(156788093) aprita mukherjee (2) (1).doc

7/25/2019 (156788093) Aprita Mukherjee (2) (1).doc

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ECONOMICS REPORTON

Service Sector in India-Analysis of major sub sectors

MONA I!"ANI #$$%##&&SARI'A C(A'RA)(AR #$$%##*&


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Services Sector in India: Analysis of major sub sectors

India is among the fast growing economies in the world. According to the International MonetaryFund(IMF),in 2010, Indias gross domestic roduct(!"#) grew at10.$% comared to 10.&% for'hina, an aerage growth rate of .*% in deeloing countries within Asia and *.+% aeragegrowth rate in emerging and deeloing economies. Although growth rate low down su-stantiallyin2011to*.2%, it was still higher than the aerage growth rate of emerging economies($.2%).erices sector has -een a maor contri-utor to Indias !"# and growth. It is the secondlargest emloyer after agriculture. Indias trade in serices has increased oertime and sericesaccounts for the largest share in India.

/he growth of Indias serices sector, its contri-ution to !"#, and its increasing share in trade andinestment has drawnglo-alattention.nlie othercountries,whereeconomicgrowthhasledtoashiftfromagriculturetoindustries,in India,therehas-eenashiftfromagriculturetothesericessector.Inthisresect,someeconomists. 'onsiderIndiaasanoutlier amongouthAsiancountriesandotheremerging marets.'ontending thisiew,haeointedoutthatIndiaisnotanoutlieras theshareofsericessectorin!"#hasincreasedwithriseinercaitaincome.200$arguedthatIndia wasanegatieoutlierin11comaredtoother emerging maretsasthe share ofsericesinalue addedandemloymentwas-elowthatof other countries.After the economicreformsof the 10s,sericessectorgrew andin2000India -ecame a ositie outlierintermsoftheshareofsericesinalueadded-utcontinuedto-ea negatieoutlierintermsof its shareinemloyment.

InIndia,growthinsericessectorhas-eenlinedtothe li-eralisationandreformsof the 10s. Inthefirstthree decades(1+0sto1*0s) afterIndias indeendencein1&*,!"#grewatanaeragedecadalgrowthrateoflessthanfourercent.Indiawaslargelyanagrarianeconomy. /he shareofsericessectorwassmallandalarge num-er of sericesweregoernment monoolies. ericessector started togrow in themid310s -ut growth accelerated in the10swhenIndiainitiatedaseriesofeconomicreformsafterthecountry facedaseere-alanceofaymentcrisis.4eformsinthesericessectorwereaartoftheoerallreformrocess,whichledtoriati5ation,remoalofF"I restrictionsandstreamliningofthearoalrocedures,amongothers.

67istingstudiesshowthatli-eralisationandreformsisoneoftheimortantfactorscontri-utingtothegrowthof sericessectorinIndia. 8itheconomicgrowthandriseinercaitaincome,

/hereisachangeindemandatternfromnecessary todiscretionary consumtionslieeducationandersonalandhealthcareserices.9ighincomeelasticity ofdemandforsericeshascontri-utedtothehighgrowthofthissector/echnologicalrogressandaaila-ility ofhighsilled manowerhas led togrowthofsericeslieinformation technology(I/) andI/ena-ledserices


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(I/e)."eeloedcountriesoutsource itssericesto deeloingcountrieslie Indialeadingtoariseindemandfor sericesfromthedeeloingmaret.9ighgoernmente7enditureoncertainsericesliecommunity,socialandersonalsericeshasalsoledtohighgrowthofserices.

