Service Sector Contribution to India's GDP

Service Sector Contribution to India's GDP

Last updated: May, 2023
Service Sector Contribution to India's GDP

India's booming service industry is a remarkable illustration of how modern economic growth models can outperform traditionally established ones. India has the fastest-growing service sector which is contributing over 50% to the country’s GDP. This sector has witnessed 10.8% growth in the first half of 2021-22 and as per first advance estimates, the gross value added (GVA) in the service sector is estimated to grow at 9.1% in FY23. The growth of India’s service sector has drawn global attention because, unlike other countries where economic growth has led to a shift from agriculture to industries, India has registered a shift from agriculture to the service sector. The growth of the service sector has led to the development of various industries such as IT, healthcare, tourism, transport, and finance, among all others.

The remarkable growth of the service sector has been supported by several factors such as the increasing number of educated and skilled workers, the growth of the middle-class population, and the emergence of the digital economy. The IT and IT-enabled services (ITeS) industry is one of the most significant contributors to the service sector in India. The revenue of the ITeS sector reached 3.1 trillion with a growth of 13-15% across all three key segments- customer relationship management (CRM), knowledge, and transactions. The growth of this fiscal year (2023) will be supported by the sharpening focus of organisations on digital transformation to enhance customer experience. It will also get support from the integration of emerging technologies across different business verticals to improve customer experience and value delivery support. These factors have led to the exponential growth of the Indian service industry globally. The availability of the country’s skilled workforce, favourable business environment, and low-cost operations have attracted several multinational companies to set up their operations in India.

Likewise, the healthcare industry in India has also witnessed significant growth of 10.6% contribution to the labour force during the fourth quarter of 2021. The female workforce in the health sector constituted around 52% of the total workforce. India’s healthcare industry is driven by several factors such as the increasing demand for quality healthcare services, the rising middle-class population, and the emergence of medical tourism.

Another important contributor to the service sector is the tourism industry. India has a rich cultural heritage and several tourist destinations which attract millions of tourists every year. India's total travel & tourism contribution to global GDP in 2023 will be US$ 457.1 billion and India is expected to reach third position after China and USA. There have been several initiatives by the Indian government to promote tourism in the country such as Dekho Apna Desh in 2020, the introduction of e-tourists and e-medical visas, promotion of destinations through the incredible India campaign, organising road shows to promote travel destinations and various handmade products of the country, etc. Apart from all these services, the finance industry also plays an important role in contributing towards the growth of the service sector in India. The emergence of digital banking and various initiatives by the government of India has also played a significant role in promoting the concept of financial inclusion in the country.

Services Sectors in India

India is a rapidly developing country with a diverse and dynamic economy. The country is known for its thriving service sector, which contributes significantly to the nation’s GDP. The service sector in India is characterized by a broad range of industries which offer various services to individuals, businesses, and the government. These sectors are critical to the growth and development of the nation and provide employment opportunities to millions of people. There are various sub-sectors in the Indian services industry. Below are some of the major services sectors which demonstrate strong potential for future growth.

  • IT-BPM: The IT-BPM sector holds the potential to grow between 10-15% per annum. The IT and fintech segments provide over US$ 155 billion in gross value to the economy annually. In the long run, the IT and ITeS segments require significant upskilling to move beyond a low-cost & low value-added service provider to a high-value-adding partner. The IT and business services market will grow at a CAGR of 8.3% between 2021-26, reaching a US$ 20.5 billion valuation by the end of 2026. This segment has the potential to leverage the skill sets to provide various fintech solutions to global financial customers. Examples: financial risk management services, insurance, natural disaster modelling and underwriting.
  • Healthcare: The current contribution of the healthcare industry is over US$ 110 billion and is expected to reach US$ 280 billion by 2020. The health sector contributed 10.6% to the total employment across various industries during 2021-22 (till September 27, 2022). This sector is growing at a CAGR of 16% and the total public and private spending on healthcare is 4% of GDP. To boost the growth of the healthcare sector, the government has launched various initiatives such as Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB PM-JAY) to provide financial risk protection against catastrophic health expenditure. It helps to the prevention of catastrophic expenditures on medical treatment which forces approximately 6 crore people into poverty each year.
  • Tourism: This industry is one of the largest employers of women’s workforce. By 2028, the contribution from the tourism industry to India’s GDP is expected to be US$ 512 billion and around 53 million additions to the jobs market by 2029. Improved customer experience is one of the key factors to attract significant revenues and contribute to the growth of these industries. In this context, various government initiatives such as e-Visas, better infrastructure facilities, safety, connectivity, etc. are supporting elements to improve the growth of the tourism industry.
  • Space Sector: Indian space services possess a distinct advantage over its global rivals owing to their demonstrated experience in a variety of launch technologies. The government is actively proving its ability with public-private participation to ensure the flow of capital as well as to strengthen competencies in the space segment. It has the potential to capture 9% of the global market share by 2030. According to a report by EY, the Indian space economy is projected to grow to US$ 13 billion by 2025 at a CAGR of 6%.
  • Financial Service Sector: The financial services sector has been identified as one of the important service sectors by government authorities. It helps to enable on-shoring of the India-related financial services, a part of which is currently being rendered from global financial centres. This would encourage the export of financial services and high-skilled jobs. In the past years, the growth of the financial sector remained stagnant and created the need to render these services from global financial centres. The involvement of technology with financial services has contributed towards the growth of this sector in India. India is currently among one of the fastest-growing fintech markets in the world and renders services across the globe. There are more than 2,000 DPIIT-recognised fintech start-ups in India which are striving towards comparatively more contribution to the nation’s GDP. By 2023, the fintech sector in India is expected to be US$ 1 trillion in Assets Under Management (AUM) and US$ 200 billion in revenue. This sector is estimated to reach US$ 150 billion by 2025. India took the lead with the fintech adoption rate of 87%, substantially higher than the world average of 64%. The government has initiated various schemes to boost the financial service sector such as Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2014 with the objective of ensuring comprehensive financial inclusion of all the households in the country by providing universal access to banking facilities. This scheme also ensured that every individual in the country has access to bank accounts without any minimum limit and hence contributed towards adding more people to enjoy the financial services.