Service sector's performance in India using GDP contribution, employment share, and productivity growth

Performance of Service Sector in India

• Sectoral Composition of GDP Growth in India

  • The share of the primary sector in GDP has fallen by 40% over time, while the secondary and tertiary sectors have grown. This trend is expected to continue due to: (i) Liberalisation, (ii) Technological advances, and (iii) Lower capital requirements.

  • Initially, the secondary sector outpaced the tertiary in growth. Since the 1990s, the tertiary sector has become the fastest-growing. In the 1980s, although all sectors grew, the secondary sector led. This reversed in later decades.

  • Note: Service sector growth may be inflated due to outsourcing and categorization errors in national accounts (e.g., cottage industries misclassified as services).

  • Despite these caveats, services have emerged as the key growth driver in the Indian economy. Presently, about two-thirds of incremental GDP growth is from the tertiary sector.

  • Table: Sectoral contribution to GDP growth

  • Period → Primary | Secondary | Tertiary
    1951–61 → 45.2% | 23.7% | 31.3%
    1961–71 → 35.1% | 26.5% | 38.4%
    1971–81 → 27.2% | 25.6% | 47.2%
    1981–91 → 24.2% | 28.6% | 47.2%
    1992–97 → 20.3% | 30.9% | 48.8%
    1997–2011 → 12.7% | 23.6% | 64.1%

• Employment Contribution of Service Sector in India

  • Unlike Western and Southeast Asian nations, India's structural shift bypassed the secondary sector. Those economies shifted labour from primary to manufacturing before services.

  • India's secondary sector hasn't absorbed enough labour, causing unskilled rural populations to stay in agriculture or move into urban informal sectors.

  • This has led to high poverty and underemployment despite rising share of services in GDP.

• Productivity Growth in the Indian Service Sector

  • Service sector growth in India has occurred at a much lower per capita income than when developed countries experienced similar service booms.

  • This highlights a disconnect: services are expanding rapidly, but without sufficient growth in high-productivity jobs or supporting industrial growth.

  • This pattern underlines the link between inadequate industrialisation and persistent poverty/unemployment in India.

Employment and Productivity Contribution of the Service Sector in India

• Sectoral Employment Distribution and Service Sector Contribution

  • From 1983 to 2009–10, India's workforce distribution showed slow structural change. The primary sector still employed 54.9% of the total workforce in 2009–10, followed by the tertiary sector (25.5%) and industrial sector (19.6%).

  • There has been a disproportionate growth in the tertiary sector—its employment share lags behind its GDP contribution.

• Employment Growth Trends within Service Sector in India

  • Within the services sector, the highest employment growth was in finance, insurance, and business services, followed by trade, hotels, restaurants, and transport. The community, social, and personal services grew the slowest.

  • During the post-reform period (1993–94 to 1999–2000), employment elasticity fell sharply from 0.40 to 0.15, indicating jobless growth.

  • However, from 1999–2000 to 2009–10, elasticity rose from 0.15 to 0.51. Most service sub-sectors except transport, storage, and communication showed rising employment elasticity.

• Productivity Growth in the Indian Service Sector

  • Growth acceleration began in the 1980s rather than the 1990s. Of the 2.4% point increase in GDP growth in the post-1980 era, about 40% came from TFP (Total Factor Productivity) growth in services.

  • Agriculture, industry, and services all saw higher output, output per worker, and TFP, but the increase was most prominent in services.

  • Highest output per worker growth was recorded in Public Administration & Defence (PA&D) and community, social, and personal services at 4.2% p.a., followed by transport, storage, communication at 3.3%, and trade, hotels, restaurants at 2.9%.

  • Growth in PA&D productivity may reflect public sector downsizing and periodic government pay hikes rather than real economic productivity. In contrast, THR (trade, hotels, restaurants) growth reflects rising demand and market expansion.

  • IT adoption likely contributed to productivity gains in services. However, measurement of service output and productivity remains debatable.

Exports of Services in India and Global Trade Trends

• Importance of Services in Export Earnings

  • Service exports complement merchandise exports as a source of foreign exchange earnings. These include telecommunications, transportation, tourism, banking, insurance, construction, computer services, and other professional services.

  • As with goods, the nature of service exports is evolving rapidly, driven by technology and globalisation. Trade in services and high-tech industries are increasingly symbiotic.

• World Trade in Services

  • Global service exports have grown at 10% annually in recent years, driven by factors on both the demand and supply sides.

  • Demand-side factors include advances in computers and telecom, increasing demand for business services, innovation, market opening, and global strategies.

  • Supply-side growth comes from outsourcing of specialised services (e.g., legal, IT) that were once in-house functions of companies.

  • Future growth will be supported by WTO agreements on telecommunications, information technology, and financial services, which already generate $100 bn, $210 bn, and $50 bn respectively in cross-border trade.

• India’s Exports of Services: Performance and Modes

  • India exports $100 billion worth of services annually, making up 2.7% of global service exports—a share higher than its portion of merchandise exports.

