Services Sector in India

Introduction

The services sector is not only the dominant sector in India’s GDP, but has also attracted significant foreign investment, has contributed significantly to export and has provided large-scale employment. India’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction.

Market Size

The services sector is a key driver of India’s economic growth. The sector contributed 55.39% to India’s Gross Value Added at current price in FY20*. Services sector’s GVA grew at a CAGR of 1.45% to US$ 1,064.8 billion in FY20 from US$ 1,005 billion in FY16. According to RBI data, in April 2020, service exports stood at Rs 1,254.09 billion (US$ 17.06 billion) while imports stood at Rs 709.07 billion (US$ 9.65 billion).

Nikkei India Services Purchasing Managers' Index (PMI) stood at 41.8 in August 2020, reflecting the highest reading since March 2020 before the coronavirus pandemic accelerated; however, it is still below the neutral mark, indicating a fifth consecutive decline in business activity in the private sector.

Industry developments

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

• The Indian healthcare industry is expected to shift digitally enabled remote consultations via teleconsultation. The telemedicine market in India is expected to increase at a CAGR of 31% from 2020 to 2025.
• In August 2020, Japan committed ~Rs 35 billion (US$ 476.11 million) under the Official Development Assistance for the health sector to fight the COVID-19 crisis in India and improve resilience of India’s health systems against infectious diseases.
• In September 2020, LinkedIn and NSDC collaborated to accelerate digital skills training for the Indian youth.
• In September 2020, NASSCOM FutureSkills and Microsoft collaborated to launch a nationwide AI skilling initiative to train 1 million students in AI by 2021.
• In September 2020, Byju's acquires 3D virtual lab startup LabInApp to strengthen its edtech presence.
• Services sector is the largest recipient of FDI in India with inflow of US$ 82 billion between April 2000 and March 2020.
• In June 2020, Jio Platforms Ltd. sold 22.38% stake worth Rs 1.04 trillion (US$ 14.75 billion) to ten global investors in a span of eight weeks under separate deals, involving Facebook, Silver Lake, Vista, General Atlantic, Mubadala, Abu Dhabi Investment Authority (ADIA), TPG Capital and L. Catterton. This is the largest continuous fundraise by any company in the world.

Government Initiatives

The Government of India recognises the importance of promoting growth in services sector and provides several incentives across a wide variety of sectors like health care, tourism, education, engineering, communications, transportation, information technology, banking, finance and management among others.

The Government of India has adopted few initiatives in the recent past, some of these are as follows:

• In September 2020, the government announced that it may infuse Rs 200 billion (US$ 2.72 billion) in public sector banks through recapitalisation of bonds
• In the next five years, the Ministry of Electronics and Information Technology is working to increase the contribution of the digital economy to 20% of GDP. The government is working to build cloud-based infrastructure for collaborative networks that can be used for the creation of innovative solutions by AI entrepreneurs and startups.
• On Independence Day 2020, Prime Minister Mr Narendra Modi announced the National Digital Health Mission (NDHM) to provide a unique health ID to every Indian and revolutionise the healthcare industry by making it easily accessible to everyone in the country. The policy draft is under ‘public consultation’ until September 21, 2020.
• In September 2020, the Government of Tamil Nadu announced a new electronics & hardware manufacturing policy aligned with the old policy to increase the state's electronics output to US$ 100 billion by 2025. Under the policy, it aims to meet the requirement for incremental human resource by upskilling and training >100,000 people by 2024.
• The Cabinet Committee on Economic Affairs has given its approval for continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs for another year beyond 2019–20.
• Government of India has launched the National Broadband Mission with an aim to provide Broadband access to all villages by 2022.
• Under the Mid-Term Review of Foreign Trade Policy (2015–20), the Central Government increased incentives provided under Services Exports from India Scheme (SEIS) by 2%.

Road Ahead

Services sector growth is governed by domestic and global factors. The Indian facilities management market is expected to grow at 17% CAGR between 2015 and 2020 and surpass the US$ 19 billion mark supported by booming real estate, retail, and hospitality sectors.

By 2023, healthcare industry is expected to reach US$ 132 billion. India’s digital economy is estimated to reach US$ 1 trillion by 2025. By end of 2023, India’s IT and business services sector is expected to reach US$ 14.3 billion with 8% growth.

The implementation of the Goods and Services Tax (GST) has created a common national market and reduced the overall tax burden on goods. It is expected to reduce costs in the long run on account of availability of GST input credit, which will result in the reduction in prices of services.

Note: Conversion rate used for September 2020 is Rs 1 = US$ 0.01370

References: Media Reports, Press Releases, DPIIT publication, Press Information Bureau

Note: P - Provisional, * As per second advance estimates

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