Report On Indian Service Sector Economics Essay

The service sector is the lifeline for the social economic growth of a country. It is today the largest and fastest growing sector globally, contributing more to the global output and employing more people than any other sector.

The real reason for the growth of the service sector is due to the increase in urbanization, privatization and more demand for intermediate and final consumer services. Availability of quality services is vital for the well being of the economy.

In advanced economies the growth in the primary and secondary sectors are directly dependent on the growth of services like banking, insurance, trade, commerce, entertainment etc.

In alignment with the global trends, Indian service sector has witnessed a major boom and is one of the major contributors to both employment and national income in recent times. The activities under the purview of the service sector are quite diverse. Trading, transportation and communication, financial, real estate and business services, community, social and personal services come within the gambit of the service industry.

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One of the key service industry in India would be health and education. They are vital for the country’s economic stability. A robust healthcare system helps to create a strong and diligent human capital, who in turn can contribute productively to the nation’s growth.

Post Liberalization

The Indian economy has moved from agriculture based economy to a knowledge based economy. Today the IT industry and ITE’S industry are the dominant industry in the service sector. Media and entertainment have also seen tremendous growth in the past few years.

Service Sector of Indian Economy contributes to around 55 percent of India’s GDP during 2006-07. This sector plays a leading role in the economy of India, and contributes to around 68.6 percent of the overall average growth in GDP between 2002-03 and 2006-07.

There has been a 9.4 percent growth in the Indian economy during 2006-07 as against a rise of 9 percent in the same during 2006-06. During this growth in Indian economy, the service sector witnessed a rise of 11 percent in the year 2006-07 against the 9.8 percent growth in 2005-06.

There has been a 13 percent hike in the service sectors of trade, hotels, transport and communication in India’s economy as compared to the 10.4 percent rise in the previous year. The financial services that comprise of banks, real estate, insurance, and business services witnessed a rise of 11.1 percent during 2006-07 against the 10.9 percent growth in the previous year. Service sectors including community, social, and personal services experienced a growth of 7.8 percent during 2006-07 as against 7.7 percent growth in the previous year.

The service sector of India has also witnessed a remarkable rise in the global market apart from the Indian market. It has experienced a rise of 2.7 percent in 2006 from that of 2 percent in 2004. The broad-based services in the trade sector has undergone a large-scale rise. A statistics concerning the growth of India’s service sectors are listed below:

The software services in Indian economy increased by 33 percent which registered a revenue of USD 31.4 billion

Business services grew by 82.4 percent

Engineering services and products exports grew by 23 percent and earned a revenue of USD 4.9 billion

Services concerning personal, cultural, and recreational had a growth of 96 percent Financial services had a rise of 88.5 percent Travel, transport, and insurance grew by 23 percent The software services in Indian economy along with the export of products is growing at a massive pace and thereby witnessed an alarming rise of 35.5 percent and reached a lumpsome amount of USD 18 billion.

The IteS and BPO sectors grew by 33.5 percent and earned a revenue of USD 8.4 billion. The service sector of Indian economy has been the most high-powered sector in India’s economy. It has also been focusing in various investments of late. As Indian economy is looking forward for more liberalization, sectors like banking are on its way to loom large and occupy a more significant position in India’s economy.

Sub sectors

Information Technology Industry

The Information Technology industry has achieved phenomenal growth after liberalization. The industry has performed exceedingly well amidst tough global competition. Being knowledge based industry; India has been able to leverage the global markets, because of the huge pool of engineering talent available and the proficiency in English language among the middle class.

The contribution of India’s IT industry to economic progress has been quite significant. The rapidly expanding socio-economic infrastructure has proved to be of great use in supporting the growth of Indian information technology industry.

The flourishing Indian economy has helped the IT sector to maintain its competitiveness in the global market. The IT and IT enabled services industry in India has recorded a growth rate of 22.4% in the last fiscal year. The total revenue from this sector was valued at 2.46 trillion Indian rupees in the fiscal year 2007.

Out of this figure, the domestic IT market in India accounted for 900 billion rupees. So, the IT sector in India has played a major role in drawing foreign funds into the domestic market.

Retailing

Prior to liberalization, India had one of the most underdeveloped retail sectors in the world. After liberalization the scenario changed dramatically. Organized retailing with prominence on self service and chain stores has changed the dynamics of retailing. In most of the tier I and tier II cities supermarket chains mushroomed, catering to the needs of vibrant middle class. This indirectly contributed to the growth of the packaged food industry and other consumer goods.

ITES sector

The ITES sector has also leveraged the global changes positively to emerge as one of the prominent industries. Some of the services covered by the ITES industry would be:Customer interaction services -Non voice and Voice. Back office, revenue accounting, data entry, data conversion, HR services. Medical Transcription. Content development and animation. Remote education, market research and GIS.