  • India’s services are exported via four WTO-GATS delivery modes:

    • Mode 1 – Cross-border supply: e.g., call centres

    • Mode 2 – Consumption abroad: e.g., medical care, education, tourism

    • Mode 3 – Commercial presence: requires FDI, e.g., banking

    • Mode 4 – Movement of natural persons: e.g., IT professionals working abroad

• Balance of Trade in Services

  • Service exports and imports are imbalanced, especially in transportation, business services, and investment income.

  • Due to interest and service payments on foreign loans, India experiences trade deficits in services, and these are widening.

• Key Determinants of Exports of Services

  • Travel receipts depend on expansion of tourist facilities.

  • Transportation receipts relate to volume of merchandise exports.

  • Insurance receipts are generally linked to goods exports.

  • Investment income receipts correlate with global economic growth.

  • Professional/technical service earnings depend on domestic expertise development.

• Need and Prospects to Boost India's Services Exports

  • Service trade deficits may widen if India doesn't harness global technology inflows. This will affect the Balance of Payments and rupee stability.

  • India must focus on tourism and business services by leveraging its natural and human capital. Micro-level strategies, incentives, and infrastructure support are needed.

  • India has comparative advantages in:

    • Mode 1: Outsourcing

    • Mode 3: Outward investment in global markets

    • Mode 4: Export of IT professionals

  • The most ambitious domain is software exports. If growth continues, these could reach $150 billion by 2015, still just 1% of global software output—a realistic target.

Strengths, Weaknesses, and Growth Causes of Indian Service Sector

• Strengths of India’s Service Sector

  • Economical wages and favourable time-zone difference between Indian and Western cities

  • Trained, skilled, English-speaking, younger workforce

  • Well-established financial network

  • Promotional fiscal and Exim policies

  • Opening up of global markets

  • Euro-zone functioning as a single market

  • Global business links and FDI opportunities

  • Emerging service conclaves with a positive international image

• Weaknesses and Threats

  • Traditional and labour-constrained financial system

  • Underdeveloped telecommunications

  • Higher inflation in consumer prices

  • Regional disparities

  • Technological lag and low telecom intensity

  • Rigid labour conditions

  • Restricted capital account compared to peer nations

  • Technological upgradation is critical to enhance competitiveness. Weaknesses and threats require urgent attention to avoid compromising service export potential.

  • India's natural advantages in services should reshape how we approach WTO negotiations. Misplaced concerns in agriculture and merchandise trade must not compromise our interest in services.

• Causes of Rapid Increase in Tertiary Sector (Non-Commodity)

  • The non-commodity sector is growing faster than the commodity sector, driven by several structural and technological changes.

  • (i) The advent of information technology and the knowledge economy has accelerated both high and low productivity service activities.

  • (ii)Infrastructure services like banking, insurance, finance, transport, communication, education, and healthcare are expanding rapidly to support development needs.

  • (iii)Public services grow where the government plays an active economic role. Modern state policies increasingly expand national and international economic and social infrastructure.

  • (iv)Demonstration effects via foreign trade, tourism, and education promote service expansion.

  • (v)Urbanisation fuels demand for infrastructure services and changes consumption patterns. New services enter the consumption basket as cities grow.

  • (vi)Tourism has globalised with television, the internet, and better transport and hospitality. This has boosted various services.

  • (vii)Industry is becoming service-oriented with functions like finance, legal, marketing, and HR increasingly outsourced due to labour laws, resulting in counted service sector growth.

  • Share of services in GDP has also risen because the commodity sector (especially primary and secondary) has not grown fast enough. Manufacturing and construction lag behind, reducing commodity sector’s contribution to overall growth.

Prospects and Opportunities for Growth in Indian Services Sector

• Domestic Factors Boosting the Indian Service Sector

  • (i) As real per capita GDP grows, demand for services increases more than proportionately, which reinforces GDP growth.

  • (ii) Within services, demand for producer and government services (mainly intermediate consumption) has strong multiplier effects on GDP.

  • (iii) Growth in dynamic services that use communication and information technology will generate rising employment opportunities.

  • (iv) Economic growth has led to emergence of new sub-sectors like advertising, publicity, and marketing, which build strong inter-sectoral linkages.

  • (v)Efficient delivery of services increases productivity of labour and capital, acting as a catalyst for overall growth.

• International Opportunities for Indian Services Sector

  • (i) Rapid growth in knowledge-based services (e.g., technical and professional services) offers great potential. India has advantages due to strong educational infrastructure and low labour costs.

  • (ii) Advances in information technology allow separation of production and consumption of information-intensive services such as R&D, inventory management, marketing, secretarial, and legal services.

  • (iii)Global prices of transport and communication services have declined dramatically, reducing the cost impact of India’s distance from industrial markets.

  • (iv) India can export services like software and music without needing to produce the related hardware. Value-added services do not require technological parity in equipment manufacturing.

  • (v) Declining share of manufacturing in rich countries means future export growth depends more on service efficiency than natural resources.

  • (vi)Ageing populations in developed countries will raise long-term demand for services.

  • India is uniquely positioned among developing nations to take advantage of technological, trade, and manpower shifts. A virtuous cycle of higher growth, capital inflow, and savings can drive further expansion.