Social Economic

India’s Service Sector –Huge Untapped Potential

Since the late 1990s, the Service sector has been the engine for growth in India. It expanded with double digit growth from the year 2000 to 2008. Service sector started showing slow down since 2010 because of the global slowdown. At present many among us hold views that the sector has reached its saturation level. Economic survey 2017 dropped a trend of including an independent chapter on services. Though, this doesn’t show apathy of the government towards this sector. Instead, there are many reforms in the pipeline or under execution to further boost this sector.

This sector still has huge potential & is the only answer to India’s many serious problems; unemployment & low wages are among the serious problems which can be answered through growth in services. There are many myths about this sector which need clarification before discussion on growth possibilities.

Myths about Service Sector

Service Sector is ICT & ITES only

When we talk about service sector in India, many equate this with Information communication technology (ICT) & IT enabled services (ITeS) which is wrong. IT industry is just a part of the service sector. The service sector also includes tourism, shipping, Transport, real estate, financial services and many other industries. Though, a major part of service sector contribution in GDP comes from IT & its related industries, contributing around 12% of GDP.

Service Sector has Low employability

Service sector doesn’t have lower employability. Against the fact, it is the largest employer in the west. China also has larger work force employed in the service sector than India. India’s workforce employed in the service sector is lower than even the world average. Though, it can be said that the growth rates of employment in ITC & ITeS sector has decreased because of automation and emerging technologies. Also, the sector itself is going through flat growth rates.

But, this is just a part of the service sector. There are still huge employment opportunities in shipping & Port services, logistic, Tourism, education industry which are yet to be explored. Another major point is of wages, Even if various MSME’s and other manufacturing industries have higher employability than service sector, they offer significantly lower wages and have health hazardous working conditions.

India’s Service sector is huge and specifically IT industry

The fact is that Indian service sector is minuscule when compared to that of China or US. Also, the higher share of service sector in GDP is not at odds with other nations. On the contrary, it is lower when compared to developed nations.  It’s only the Indian IT industry which is comparable with other large economies among various service industries. That’s too only in service category and not in goods category. India has registered higher growth rates in the services sector compared to US & equitable to that of China because of the of the lower base.

Ignored Service Industries

Shipping, Port services, Tourism, Transport & Storage, construction are the major industries under service sector which are weeping for reforms. There are some service industries which can be a game changer for Indian Economy especially in terms of employment creation. Also, growth in these sub sectors is a prerequisite for growth in other sectors or to have a balanced growth.

India’s Performance compared to China & US
China India USA
GDP (constant 2010 US$) 890.8 230.1 1659.7
Services, etc., value added (constant 2010 US$) 401.7 112.0 1253.3
Services, etc., value added (% of GDP) 50.2 52.9 78.9
Service exports (BoP, current US$) 21.7 15.6 75.1
Service imports (BoP, current US$) 43.6 8.3 48.9
ICT service exports (BoP, current US$) 8.3 10.5 17.1
International tourism, receipts (current US$) 11.4 2.1 24.6
CAGR growth rate in Services from 2001-08 11.7 9.3 2.2
CAGR growth rate in Services from 2010-14 8.4 8.6 1.8
Employment in services (% of total employment) 34.6 26.6 80.3
Research and development expenditure (% of GDP) 1.8 0.8 2.8
Global Competitiveness Index: R&D Innovation (ranks)
University – Industry collaboration on R&D 32 2 50
Capacity for innovation 49 50 2
PCT patents granted/ million population 32 61 11
All figures are for the year 2015 in 100 Billion except for percentage figures. Data collected from World bank database.

There are many industries worth mentioning, but considering the current scenario, the following industries need special attention.

Tourism Industry

If we talk about tourism Industry, then Bangladesh & Vietnam’s has performed better than India in terms of International Tourist Arrivals (ITAs). India is the seventh largest nation in terms of geography comprising vast natural beauty, cultural diversity, multiple kinds of weather. Despite all, we couldn’t develop our tourism industry. One of the biggest contradictions to any claim regarding past reforms in the Tourism industry in India is North East. None of these seven states comes in even top five states for domestic tourism. It has been only recently that attention has been made towards the development of this region for tourism.

Well-developed tourism industry can be a big source of foreign currency & could help in balancing the trade deficit. Also, tourism along with its associated industries has high employment opportunities. As per World Travel and Tourism Council (WTTC), 2014, it comprises around 9.4% of total employment and has further potential to grow at 2.3%. India’s tourism industry had registered a double digit growth rate in last few years. This growth is mainly because of the lower base (India attracts only 0.68% of global ITAs) and decent growth in domestic tourism. It is this lower base which signifies huge potential for growth in years to come.

Government policies to reform this sector has been mixed and responsibility has been left majorly on individual states. On one side, government dilutes its stake in Indian Tourism development corporation, ITDC and on other make some positive efforts towards easing norms for foreign tourists. These small efforts will not be sufficient to revive the sector, the sector needs some big reforms, huge investments to develop the infrastructure for tourism.

Construction & Infrastructure Sector

Construction sector tried to stand up and run around 2000 with government initiatives like “Golden Quadrilateral” & “Pradhan Mantri Gram Sadak Yojna”. But now this sector has one of the largest shares of bad investments and also highest NPA’s of more than 10% till 2016. The sector has suffered hugely from various government policies like land acquisition, labor laws, center vs state or state vs state tussle. Boost to Construction sector is a must for absorbing India’s huge unskilled labor. A strong infrastructure is also a prerequisite for enhanced Internal Trade, tourism & logistics.

