP). which is seen to be world’s ―mega-trend‖. community services and trade (distribution) services are among the fastest growing sectors contributing to one third of the total output of services in 2000.8% since 1994. average 5. with the growth rate of 7. increasingly demanding customers. Economic liberalization and gradual opening up the world have boosted growth and lifted millions of people out of poverty. the Indian Economy has posted an excellent average GDP growth of 6.16% in1998-99. Many factors are behind their robust. over the next 15 years. providing employment to 23% of the work force. In Asia. every country has to face the challenge in its specific context and environment.69% in 1990-91 to 51. It has largest share in the GDP. Performance of the Indian Economy in 2004-05. airlines. hotels and restaurants. especially China and India are expected to be the focal drivers of this global economic boom during the first quarter of 21st century. financial services. and in some markets slowing growth.7% per year. Emerging Services and Indian Economy:Growth in the Indian Economy has steadily increased since 1979. The service sector’s share has grown from 43. is likely to be future strengthened with projected 80% global economy as compared to year 2000.38% to 22. is the fastest growing sector. service businesses around the world are trying to boost their productivity. . The service sector of India. In contrast.5% in 1951-80.Full Length Paper India has successfully emerged as a strong led economy with potential to set the rule of the game in the new economic era. Contribution of service sector has been pivotal in realizing the overall economic growth. Business services including information technology (IT) and IT enabled services. In order to ensure the benefits of the economic integration process to be evenly distributed to he country men. high labour costs. communication services.
Some services have grown fast in terms of their share in GDP and also in terms of their share in trade and FDI (e. In general. software and telecommunications services). from 32 % in 1990 to 22 % in 2003.44%. Growth trends in some of emerging services areas are as under: In line with the global trend.26% to 7.22% to11. Further.9% in 2003-04. The agricultural sector has fallen from 30. with no corresponding growth in the share of manufacturing sector.61% in these years. health and education) while there are some services that have in fact witnessed a negative growth and also a low share in international transactions. it is found that growth pattern in the service sector has not been uniform across all services in India. And second. in spite of the rising share of services in GDP and trade. has been picked up by the service sector while manufacturing sector's share has remained more or less the same. restaurants increased from 12. The share of construction has remained nearly the same during the period while that of financing. real estate and business services has risen from 10.g. there has not been a corresponding rise in the share of services in total employment. though the growth of service sector in India is in line with the global trends. But there are some services. services trade has also grown at the same rate as goods trade over the 1990s (i. the entire decline in the share of agriculture sector in GDP. . has raised doubts about its sustainability in the long run. So the fact is that the service sector now accounts more than half the GDP probably marks a watershed in evolution of Indian Economy. i. hotels..g.. The share of transport storage and communication has grown from 5. insurance.93% to 26. about 6. In the trade mode.e.83% in the respective years.68% in 1998-99.52% in199091 to 15. However. the share of trade.e. The average growth rate in service sector during 2004-2005 was 8. First. such a trend is mainly experienced by high-income countries and not by developing countries. service sector in India has also grown rapidly in the last decade. there are two unique characteristics of India's service sector growth. Its growth has in fact been higher than the growth in agriculture and manufacturing sector.. It now contributes around 51 percent of GDP. This jobless growth of India's service sector. which have grown fast but have not been able to improve their share in international transactions (e.accounting for 48% in 2000 up from 15% in1950.6% as compared to 8. Within the service sector.5 per cent) and its share in total trade has reached around 24 per cent..