/he o-ectie of thisaer istoroideanoeriew of theIndian sericessector.Itidentifiesmaor-arriersfaced-y thesectorandroidesolicy recommendationswhichifimlementedwillleadtoinclusiegrowth,increaseroductiity,and generate;uality emloymentandincrease

tradeandinestment.ectionI roidesanoeriewofthesericessectorinIndia,focusingon itscontri-utionto !"#, !"# growth and emloyment. It also resents futuregrowthroections.ectionIIe7aminesIndiastradeandinestmentinserices.ectionIII discussesIndiasnegotiating ositioninsericesinthe8/


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Services Sectors:

8holesaleand retailtrade@reairofmotorehicles and motorcycles

/ransortationand storage

Accommodation and food sericeactiities

Informationand communication

Financialand insuranceactiities4ealestateactiities

#rofessional, scientific andtechnicalactiities

Administratie and suortserice actiities#u-lic administrationand defence@comulsorysocialsecurity

6ducation9uman healthand socialworactiities

Arts,entertainmentandrecreationI'200and>'#'classification.Forinstance,in>I'200,constructionisnotaart ofsericessectorwhileinthe>'#'constructionisincludedinthe sericessector.

"isaggregated data for many serices is not aaila-le in India. "ifferent goernmentdeartmentssuchasthe'entral tatistical


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o 9ealth andrelated serices,realestateserices,retail,serices incidentaltoagriculture,

huntingand forestry''446>/ I/

o #rofessionalserices (legal, accounting, auditingand-oo3eeing, ta7ation, architectural,

engineering, integrated engineering, ur-an lanningand landscae architectural, medicalanddentalserices andsericeroided -ymidwies, nurses, etc.), education, rintingand u-lishing,electricity

B. Contribution oftheServicesSector to Indias GD

AfterIndiasindeendence,formorethanadecadeshareofsericesinthe!"#waslessthan:0%. /a-le 1showsthatoertime theshare ofsericesin!"#hasincreasedwhile thatofagriculturehasdeclined.Inthelastdecade,theshareofsericeshassurassedthecom-inedshareofagricultureandindustry,maingitthemostimortantcontri-utortothecountrys outut.In200310,serices,industriesandagricultureresectiely accountedfor+*.:%,2+.*%and1$.%ofIndias!"#.>eertheless,theshareofsericesislowerthanthatofdeeloed'ountries(thenitedBingdom(B,*.&%)andthenitedtates(,*.2%)),-uthigher than that of'hina (&1.%).

!able ":Decadal Averageofthe#earon#ear ShareoftheDifferent Sectors inIndias

GDfor theeriod"$%&'(&"&(in %)

Sector "$%&)%"' "$*&)*"' "$+&)+"' "$,&),"' "$$&)$"' (&&&)&"'"$%$)*& "$*$)+& "$+$),& "$,$)$& (&&&)&" (&&$)"&

#rimaryCAgriculture ++.: &*.$ &2. :*.: :0. 21.

econdaryCIndustries 1&. 1.$ 21.: 22.: 2:.: 2&.+

/ertiaryCerices 2. :2. :+. &0.: &+.* +:.*

Source:Authors own calculations from >ationalIncome Accounts, '


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Figure1). 6en during the glo-al slowdown the serices sector remained resilient toe7ternalshocs.In200310,the sericessectorgrew at.$% comaredto.1%growthin industriesand1.+*%inagriculture./hecomoundannualgrowth rates('A!4)ofsericesin'hinaandIndiaduring200132010wasresectiely11.:%and.&%./hisimliesthateenthoughtheresentshareofsericesin!"#for'hinaislowerthanIndia,sinceitisgrowingata

Fasterrate, in futurethe shareof sericeswill-ehigherand can een surass that ofIndia.agaland,/amil>adu,/riuraand8est?engalwashigher than the all3India aeragewhile thatof 'hhattisgarh and9imachal #radeshwaslower./he

!rowthrateof serices for statessuch asArunachal#radeshand iimishigher thantheallIndiaaeragewhilethatofAndhra#radesh,Barnataa,4aasthan,>agalandand/riuraisower.6enthoughtheshareofsericessectorin!"#ishighforstateslie>agalandand/riura,share ofsericessectorise7ectedtofallinfuture -ecausegrowthofsericessectoris low.Itfoundthattheshareofu-licsectorsericesincludingadministration

isgrowinginlaggardstateswhiletheshareofriatesectorsericesisgrowinginfast3growingstates.Anum-eroffast3growingstateshaeshownadeclineingrowthinmanufacturingand riseinserices.