100 smart cities, investment of more than 2 lakh crore in building ports, planned expansion of highways and many other projects all are good intentions from the government. But, the fact is that the sector is not picking up. Neither are any private players ready to start new projects nor banks ready to lend them. The government tried to ease norms & policies for the sector through new Land Bill & labor laws, environmental regulations, but none of them was able to get through political battles. Government’s tight fiscal targets with lower expenditure had further worsened the situation. Major shock for the sector is 18% tax slab under GST on construction activities.

Many other industries like tourism, internal trade, transport depend on the well-being of this sector. An increasing infrastructure is a must to have the base for an economy to grow sustainably.

Shipping & Port Services

Shipping & port services never got the chance even to shake the shackles because of claws of customs & excise duties. India has one of the worst performing shipping & port facilities among developing economies mainly because of bureaucracy and corruption. Because of High turnaround time, delays in paper clearance, complex rules & regulations; India is ranked 9th in developing countries only by UNCTAD. Baltic Index of India, an index for freight, also a check for the robustness of trade and demand for shipping services is on the continuous downfall since 2008.

On the one hand, Indian shipping industry is facing a low demand and another side Indian fleet is aging. The average age of Indian ships has increased from 15 years in 1999 to 17.89 as of 2015. Possible decrease in freight rates because of low demands & increase in costs due to an increase in standards by International Maritime Organization’s (IMO) for green and sustainable shipping will further worsen the situation for Indian Shipping industry.

Indian ports handled 1052 MMT of cargo in 2015 at 12 major and around 200 minor ports. The growth rate in cargo traffic from 2007 to 17 at major ports have been around 7.4% and 15.9% at minor ports. Considering the Indian maritime border & geographically important position these figures are disappointing. It is this disappointing capacity that forced the Indian government to invest 2.96 lakh crore for capacity building by 2020. As per Indian maritime agenda focus will be on the development of non-major ports. These steps are welcome steps but without administrative reforms, such an investment will be futile & will not lead to any substantial results.

Research & Development

No matter which sector we talk about, agriculture, manufacturing, IT-BPM service or any other sector; technological growth is must to have for expansion. Figures show that we are a poor performer in this sector. Be it, patents per million populations or university industry collaboration or capacity for innovation, we are nowhere close to global standards. Our R & D expenditure as a percentage of GDP is minuscule when the effect of a smaller base (Lower GDP) is considered.

There is increasing worry over the performance of this sector. Because of no signs of improvement. The science, technology, and Innovation (STI) policy 2013 targeted to increase R & D expenditure to 2% of GDP by 2020. The Policy aims to place India among the top five global scientific powers by 2020. So far, we are nowhere close to that.

The pace of change of technology is very fast and we not only need to fill the existing gap but also adapt to ongoing change quickly. To achieve this, along with investment in R & D, the education system needs to be more aligned according to industry requirements. And, therefore industry & educational institute’s relationship needs more depth.

Education Sector

Currently, Indian Education industry is valued at around $ 100 billion and is expected to increase to $180 billion dollars by 2020. India has largest higher education system & is the second largest market for e-learning after the US. Education sector also has a huge potential of attracting foreign students also and thus is a possible source of foreign income. There are reforms to strengthen India education system both higher & primary. Policy recommendation of awarding degrees for online courses, recommendation for carrying independent courses by “Category 1” colleges under UGC draft policy on colleges are some examples. Though, these reforms are under criticism from many academicians. According to them these reforms will increase privatization & cost of education further. Some even argue that these will dilute the level of education. But privatization of education has a major benefit of minimized supply demand mismatch.

Supply Demand Mismatch

Supply demand mismatch can be of two types – one of required skill set & second of time & quantity. Mismatch of skills required by the industry & that of attained by graduate professionals are well known. Many Industry tycoons had repeatedly mentioned that Indian graduate is not “shop floor” ready & they are forced to spend a huge amount on their training. Supply demand Mismatch of the second type is lesser known & understood.

For example, A possible case of time & quantity mismatch can be of Biotech Industry. Year on year growth of the industry has been phenomenal. The industry had recorded a CAGR of around 30% between 2010 and 2016 with year on year growth of 57.4% in 2016. As of now, there are 800 companies in the industry. Government dreamed to expand the industry to $100 billion by 2025. To achieve this target Industry will need around 20 lakh industry trained professionals by 2020.  Institution strength in the country is not sufficient to meet this demand. It is a specific case, where our education system is lagging behind the industry.

Institutions under strict watch of government regulations failed to match with industry requirement. Providing degrees to students at low cost which does not have any significance in the industry is of no relevance either to the nation or to the individual. Privatization might increase the cost of education, but it will also increase the relevance of education system. Thereby lowering the supply demand mismatch and also the training cost & time of companies.


Both agriculture & Manufacturing sector in India has surplus labor & low factor productivity. Make in India alone will not be able to absorb the whole of India’s employable labor force. Also, to increase the living standards in the nation we need industries which have higher productivity and can provide wages higher than subsistence level. Economic survey 2017, had given separate attention to shoe making & leather industry. These industries have higher employability per lakh investment and need lower skill level. But, these industries have lower productivity, lower wages, harmful working conditions and high adverse environmental impact; they offer only short term solution of generating employment. Therefore, the focus should remain on untapped service sectors for sustainable long run growth.

As per Economic survey 2015-16 – “The services sector is like an uncharted sea with plenty of opportunities that have not been fully tapped. A targeted policy of removing bottlenecks in major and potential services can result in large dividends in the form of higher services growth and services exports, which in turn can help in pulling up the economy to higher growth levels.”

 (Facts and figures mentioned are taken from World Bank database, various government reports & newspapers)

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