.. those that do not essentially require this though it may be useful. Conceptualisation of Services The earliest attempt to define services was made by Hill (1977 pp336) who argues that "goods and services belong in different logical categories. e.. Consequently. Mobile user and immobile provider. and second. it is important to first conceptualise services and discuss in what respect they differ from goods. the pace of reforms and their impact lacks uniformity across sectors. haircuts. e.One of the probable reasons for this lopsided growth in services is the fact that reforms in India at the sectoral level have evolved in an ad-hoc way rather than as part of a coherent overall strategy.g. . hospital services Mobile user and mobile provider. etc. But subsequent to this conceptualisation there have been many studies that point out that Hill's definition simply relates to contact at the factor or at the product level services and that there exists a range of services which do permit a separation (in space as well as in time) of the location of production and consumption. shifting labour to the construction site in other country.g. What is the Pattern of Growth in Services? Before we examine the pattern of growth in India's service sector. first. Though there exists an overall industrial policy and agricultural policy in India. Services that require essential physical proximity have been further categorised into three groups that are: Mobile provider and immobile user." He focussed on the fact that producers cannot accumulate stock or inventory of services. lectures.g. there is no integrated service policy. those that necessarily require the physical proximity of the user and the provider. This makes it essential for the user and the provider of the service to interact. so that service trade may take place either Services can be divided into two categories. stressing that services must be consumed as they are produced unlike the goods that can be produced and then stored. e.
to a large extent. contribution of services to GDP in the period 2001-2004. agriculture sector has grown at an average rate of 1. During 1980s. 6.9 per cent per annum. the service sector has grown on an average by 7.2%.9% and 3. Indonesia and China. e. in the case of services the distinction vanishes as factor mobility and trade in services are two integral aspects of service transaction . 1..5% . mining or agriculture'.9%. However. Corresponding growth rates in service sector has been 3. many studies adopt a broader and simpler definition of services that help in distinguishing services from goods. Consequently.2% respectively.It was pointed out that services can be: (1) complementary to trade in goods. 4. In the last ten years (1994-2004). on the rapid growth of its service sector. However. The service sector in India witnessed a phenomenal growth in the decade of 1990s. has been more than 60 per cent per annum. studies have put forward alternative definitions and classification schemes depending on the purpose of their study. while during 1990s the growth rate increased to 7.8% while manufacturing sector has grown at the rate of 7.5 %.Services for which physical proximity is inessential: The long distance services. All these characteristics have implications for how trade can occur. we find that in the same period in countries like Thailand.2 per cent per annum [as seen in figure 1]. (2) substitute for trade in goods. However. banking and insurance. In contrast to this. this growth in the service sector has not been uniform. Other associated characteristics of services that need to be noted are services are heterogeneous and growth in services. its output grew at the rate of 6.6 per cent per annum. are on a rise due to technical progress. (3) unrelated to goods.g. The emergence of India as one of the fastest growing economies in the world in the 1990s can be attributed. unlike in the case of goods where factor mobility and trade are distinct phenomena.5 per cent per annum. Alternatively. Thus.6% and 12. ahead of agriculture with growth of 3 per cent per annum and manufacturing sector with growth of 5. The growth of output in the service sector in the 1990s has been much higher than the growth of output in agriculture or industry. One such broad definition of services is: 'services form a diverse group of economic activities not directly associated with the manufacture of goods. the basic characteristics of services on which most of the classifications are based are: non-transferability and non-storability.
5 1990’s 7.9 6.4 6.6 7 2.7 6.9 10.9 13. In the 1990s.0 13. business services has been one of the fastest growing services in the 1980s closely followed by banking and insurance.3 2. Most of the developing countries witness a lower growth rate in the service sector as compared to the manufacturing sector. dwellings and real estate.3 9.7 19.8 5.1 11. there is a fall in the growth rates of railways.6 12.9%. Average Sectoral Growth Rate (1994 to 2004) Source:CSO (Central statistical Organisation) A closer scrutiny of India's service sector reveals that amongst services. but while the growth in banking has increased growth in insurance sector has slowed down in the 1990s. are found to be communication services (with average growth of around 13.3 6.6 %) and hotels and restaurants (with average growth of around 9 %). Average Annual Growth Rates in Services Sub Sectors Trade (wholesale and retail trade) Hotels and restaurants Transport Storage Communications Banking Insurance Business Services Legal Services Public Administration and Defence Personal Services Community Services 1980’s 5. legal services and public administration and defence in the 1990s.4 . However.5 8. apart from business services in the 1990s. Higher growth rate in the service sector is therefore a unique feature witnessed by India.8 6 5 8.7 6. we find that a similar trend continues for business services. which grows by almost 20 percent. The prime drivers of growth in services.and 8.5 6.9 2.
