Narayan Bhargava, Founder & Managing Director, Calibehr, 0
The service sector is the mainstay of economic as well as social development of a country. In India, it is not only the largest contributor to the country's GDP, but has also contributed significantly to exports, attracts a good amount of foreign investment and has provided large-scale employment.
India’s services sector covers a wide range of activities such as communication, trade, real estate, hotel and restaurants, financial services, transportation, travel, storage, insurance, business services, social services, community services, personal services, and construction.
The Growth Story and Comparison
IBEF reveals that the services sector’s GVA grew from US$ 1,005 billion in FY16 to US$ 1,064.8 billion in FY20, at a CAGR of 1.45 percent. Also, in April 2020, while imports stood at Rs 709.07 billion, the exports stood at Rs 1,254.09 billion.
Over the years, India has undergone a drastic transition from agriculture based economy to a knowledge based economy. However, the country is still far behind the developed economy like US where knowledge sector continues to play a dominant role by not only being a major contributor to country's GDP but also employing a major chunk of the workforce.
According to Statista, in 2019, the service sector contributed almost half to India’s GDP with telecommunications, IT, and software being the leading services industries. However, in the same year, only 32 percent of the workforce was employed in the sector, major employment sector being agriculture with almost 42 percent workforce share. Whereas, in the US, the sector employed almost 79 percent workforce in 2017 and contributed 77.37 percent to the country's GDP. In China, the GDP share of the service sector stood at 52.7 percent in 2017, employing almost 45 percent of the workforce.
Booming IT Outsourcing Market
India' IT outsourcing market has witnessed tremendous growth over the past few decades and the number of service providers keeps increasing year by year. The constant growth in IT outsourcing trends will continue to grow in the coming years as well. According to IBEF 2020, India is the export hub for software services and the IT outsourcing service market is anticipated to witness further 6-8 percent growth between 2021-2024.
As markets across the globe are becoming knowledge-intensive, India continues to be the most preferred destination for knowledge services. This is also because India has a competitive advantage in terms of a large
pool of skilled manpower which is available at relatively low cost. Further, India is the youngest democracy and its demographic index will continue to deliver more benefits for economic growth. A lot of opportunities lie ahead of the sector such as a big market in pharmaceuticals in terms of manufacturing and clinical research; infrastructure management services and engineering R&D market.
Several trends are expected to govern the market - pressure on service providers for more flexible pricing contracts; the emergence of more small alliances focused on better quality control and increased operational efficiencies; and growth of consumption-based technologies that are delivered through the cloud, among many others.
Increasing Investments in Service Sector
Between April 2020 and March 2020, the service sector in India received an inflow of US$ 82 billion, the largest recipient of FDI. The fair growth of services sector has widened the scope for the smooth inflow of FDI. Moreover, with developing and transition economies being the most attractive destinations, India becomes the most favoured due to its competitive advantage.
Why is India's service sector considered as a hot destination for FDI? Well, it is attributed to relaxation in FDI norms, young and cheap labour force, vast growing and consuming market size, a strong economy that can sustain demand and inflation rate, and technological innovation capabilities.
The Way Forward
Government of India provides several incentives to promote growth in the service sector. Some of its initiatives include the Ministry of Electronics and Information Technology's efforts to increase the contribution of the digital economy to 20 percent of GDP in next 5 years. Also, the government increased incentives provided under Services Exports from India Scheme (SEIS) by 2 percent under the Mid-Term Review of Foreign Trade Policy (2015–20).
Having the highest employment elasticity among all sectors, the service sector is capable of delivering highly productive jobs as well as huge economic growth. Talking about challenges facing job creation or lack of skilled workforce, Skill India Program targets to skill/up-skill 400 million people by 2022. It aims to achieve this by providing necessary funding and by fostering private sector initiatives in skill development programs.
Further, Make in India program that aims to bolster the manufacturing sector will add to the portfolio of the service sector as well. In this context, Start-up India initiative will play a key role.
Summing Up!
India’s competitive advantage and distinctive competencies formed by the services sector makes it the most eligible and emerging market in the world. The services sector has the potential to unlock a great opportunity which can create symbiotic growth across the globe.
Several trends are expected to govern the market - pressure on service providers for more flexible pricing contracts; the emergence of more small alliances focused on better quality control and increased operational efficiencies; and growth of consumption-based technologies that are delivered through the cloud, among many others.
Increasing Investments in Service Sector
Between April 2020 and March 2020, the service sector in India received an inflow of US$ 82 billion, the largest recipient of FDI. The fair growth of services sector has widened the scope for the smooth inflow of FDI. Moreover, with developing and transition economies being the most attractive destinations, India becomes the most favoured due to its competitive advantage.
As markets across the globe are becoming knowledge-intensive, India continues to be the most preferred destination for knowledge services
Why is India's service sector considered as a hot destination for FDI? Well, it is attributed to relaxation in FDI norms, young and cheap labour force, vast growing and consuming market size, a strong economy that can sustain demand and inflation rate, and technological innovation capabilities.
The Way Forward
Government of India provides several incentives to promote growth in the service sector. Some of its initiatives include the Ministry of Electronics and Information Technology's efforts to increase the contribution of the digital economy to 20 percent of GDP in next 5 years. Also, the government increased incentives provided under Services Exports from India Scheme (SEIS) by 2 percent under the Mid-Term Review of Foreign Trade Policy (2015–20).
Having the highest employment elasticity among all sectors, the service sector is capable of delivering highly productive jobs as well as huge economic growth. Talking about challenges facing job creation or lack of skilled workforce, Skill India Program targets to skill/up-skill 400 million people by 2022. It aims to achieve this by providing necessary funding and by fostering private sector initiatives in skill development programs.
Further, Make in India program that aims to bolster the manufacturing sector will add to the portfolio of the service sector as well. In this context, Start-up India initiative will play a key role.
Summing Up!
India’s competitive advantage and distinctive competencies formed by the services sector makes it the most eligible and emerging market in the world. The services sector has the potential to unlock a great opportunity which can create symbiotic growth across the globe.