Service Sector in India Meaning, Evolution, Growth

Table of Contents:-

• Meaning of Service Sector
• Evolution of the Service Sector
• Growth of the Service Sector in India

The service sector in India plays a significant role in the country’s economy. It includes a wide range of industries, including banking, tourism services, healthcare, telecommunications, and information technology. The service sector has experienced remarkable growth over the years and has become a major contributor to India’s GDP.

Meaning of Service Sector

The service industry forms the backbone of the social and economic development of a region. It has emerged as the largest and fastest-growing sector in the world economy, making higher contributions to global output and employment. Its growth rate has been higher than that of the manufacturing and agriculture sectors. It is the largest and most dynamic part of the Indian economy both in terms of employment potential and contribution to national income. It covers a wide range of activities, such as transportation, trading, financial, real estate, communication and business services, as well as community, social and personal services. The service sector is an essential aspect of the economy that produces intangible goods. It consists of services such as messenger services, transportation and warehousing. Jobs in this sector produce services rather than goods with examples being teaching and nursing.

Services hold immense potential to accelerate the growth of an economy and enhance the overall welfare of individuals. They offer numerous business opportunities to the investors. They can generate substantial economic employment opportunities and increase per capita income. Without them, the Indian economy would not have acquired a solid and dominating place on the world platform.

Evolution of the Service Sector

The service sector has evolved through different stages viz., pre-industrial stage, industrial stage and post-industrial stage. While in the pre-industrial stage, service was restricted only to households, the industrial stage was characterised by the dominance of factories and manufacturing processes. Hence the service sector has started being recognised in the post-industrial stage encompassing rapid growth in transportation, utilities, banking, real estate, insurance and higher education.

The various stages through which the service sector has evolved are as follows:

1. Pre-Industrial Stage
2. Industrial Stage
3. Post-Industrial Society

1) Pre-Industrial Stage

The essence of life revolved around the concept of a game against nature. Working with muscle power and tradition, the labour force had been engaged in mining, agriculture, and fishing. Life was conditioned by the elements, such as the weather, the quality of the soil, and the availability of water The rhythm of life was shaped by nature, and the pace of work varied with the seasons. Productivity has been low and bears little evidence of technology. Social life revolves around the extended household, and this combination of low productivity and a large population results in high rates of underemployment (workers not fully utilised). Many seek positions in the service industry, particularly those pertaining to personal or household assistance. Pre-industrial societies are agrarian and structured around routine, tradition and authority.

2) Industrial Stage

The timeframe spanning the 18th and 19th centuries holds significance as the era of the Industrial Revolution on a global scale. There were many inventions, technological breakthroughs, new transportation modes, and scientific discoveries that took place during this period, especially in European countries. The predominant activity in an industrial society revolved around the production of goods. The focus of attention was on achieving greater results with fewer resources. Energy and machines multiply the output per labour hour and structure the nature of work.

The accomplishment of work takes place within the factory’s artificial setting, with individuals supervising the operation of machines. In today’s rapid-paced environment, life’s rhythm emulates that of machines, constrained by strict working hours and the presence of time clocks. The standard of living is determined by the quantity of goods. However, it is important to note that the complexity of coordinating the production and distribution of goods results in the creation of large bureaucratic and hierarchic organisations. The design of these organizations incorporates designated roles for their members, and their operations typically adopt an impersonal approach, regarding individuals as commodities.

3) Post-Industrial Society

In an industrial society, the standard of living finds its primary determination in the abundance of goods, whereas, in a post-industrial society, the focus shifts to the quality of life, assessed through services like health, education, and recreation. The central figure is the professional individual because information is a critical resource rather than energy or physical strength.

Post the 19th century, an era characterized by the emergence of substantial industries, the anticipation of income growth led individuals to adopt more “materialistic” preferences, prompting an upsurge in demands for services within the health, education, and entertainment sectors.

