Services
The share of service sector in India’s GDP is expected to reach 62 per cent by FY 2020.

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: February, 2015

Introduction

The services sector with an around 57 per cent contribution to the gross domestic product (GDP), has made rapid strides in the last few years and emerged as the largest and fastest-growing sector of the economy. Besides being the dominant sector in India’s GDP, it has also contributed substantially to foreign investment flows, exports, and employment. India’s services sector covers a wide variety of activities that have different features and dimensions. They include trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, & business services, community, social and personal services and services associated with construction. Services in India are emerging as a prominent sector in terms of contribution to national and states’ incomes, trade flows, foreign direct investment (FDI) inflows, and employment.

The compound annual growth rate (CAGR) of services sector GDP was 8.5 per cent for the period 2000-01 to 2013-14.

As per the survey, in India, the growth of services-sector gross domestic product (GDP) has been higher than that of overall GDP between the FY01- FY14. Services constitute a major portion of India’s GDP with a 57 per cent share in GDP at factor cost (at current prices) in 2013-14, an increase of 6 per cent points over 2000-01.

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. 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.

Market Size

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.

The HSBC India Services PMI stood at 51.1 in November 2014 – a reading above 50 signals expansion.

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

The Indian services sector has attracted the highest amount of FDI equity inflows in the period April 2000-December 2014, amounting to about US$ 41,755.46 million which is about 18 per cent of the total foreign inflows, according to the Department of Industrial Policy and Promotion (DIPP).

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

  • Zomato has acquired Cibando, one of Italy’s largest restaurant search services. With this acquisition, the company has a presence in 20 countries. Zomato further aims to widen its international presence by entering 15 more countries in 2015.
  • The private security services industry in India is expected to register a growth of over 20 per cent over the next few years, doubling its market size to Rs 80,000 crore (US$ 12.94 billion) by 2020.
  • Snapdeal.com has acquired gifting recommendation technology platform Wishpicker.com. The acquisition will enable Snapdeal to further personalise user experience and drive conversions through intelligent recommendations.
  • The Government of India has awarded a contract worth Rs 1,370 crore (US$ 221.63 million) to Ricoh India Ltd and Telecommunications Consultants India Ltd (TCIL) to modernise 129,000 post offices through automation.
  • Global online food delivery marketplace Foodpanda has acquired TastyKhana in India. Now, Foodpanda will have a selection from over 2,500 restaurants in 10 cities.
  • Taxi service aggregator Ola plans to scale up operations to 100 cities from 19 currently. The company, which is looking at small towns for growth, also plans to invest in driver eco-system, such as training centres and technology upgrade.

Government Initiatives

Strong and consistent emphasis on self-reliance in its economic development programmes over the years by the Government of India has also enabled India to build up a big and versatile cadre of professionals. They now have expertise and skills across a vast and wide-ranging spectrum of disciplines, such health care, tourism, education, engineering, communications, transportation, information technology, banking, finance, management, among others.

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

  • The Government of India plans to take mobile network by December 2016 to nearly 10 per cent of Indian villages that are still unconnected.
  • The Reserve Bank of India (RBI) has allowed third-party white label automated teller machines (ATM) to accept international cards, including international prepaid cards, and has also allowed white label ATMs to tie up with any commercial bank for cash supply.
  • The Government of India has launched tourist visa on arrival (TVoA) enabled by electronic travel authorisation (ETA) to 43 countries.
  • India and Japan held a Joint Working Group conference for Comprehensive Cooperation Framework for Information and Communication Technologies (ICT). India also offered Japan to manufacture ICT equipment in India.
  • Citizens of India is expected to get a minimum of 2 megabits per second (MBPS) Wi-Fi speed at every government owned service point such as railways stations, airports, bus stops, hospitals and all government departments that deal with the public on a daily basis.

Road Ahead

Services sector growth is governed by both domestic and global factors. The sector is expected to perform well in FY16. Some improvement in global growth and recovery in industrial growth will drive the services sector to grow 7.4 per cent in FY16 (FY15: 7.3 per cent). The performance of trade, hotels and restaurants, and transport, storage and communication sectors are expected to improve in FY16. Loss of growth momentum in commodity-producing sectors had adversely impacted transport and storage sectors over the past two years. The financing, insurance, real estate and business services sectors are also expected to continue their good run in FY16. The growth performance of the community, social and personal services sector is directly linked with government expenditure and we believe that the government will remain committed to fiscal consolidation in FY16.

Exchange Rate Used: INR 1 = US$ 0.016 as on February 26, 2015

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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