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Service Sector in India

November, 2013

Brief Overview

The services sector is a vital cog in the wheel of the Indian economy. The sector, accounting for 60 per cent of the gross domestic product (GDP), grew 5 per cent in the FY13.

The Indian service industry has emerged as one of the largest and fastest-growing sectors on the global landscape and hence has made substantial contribution towards global output and employment. Growing at faster pace as compared to agriculture and manufacturing sectors, Indian service segment comprises of wide range of activities, such as trading, transportation and communication, financial, real estate and business services, as well as community, social and personal services.

Key Statistics

  • The HSBC Markit services Purchasing Managers' Index (PMI), which gauges business activity from a survey of over 400 companies ranging from banks to hospitals, stood at 47.9 points in July 2013.
  • Indian service sector enjoyed foreign direct investment (FDI) inflows amounting to US$ 547 million during April-May 2013-14, according to the recent statistics released by the Department of Industrial Policy and Promotion (DIPP).
  • Services sector, including insurance and real estate, grew by 9.1 per cent in January-March quarter of 2013. The segment grew by 8.6 per cent in 2012-13. Community social and personal services expanded by 4 per cent in the fourth quarter of FY13 while they grew by 6.6 per cent in 2012-13. Trade, hotels, transport and communications segment grew at 6.2 per cent in the January-March quarter this year as against 5.1 per cent in the same period a year ago. The sector grew at 6.4 per cent in 2012-13.

Recent Investments/ Developments

  • In order to facilitate easier urgent travels to the UK, the UK Home Office has launched the same-day visa service in South India. The ‘super priority’ service, which has already been initiated in Delhi and Mumbai, is available to customers who apply for a six-months to a two-year multiple entry visit visa (excluding student visitors) who have previously travelled to the UK, the US, Australia, New Zealand, Canada or a Schengen country within the last five years. It is also available to visa applicants sponsored by companies which are members of the Business Express Programme.
  • In another bid to make things easier for passengers, Indian Railway Catering and Tourism Corporation (IRCTC) has launched a pilot project of ticket booking through non-internet based mobile phones with effect from 1st July 2013. If the pilot goes well, the new development will enable people using non-internet based mobile phones to easily access Railway ticketing services through SMS/IVRS/USSD. The facility is user-friendly, secure and also eco-friendly, as no print-out is required.
  • Tata Communications’ 100 per cent subsidiary Tata Communications Payment Solutions (TCPS) has launched India’s first white label ATM (WLA) at Chandrapada, a tier-V town near Mumbai. The WLA has been branded 'Indicash' by the company. TCPS already operates about 27, 000 ATMs for 37 banks in India.
  • E-commerce and internet are one of the fastest growing service sub-segments in the Indian economy. Finding the Indian e-commerce space lucrative enough, Amazon, the world’s largest online retail company, has entered the market with a promise of ensuring low prices for users and a better platform for sellers. India is the tenth market where Amazon has come up with a country-specific retail Web site.

While Amazon.in will introduce categories like mobile phones and cameras in its online store eventually, it has made available books, movies and TV shows for sale to its users.

Government Initiatives

Enterprise solutions provider SAP has launched three new applications in order to help Government bodies enhance their delivery mechanism. The three new applications -- Rakshak , TracOHealth and The 'Milk Co-operative' Experience, which have been conceived and executed by SAP Labs India, will facilitate better responsiveness, and improved preparedness, prevention, safety and security results in real-time basis. The applications are also aimed at reducing the difference between rural and urban platforms.

The Indian Government has also taken many policy initiatives to liberalise the FDI policy for the services sector. These include liberalising the policy on foreign investment for companies operating in the broadcasting sector, like increasing the foreign investment limit from 49 per cent to 74 per cent in teleports (setting up up-linking HUBs/teleports) and direct to home (DTH) and cable networks, and permitting foreign investment of up to 74 per cent in mobile TV. Foreign airlines have also been permitted to make investment up to 49 per cent in scheduled and non-scheduled air transport services.

A meeting of senior cabinet ministers chaired by Prime Minister Manmohan Singh has decided to hike FDI limit in the insurance sector to 49 per cent from the existing 26 per cent. The move is expected to ripe benefits soon, in terms of more foreign investments into the country.

Road Ahead

The services industry comprises of various industry sub-segments which are poised to mark immense growth in the years to come.

Industry body CII projects the growth rate for Indian insurance industry in 2013-14 at around 5 per cent. It also projects that 60 per cent of non-life insurance companies would record an average growth of more than 10 per cent. Increasing the FDI limit from 26 per cent to 49 per cent in the sector is being viewed as a major factor to push the insurance density in India.

Furthermore, Indian banking system has majorly underwent revamp and modernisation over a last few years. The new infrastructure adopted by the banking system is mainly comprised of information technology (IT) products and services.

Indian banking and securities companies will spend around US$ 422 billion on IT products and services in 2013. That will imply a 13 per cent rise from Rs 37,300 crore (US$ 5.72 billion) spent in 2012. IT services is the largest overall spending category at Rs 13,200 crore(US$ 2.02 billion) in 2013. This ensures that IT service providers lay a strong focus on the financial services sector, according to a study by research and analyst firm Gartner.

Exchange Rate Used: INR 1 = US$ 0.01534 as on August 22, 2013

References: Media Reports, Press Releases, DIPP publication, Press Information Bureau, Indian budget publication