Services
The growth in the services sector in India is expected to be around 5.6 per cent in FY 15.

We have been sourcing services and components out of India since 1998. On an average, we have grown the sourcing volume by about 10 per cent per year…

Wilfried Aulbur
Managing Director and CEO, Mercedes-Benz India

Service Sector in India

Updated: November, 2014

Introduction

The percentage of people in a country who are employed in services sector or tertiary sector jobs is a determinant of the economic development of that nation. The shift from primary and secondary activities to tertiary activities by the citizens of a country indicates that it is on the path of progress. India's services sector accounts for around 60 per cent of its gross domestic product (GDP) and has matured considerably during the last few years.

The growth in the services sector can be attributed mostly to the emergence of the Indian Information Technology (IT) and IT enabled Services (ITeS) sectors as well as e-commerce. The services sector in India comprises a wide range of activities such as transportation, logistics, financial, business process outsourcing services, healthcare, trading, and consultancies, among many others.

Furthermore, with the Government of India's liberal foreign direct investment (FDI) policies, the services sector has attracted the highest amount of foreign equity among all other sectors in the Indian economy.

Market Size

The Indian services sector has attracted the highest amount of FDI equity inflows in the period April 2000-September 2014, amounting to about US$ 40,684.98 million which is about 18 per cent of the total foreign inflows, according to the Department of Industrial Policy and Promotion (DIPP).

The HSBC Purchasing Managers Index (PMI) for services stood at 52.2 points in July 2014, expanding for the third month in a row.

According to the data provided by International Data Corporation (IDC), the total mobile services market revenue in India is expected to touch US$ 37 billion in 2017 growing at a compound annual growth rate (CAGR) of 5.2 percent.

The growth in the ITeS sector has resulted in increasing competition between the different brands in the e-commerce sector. As a result, it is expected that the e-commerce sector will generate close to 150,000 jobs within the next 2-3 years.

The logistics sector in India which was valued at US$ 101 billion in 2013 is expected to grow by 10 per cent per annum to reach US$ 136 billion by 2016, according to Mr R Dinesh, Chairman, CII Institute of Logistics Advisory Council and Joint Managing Director, TVS Sons Ltd.

Investments

Some of the developments and major investments by companies in the services sector in the recent past are as follows:

  • George Soros-backed Aspada Investment Co has invested US$ 2 million in New Delhi-based Allfresh Supply Management. Allfresh, a B2B business, operates across the entire fresh fruit value chain from farm extension services for small-hold farmers to postharvest controlled atmosphere supply.
  • Zomato has acquired Gastronauci, a Poland-based restaurant search service. This is Zomato's fourth acquisition in three months. Zomato is now present in 16 countries, and provides information for over 260,000 restaurants in these nations.
  • SIS Prosegur has acquired the cash management business of Danish major ISS for about Rs 150 crore (US$ 24.25 million) which will make it India's second largest cash management operator. SIS Prosegur operates in 320 cities across the country.
  • Deutsche Post DHL plans to test its e-commerce business model for the Asia-Pacific region in India and will invest more than €100 million (US$ 124.84 million) in the country over the next two years to create infrastructure for itself.
  • Ramco Systems Ltd has signed a five-year contract with the Asia division of Netherlands-based Koninklijke Vopak NV to integrate a part of its regional human resource functions into a single platform. Ramco's services will now be made available to over 700 Vopak employees across eight entities in Singapore, Indonesia, Vietnam, Australia and India.
  • Vodafone Group Plc plans to spend around US$ 1 billion to upgrade its network services and retail stores in India as it counts on surging data use to drive growth in the market. Vodafone has 169 million customers in India and posted Rs 376 billion (US$ 6.08 billion) in service revenue last year.

Government Initiatives

India plans to double India's exports of goods and services by the end of the 12th Five-Year Plan period, over the level achieved at the end of the 11th Five-Year Plan period. The long-term objective is to double India's share in global trade by the end of 2020 through adoption of appropriate strategies.

The government of India has adopted a few initiatives in the recent past. Some of these are as follows:

  • The Reserve Bank of India (RBI) has eased the guidelines for issue of shares or convertible debentures under the automatic route which will allow companies to issue equity shares to a resident outside India against any type of fund. The norms allow issuance of shares subject to conditions such as entry route, sectoral cap, pricing guidelines, and compliance with the applicable tax laws.
  • As part of Government's 'Look East Policy', Shipping Corporation of India (SCI) has started a fortnightly service to Myanmar. The service will cater to Mizoram and other north-eastern states using the Sittwe port in Myanmar located on the mouth of the Kaladan river.
  • The Government of India has signed the Free Trade Agreement (FTA) with the 10-member Association of Southeast Asian Nations (ASEAN). The move is expected to pave the way for freer movement of professionals and further open up opportunities for investments.

Trade between India and the 10-member bloc stood at about US$ 76 billion in 2012-13. Both sides aim to increase it to US$ 100 billion by 2015 and envisage lifting import tariffs on more than 80 per cent of traded products by 2016.

Road Ahead

India has the potential to build a US$ 100 billion software product industry by 2025 riding on its IT services market, according to Indian Software Product Industry Roundtable (iSPIRT).

Also, in the telecommunication sector, India is all set to emerge as a leading player in the virtual world by having 700 million internet users of the 4.7 billion global users by 2025, as per a Microsoft report.

Furthermore, with increase in standard of living, growing disposable income and demand for quality healthcare, sectors such as healthcare services and insurance are slated for some major growth.

Exchange Rate Used: INR 1 = US$ 0.016 as on November 27, 2014

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

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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