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.

As of 2018, 31.45 per cent of India’s employed population is working in the services sector.

Market Size

The services sector is a key driver of India’s economic growth. The sector contributed 55.39 per cent to India’s Gross Value Added at current price in FY20*. Services sector’s GVA grew at a CAGR of 1.45 per cent to US$ 1,064.8 billion in FY20 from US$ 1,005 billion in FY16. Net export estimate in FY20 from services stood at US$ 214.14 billion, while import was at US$ 131.41 billion in FY20.

Nikkei India Services Purchasing Managers' Index (PMI) stood at 14.6 in May 2020, indicating a contraction as COVID-19 led shutdown impaired businesses.

Investments

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

• 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 per cent 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.
• In February 2020, Novartis launched Biome India, a digital innovation hub, in Hyderabad, its first such centre in Asia and the fourth globally.
• Indian healthcare companies are entering into mergers and acquisition (M&A) with domestic and foreign companies to drive growth and gain new markets.

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:

• 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 two per cent.
• Government of India has been working to remove many trade barriers to services, for which it tabled a draft legal text on Trade Facilitation in Services to the WTO in 2017.

Achievements

Following are the achievements of the Government in the past four years:

• India’s rank jumped to 22 in 2019 from 137 in 2014 on World Bank’s Ease of doing business - Getting Electricity ranking.
• Ministry of Tourism sanctioned 18 projects covering all the Northeast States for Rs 1,456 crore (US$ 211.35 million) for development and promotion of tourism in the region under Swadesh Drashan and PRASHAD schemes.

• A total of 11 projects worth Rs 824.80 crore (US$ 127.98 million) were sanctioned under the Swadesh Darshan scheme. During 2019-20, an additional fund Rs 1,854.67 crore (US$ 269.22 million) was sanctioned for new projects under this scheme.
• Statue of Sardar Vallabhbhai Patel, also known as ‘Statue of Unity’, was inaugurated in October 2018 and the total revenue generated till November 2019 stood at Rs 82.51 crore (US$ 11.81 million).
• IT-BPM industry’s revenue was estimated at around US$ 191 billion in FY20 with a growth rate of 7.7 per cent.

Road Ahead

Services sector growth is governed by domestic and global factors. The Indian facilities management market is expected to grow at 17 per cent 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 per cent 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 in April 2020, Rs 1 = US$ 0.013123

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.