As per the Department of Information Technology, the ITeS-BPO segment in the domestic market has witnessed noticeable growth over the past few years. The share of ITeS-BPO industry in the domestic market is estimated to have increased from 3.8 per cent in 2001-02 to 15.3 per cent in 2008-09.

ITeS, which started with basic data entry tasks over a decade ago, is witnessing an expansion in its scope of services. It now offers services such as knowledge process outsourcing (KPO), legal process outsourcing (LPO), games process outsourcing (GPO) and design outsourcing, among others.

The Indian BPO sector has not only added scale in the last nine years, but has also matured significantly in terms of scope of service offerings, buyer segments served and service delivery models. Apart from achieving maturity in the horizontal segment, providers are increasingly developing vertical/domain specialisation to capture greater value.

Telecomm

With 141 million gross subscriber base the telecom service industry is growing at the rate of 30% annually and its contribution to the country’s Gross Domestic Product (GDP) is 1% according to chairman of Telecom Dispute Settlement and Appellate Tribunal (TDSAT) Justice (Retd) N Santosh Hegde.

The telecom service industry with a turnover of Rs 90,000 crore during last one year expected its contribution to GDP to rise by another 1% over the next three years.

Financial Services-Banking And Insurance

Prior to liberalization these two sectors were controlled and regulated by the government. Nationalized banks and insurance companies had a firm grip over the market. After liberalization the banking and insurance domain opened up for private participation.

Banking Sector

The three major changes in the banking sector after liberalization are:

Step to increase the cash outflow through reduction in the statutory liquidity and cash reserve ratio. Nationalized banks including SBI were allowed to sell stakes to private sector and private investors were allowed to enter the banking domain.

Foreign banks were given greater access to the domestic market, both as subsidiaries and branches, provided the foreign banks maintained a minimum assigned capital and would be governed by the same rules and regulations governing domestic banks.

Banks were given greater freedom to leverage the capital markets and determine their asset portfolios. The banks were allowed to provide advances against equity provided as collateral and provide bank guarantees to the broking community.

Insurance Sector

The Insurance Regulatory and Development Authority Act 1999 (IRDA Act) allowed the participation of private insurance companies in the insurance sector. The primary role of IRDA was to safeguard the interest of insurance policy holders, to regulate, promote and ensure orderly growth of the insurance industry.

The insurance sector could invest in the capital markets and other than traditional insurance products, various market link insurance products were available to the end customer to choose from.

Some of the prominent insurance companies are:

Bajaj Allianz Insurance Corporation

Birla Sun Insurance Co Ltd

HDFC Standard Insurance Co Ltd

ICICI Prudential Insurance Co Ltd

Max New York Insurance Co Ltd

Tata AIG Insurance Co Ltd

The Indian economy is estimated to have grown by 6.7 per cent in 2008-09. According to the latest Central Statistical Organisation (CSO) data, financial services, banking, insurance and real estate sectors rose by 7.8 per cent in the third quarter of 2009-10.

The government has taken a number of steps in recent months to revive the economy, including slashing interest rates, lowering factory levies and more than doubling the limit on foreign investment in corporate bonds. The financial services space is a rapidly growing one in India.

As per the Securities and Exchange Board of India (SEBI), number of registered FIIs as on March 29, 2010 was 1710 and the cumulative investments in equity since November 1992 to March 29, 2010, was US$ 76.74 billion, while the cumulative investments in debt during the same period were US$ 11.85 billion.

The average assets under management of the mutual fund industry stood at US$ 174.06 billion for the month of February 2010, an increase of nearly 36 per cent from US$ 111.55 billion in February 2009, according to the data released by Association of Mutual Funds in India (AMFI).

Funds raised by the Indian corporate sector via ADRs/ GDRs has jumped over 33 times from around US$ 101.72 million in 2008 to about US$ 3.50 billion in 2009.

Hotels

Over the last decade and half the mad rush to India for business opportunities has intensified and elevated room rates and occupancy levels in India. Even budget hotels are charging USD 250 per day. The successful growth story of ‘Hotel Industry in India’ seconds only to China in Asia Pacific.

With the USD 23 billion software services sector pushing the Indian economy skywards, more and more IT professionals are flocking to Indian metro cities. ‘Hotel Industry in India’ is set to grow at 15% a year. This figure will skyrocket in 2010, when Delhi hosts the Commonwealth Games.

Already, more than 50 international budget hotel chains are moving into India to stake their turf. Therefore, with opportunities galore the future ‘Scenario of Indian Hotel Industry’ looks rosy.