Some researchers stated –

According to Bell, “The transformation from an industrial to a post-industrial society occurs in many ways”.

i) There is a natural development of services, such as transportation and utilities, to support industrial development. The incorporation of labour-saving devices into production operations results in increased workforce participation in non-manufacturing functions, including maintenance and repair.

ii) Growth of the population and mass consumption of goods increase wholesale and retail trade, along with banking, real estate, and insurance.

iii) As income increases, the proportion spent on the necessities of food and home decreases, and the remainder creates a demand for durables and then for services.

According to Ernst Engel, a Prussian statistician of the 19th century, “As family incomes increase, the percentage spent on food and durables drops while consumption of services that reflect a desire for a more enriched life increases correspondingly”. Analogous to Maslow need hierarchy theory, the phenomenon showcases that after securing fundamental sustenance and shelter, individuals strive for tangible acquisition and eventually, self-growth.

Higher education becomes the condition for entry into a post-industrial society, which requires the professional and technical skills of its population. It also, claims that more services and social justice lead to a growth in government. Concerns for environmental protection require government intervention and illustrate the interdependent and global nature of post-industrial issues.

The table summarises the features that characterise the pre-industrial, industrial, and post-industrial stages of economic development.

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Growth of the Service Sector in India

Over the years, the service sector has witnessed a remarkable evolution in the type and quality of services offered to customers. Service providers have grown to realise that change is the only constant thing and if they do not evolve with the market, they risk losing market share to their competitors. Increasing competition in the service sector in India has made it necessary for service firms to grow from purely selling services to building lasting relationships with their customers.

To gain insight into the growth of India’s service sector and its implications for the economy, analyze the following points:

1. Services GDP
2. FDI in the Services Sector
3. State-Wise Comparison of Services
4. India’s Services Trade
5. Services Employment in India
6. Performance of Some Major Services

1) Services GDP

The survey reveals that the share of services in India’s GDP at factor cost (at current prices) increased from 33.5% in 1950-51 to 55.1% in 2010-11 and to 56.3% in 2011-12 as per Advance Estimates (AE). Taking construction into account, the Service Sector’s contribution expanded to 63.3% during 2010-11 and saw a subsequent rise to 64.4% in 2011-12. Projecting the employment figures, the survey says that while agriculture continues to be the primary employment-providing sector, the service sector (including constriction) is in second place.

According to the Employment and Unemployment Situation in India 2009-10 report by the National Sample Survey Organisation (NSSO), which analyzes usually working individuals in principal and subsidiary statuses, the employment distribution for every 1,000 people in rural India includes 679 in the agriculture sector, 241 in the service sector (including construction), and 80 in the industrial sector. In urban India, the corresponding figures are 75 in the agriculture sector, 683 in the service sector (including construction), and 242 in the industrial sector.

2) FDI in the Services Sector

FDI inflows into the service sector and the involvement of transnational corporations play a pivotal role in driving the growth of this sector. While the ambiguity in classifying various activities within the services sector continues. In 2011-12, FDI inflows to the services sector (top five sectors including construction) grew robustly at 57.62 per cent to U.S. $12.14 billion compared to the growth of overall FDI inflows at 33.6 per cent. However, in 2012-13 (April – November), overall FDI inflows fell by 433 per cent to U.S., $15.85 billion from US. $27.93 billion in the corresponding period of the previous year.

Following this trend, FDI inflows in the top five services also fell by 9.7 per cent to the US. $8.19 billion. Among them, while FDI inflows to the top four service sectors fell in the range of 14 to 97 per cent, FDI inflows to the hotel and tourism sector increased by a very high 328 per cent over the corresponding period in the last year.