The most important service in terms of its share in GDP in the last decade has been wholesale and retail trade. we find that business services and communications have experienced the maximum growth in the 1990s. insurance (11%). Further It was found that increase in the share of services in GDP has not been t`he same across the board for different services in India compares share of different sectors in GDP in the last ten years. Community services (which include education and health) on the other hand.e.1 Share in GDP A striking feature of India's growth performance is that in the four decade period.Other Services 5.4%. but have in 2002-03 we find that the contributions changed. High share of services in GDP is a unique feature of the Indian economy as in other developing countries decline in agricultural sector's share has been followed by growth in manufacturing sector's share and the shift towards services sector has occurred only in the final stages of growth. 1950 to 1990. the contribution of service sector to the growth rate of GDP was nearly 60 per cent in contrast to 54 per cent in middle income countries. Other services that have witnessed a fall in their shares in 2002-03 are railways. 1993-94 and 2002-03. But this growth in share of GDP differs for different services.3 7. sectoral community services (6. but their share in GDP is still quite low.. services sector has grown in importance as compared to other sectors in terms of its contribution to GDP and also its growth rates since 1990s. have improved their share in GDP and also their growth . 43 per cent in least developed countries and 34 per cent in China. i. real estate and dwellings. while industry and services have gained equally. But share of insurance has declined to 7%. What emerges from the above trends is that. agriculture's share in GDP has declined by about 25 percentage points. The share of industry has stabilised since 1990 and consequently the entire subsequent decline in agriculture has been picked up by the services sector During the 1990s. The most important services in terms of their share in GDP in early 1990s were trade (12%). Share of trade has increased to 14% and community services to 8.5%). But in terms of growth.
export and software industry data indicate that the growth was mainly on account of the IT sector. In community services. Despite being the fastest growing sector. the contribution of banking to services sector growth was larger than that of the communications sector. in the 1980s .10 -and 1990s). In the banking sector. this was due to both education . the growth path for industry. Communication services. respectively. made a significant contribution to services growth. Overall. Growth was most rapid in the NBFIs (which grew by 24 percent in the 1980s and 19 percent in the 1990s). Fast Growers Based on the above criterion. but the trend shifted upwards in the 1980s and then perhaps again in the 1990s. but experienced a pick up in growth in the latter part of the decade. fast growers were as follows: Business services (including IT) was the fastest growing sector in the 1990s. has been flat over the past two decades. the growth path was more or less flat. growth rates were similar to the past trend A. growth jumped from about 7 percent over the period 1950–80. The growth in communication was mostly due to telecom. Though disaggregated data for this category are not available. The acceleration in services growth in the 1980s and 1990s was not uniform across different activities. while for other subsectors. Through the 1970s.Growth trends in some of the emerging service areas are as under: The data on annual growth rate over the past fifty years suggest a structural break in growth in services starting in 1980. particularly IT activity. to 12 percent in the 1980s. By contrast.This segment is expected to continue growing at a very high rate and is likely to contribute more significantly to services growth in the future. It has registered growth of 14 percent a year during the 1990s. which accounts for 80 percent of output. and 13 percent in the 1990s. Some subsectors grew at a much faster rate than in the past. with growth averaging nearly 20 percent a year. business services. which exhibited a declining trend between 1954–80. was growing off a low base and its contribution to the services sector and GDP growth was quite modest in the 1990s. Community services and hotels and restaurants increased at the trend growth rate through the early 1990s. followed by growth in the banks (by10 percent and 9 percent.