Contribution of Services Sub-Sectorsto Indias GDP

/here are ariationsin growthanderformanceofdifferentsu-3sectorsofserices.?usinessserices(includingI/),communicationsandtradehaegrownfaster thanthe oerallsericessectorgrowth inIndia.


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initsshareinIndias!"#./hechangeintheroductionstructurefromagriculturetosericeshasnot-eenreflected-yaroortionatechangeinthe


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.Asaresult,serices3ledgrowthhas-eenao-lessgrowth.

Intermsof si5e of totalemloyment(-oth organisedandunorganised),in1:3&,close to$:% of theoulationwasengaged inagriculturesector andaround 21% inserices.I'1*classificationisusedwhere sericessuchaswholesaleandretailtrade@reairofmotorehicles,motorcyclesEersonalEhouseholdgoods,hotels,andrestaurants


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were clu--edtogether.imilarly, financial intermediation andreal estate,renting,and-usinessactiitieswereclu--edtogetherandu-licadministrationanddefence@comulsory social security,education, health, and social wor wereclu--ed together.

In200310,itaccountedforaround$2%ofthetotalorganisedsectoremloyment.9oweer, withinthesericessector,oer0%of theemloymentisinthe unorganisedsector. u-3sectorssuchasfinance,insurance,realestate and-usinesssericesandcommunity,socialandersonalsericeslargelyroideorganisedsectoremloymentwhilesericessuchasretailandwholesaletradelargelyroide unorganisedsector emloyment.

In1:30&,around $%of the totalorganisedsericessector emloymentwasinthe u-licsector-utin20032010itdeclinedto*+%./rade,hotelsandrestaurantsistheonlysectorwheretheshareofu-licsectorislessthantheriatesectoremloyment. /herearestate3wise ariations in

emloymentin serices. "elhiand Beralahaethe highest sharein organisedsectoremloyment./hesestates also haeoneof thehighest shares of serices in the!"#.


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!able %: Categorisationof different Services basedontheir roductivit0 Growth

Grou/" 4 !raditional

services

Grou/( 4 50bridof

traditional andodern

Grou/1 4 6odernservices

services4etail and wholesale trade,transort and storage, u-licadministration and defence

6ducation, health and socialwor, hotels andrestaurants, and othercommunity, social

Financial intermediation,comuter serices, -usinessserices, communications, and


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Anon3goingroductiityresearchstudyfunded-y4?I showsthatfortheeriod103200,thetotalfactorroductiity growthinIndiahas-eenthehighestinsericessector(1.+%erannum(.a.))followed -y agriculture(1.0$%.a.)andmanufacturing(0.:%.a.)./heeconomywideestimatesrecordedala-ourroductiitygrowthofaround&.+%.a.fortheeriod103

200. !rowth of la-ourroductiity f o r s e r i c e s , agriculture and manufacturing were

4esectiely:.+2%.a.,1.&%.a.and+.&+%.a.Inthesu-3eriodanalysis,thestudyfoundthatla-ourroductiitygrowthratesforsericesincreasedfrom2.$%.a.in103to$% .a.in20003200./hisincreasewasduetoalargeincreaseinla-ourroductiitygrowthrates in serices su-3sectorssuch as ostandtelecommunications, hotels andrestaurantsand trading serices-etween103and20003200.u-3sectorsinwhichthere wasaslowdowninla-our roductiitygrowthratesincludehealthandsocialwor,othersericesandeducation./he outcomeofthisstudydoessufferfromthenon3aaila-ility ofdisaggregateddata.Forinstance,thestudydoesnotdistinguish-etweengrowthintelecommunicationsandostalsector. Itise7ectedthatthehighroductiityoftheostandtelecommunicationssectorislargelydrien -y

thetelecommunicationssector,sincetheostalsectorinIndiaisstillagoernmentmonooly whichsuffers from oeremloyment.