3) State-Wise Comparison of Services

A comparison of the share of services in the Gross State Domestic Product (GSDP) of different States and Union Territories (UTS) in 2011-12 shows that the service sector is the dominant sector in most states of India. States and UTs such as Chandigarh, Kerala, Delhi, Mizoram, Tamil Nadu, West Bengal, Maharashtra, Nagaland, and Karnataka have higher than all-India shares. Chandigarh ranks first on the list, with a share of 85 per cent followed by Delhi with 81.8 per cent. Other than Arunachal Pradesh (33.8 percent), Sikkim (37.0 percent), and Chhattisgarh (36.7 percent), the share of services in the GSDP in all other States is more than 40 percent. In 2011-12, in tune with the general moderation in overall service growth, service growth rates in many States also moderated.

Certain states have consistently upheld impressive growth rates, led by Himachal Pradesh at a remarkable 17.3 per cent, closely followed by Bihar at 16.6 per cent. Among UTs with a high service share in GSDP, Delhi with 11.5 per cent. growth tops the list. The services revolution in India is becoming more widespread, with even the hitherto backward states piggy-backing on the good performance of this sector, the initial momentum seems to have slowed down for some North-Eastern States like Mizoram, Arunachal Pradesh, and Nagaland after the advantage of base effect is over.

4) India’s Services Trade

India’s share of service exports in the world exports of services, which increased from 0.6 per cent in 1990 to 1.0 in 2000 and further to 3.3 per cent in 2011, has been increasing faster than the share of merchandise exports in the world exports. The growth rates of  India’s service exports and the world show two distinct phases. The first phase lasted until 1996 when the growth rates of the two showed a scissor-like movement, and the second phase after 1996, when the growth of India’s service exports was more than that of the world in almost all the years excluding 2009. In this second phase, the former was much above the latter in upswings but almost converged with the latter during downswing.

The level of economic openness reflected by total trade including services as a percentage of GDP shows a higher degree of openness at 55.0 per cent in 2011-12 compared to 38.1 per cent in 2004-05. In 2011-12, the openness indicator, solely considering merchandise trade, stood at 43.2 per cent, a notable increase from the 28.3 per cent recorded in 2004-05.

5) Services Employment in India

The distribution of employment across sectors has undergone significant changes in the past two decades with the share of agriculture falling from 64.75 per cent in 1993-94 to 53.2 per cent in 2009-10 and of industries (excluding construction)  has also decreased from 12.43 per cent to 11.9 per cent. The shares of the services and construction sectors in employment experienced a notable increase during the same period. the services sector witnessed a rise from 19.70 per cent to 25.30 per cent and 3.12 per cent to 9.60 per cent respectively.

According to the National Sample Survey Office’s (NSSO) report on the Employment and Unemployment Situation in India 2009-10, the data based on usually working individuals in principal and subsidiary statuses reveals that for every 1,000 people employed in rural India, 679 individuals find employment in the agriculture sector, 241 in the services sector (including construction), and 80 in the industrial sector.

The agriculture sector in urban India employs 75 individuals, while the service sector (including construction) provides employment for 683 people, and the industrial sector employs 242 individuals. Construction; trade, hotels, and restaurants; and public administration, education, and community services are the three major employment-providing service sectors. Research indicates that the proportion of tertiary employment share has strong upward slopes in all the income quintiles both in rural and urban areas with higher income quintiles having higher shares in each successive NSSO round. Thus tertiary employment growth is steadily moving from being an absorber of low-income labour to the provider of high-income jobs.

6) Performance of Some Major Services

The performance of the different services based on the other indicators shows that sectors like tourism, telecom, and railways have done well in 2011-12. Shipping and ports show poor performance reflecting the effects of the global economic slowdown. The performance and outlook for the different services sectors based on limited firm-level data, estimates and forecasts, show a mixed picture for the current year, though there are some grounds for optimism in the coming year.

This section takes an in-depth look at India’s vital commercial services, offering comprehensive insights into their role within the economy based on GDP, employment rates, export performance, and future possibilities. Avoiding repetition is a priority, especially in services addressed in other chapters like infrastructure, financial intermediation, and social sectors. The important services for India include trade, tourism services, shipping and port services, real estate services, business services including IT and IT enabled Services (ITeS), Research and Development (R&D) services, legal services, and accounting and audit services.

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