Gordon and Gupta (2004) attempts to find out whether India is an outlier in this case by using . a forceful case is put forward that services can become the major driving force of economic growth. This argument becomes stronger since economic theory suggests that a decline in the share of agriculture sector and manufacturing sector is a phenomenon that is generally associated with the growth process of a high-income economy and not a developing country. In short. and accelerated further to about 7 percent in the 1990s—just below the threshold for fast growers. It has been argued that income from the service sector is growing much in excess of the demand generated for services by the commodity sector and since income might grow faster than employment in the organised services. Though. but remained below the growth in most other services activities. Growth spiked in response to the Fifth Pay Commission awards to government employees in the late 1990s. Can India's Service Sector Sustain its Growth? One of the critical issues that have been discussed is the role played by services in the growth process. and storage grew more or less at the same rate in the 1980s and 1990s as in previous decades. To test the issue of sustainability of service-led growth in India. The other sub-sectors such as transport. but this did not substantially increase average sector growth for the decade as a whole. respectively) growing at an average rate of 8 percent in 1990s. therefore service-led growth can have serious implications for inflation. higher than in previous decades. The rate of growth of public administration and defence in the 1990s averaged 6 percent. The growth rate of personal services jumped to 5 percent in the 1990s. it is argued that this growth is not sustainable in the long run. the growth rate of distribution services (the largest service sub sector in India). which was similar to the growth experienced in previous decades. income distribution and balance of payments. Trend Growers Among the trend growers. averaged about 6 percent in the 1980s.and health services (70 percent and 23 percent of value added. dwellings. B.
it is crucial to note that the structural change does not necessarily imply that services become more important in final consumption. We now turn to the issue of trade in services and particularly to what explains trade in services. closer to that of an upper middle income country. they find that in 1990. i. However. In short. . the countries with higher per capita income also have a larger share of services in GDP. the current literature emphasises that the 'service economy' is structurally different from economic system from the previous era of mass industrial production. then by 2010. But. i. However. Increased expenditure on producer services also enhances the efficiency of production by allowing higher level of specialisation in production. relative to GDP. as a result of rapid growth of services in 1990s. In this regard. share of India's service sector in GDP was very close to the average share predicted by the linear relationship. from the literature it can be derived that services are becoming more and more crucial to the growth process of an economy. they argue that if different sectors in India grow at the average growth rates experienced in 1996-2000. They can not only sustain their own growth process but can also improve the growth rate of manufacturing sector by improving the efficiency of production.cross-country data on sectoral shares in GDP and fitting a trend line. they do not find India to be an outlier at present. the study estimates the impact of higher use of services input on productivity growth of manufacturing sector. Therefore growth in service sector will induce growth in other sectors The issue of sustainability of services growth. the share of services would increase to 58 percent. Rather.e. Thus. whether the lack of rise in the share of manufacturing sector and the corresponding shift to services is sustainable or not. But in spite of this.. This would bring size of India's services sector. It was found that the share of service sector in GDP is associated positively with per capita income. In case of India. by 2001. even though India would still belong to the low income group. They construct a multilateral total factor productivity index for 41 major industry groups for the period 1980-81 to 1999-00..e. services become ever more crucial to co-ordinate and control production processes of differentiated consumer products that are subject to economies of scale. India's share of services moved above the average share by as much as 5 percentage points.
The remaining sectors grew at a constant or trend growth rate. leading to a decline in their relative prices. and this has led to the services share in output being relatively large in India compared with other countries at similar levels of development. In the 1990s. Significant productivity gains appear to have occurred in the faster growing sectors. As a result. Nevertheless. So there is considerable scope for further rapid growth in India’s service economy. the services sector in India has grown faster than agriculture and industry. That Indian services exports have strong future growth prospects is well known. and community services (education and health). Admittedly the employment data suffer from limitations. . at least in the 1990s. The acceleration in growth of the services sector in India in the 1990s was due to fast growth in communications. it is imperative that the industrial and agricultural sectors also grow rapidly. It shows that in common with the experience of many other countries. Nonetheless. Also important.Conclusion This paper studies the growth of the services sector in India. The relatively jobless nature of growth in India’s services sector further underscores this need. have been factors such as economic reforms and the growth in foreign demand for services exports. services growth was particularly strong. banking services. the share of services in GDP has increased over time. business services (IT). It is shown that factors such as high income elasticity of demand and increased input usage of services by other sectors have played an important part in elevating services growth. but we also find that there is considerable scope for further rapid growth in other segments provided that deregulation of the services sector continues. unlike the experience of many countries where productivity growth in the service economy has tended to lag behind that of other sectors. it appears that the Indian services sector has been characterized as experiencing increasing labour productivity. What is also striking about India’s growth experience is that the services sector does not appear to have created many jobs.
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