Itisdifficulttocomarethedifferentstudiesonroductiityinsericesduetoinconsistenciesinthedataandsectorialclassifications.9oweer,the-roadfindingsofthestudies show thattotalfactorroductiityinsericessectorhas-eenthehighestandthatcommunicationssericesis oneofthemaorroeller ofserices sector roductiitygrowth inIndia.

-. 7uture Growthof Services

/heIndianeconomicgrowthhassloweddownto$.% in2012.>eertheless,itisroectedtogrowat*.:%in201:, whichishigherthantheaerageroectedgrowthrateforemerging and deeloingeconomies($%).8iththerisein!"#andercaitaincome,thenum-erofeole -elow the oerty linehas declined while those in high and middle3income grou haeincreased.ForecastthatiftheIndianeconomygrowsattherateof*.:%-etween200+and202+,then-y 202+,+:millionIndianswill-einthemiddleclass,whichise;uialenttothecurrentoulationofAustralia./heshare ofmiddleclassinthetotaloulationwillincreasefromaround+%in200+to&1%in202+./hey willaccountfor+%ofthecountrystotalconsumtion-y202+.8ithincreaseinincome,therehasalso-eenanincreaseintheliteracyrate,whichise7ectedtoincreasefurther.Moreoer,Indiahasoneoftheyoungestoulationsintheworld3with+&%ofIndians-elow2+yearsofage.Allthis is leading

toachangeintheconsumtionatternwithanincreaseindemandfordiscretionarysericeslieeducation,riatehealth,ersonalcareandhotelsandrestaurants./heIndian

maret is large and unsaturated and maority of serices has -een oened u for foreign

Inestment.Indiawantstodeeloasa nowledge3-asedhu-andthegoernmentisromoting e7ortsofserices. All these factors willdriethe futuregrowth ofserices inIndia.


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Indiangoernmentroectionshowthatsericessectorwillcontinue togrowata fastace./he #lanning

'ommissionestimatesthattheeconomy willgrowat.+%inthe GIIth

FieHear#lan (20123201*)./hesericessectorisroectedtogrowattherateof10%during 20123201*.'ertainsericeslietrade,hotelsand restaurantsandtransort, storage andcommunicationsandfinancing,insurance,realestateare e7ectedtogrowfasterthanoerallsericesgrowthwhile others liecommunitysocial and ersonserices maygrow at a slower ace.

II. !radeandinvestent in Services

4eformsandli-eralisationalong withtechnologicaldeeloment,growthofmultinationals andnewdeliery models,andlargeunsaturateddomesticmarethaeenhancedIndiastradeandinestmentin serices.

A. Indias !radeinServices

India enoysglo-al cometienessinI/ andI/eserices, which has increased serices e7ortsmanifolds./he demandforIndiassericese7ortsinglo-almaret hasledtoanincreasein Indiastradesurlus in this segment (Aleandroet. al2010). ericese7orts haecontri-utedto inclusieeconomicgrowth -yincreasingthe num-er ofwell3aido-s and -yreallocatingla-our toahigh3roductiity sector.ericese7ortshaealsoincreasedta7reenuesandstimulated domesticdemand,includingdemandforinfrastructure.

67isting literatureshowsthattherehae-eenchangesincomositionofsericestrade3from

traditionalsericessuchastraelandtransorttowards nowledge3-asedand-usinessserices('handa2002).Indiahase7ortotentialinsill3-asedandla-our3intensieserices(Ministry ofFinance200*).

/radein serices has -een growing raidlyin theast two decades (1032010).In 10sIndiassericestradewasaluedat$-illionandin2010itreached2&0-illion.Indiassericese7ortsnotonlygrewmoreraidlythanthecountrysmerchandisee7orts,-utitalsogrewfasterthanglo-alsericese7orts.Fortheeriod1032010,Indiassericee7ortsgrewata

'A!4of1:.2%,whileworlde7ortsofsericeshaegrownattherateof*.&%.u-stantial#artofthisgrowthhas-eenintheostreformeriod(1132010)J21.*%.Inthe10sand

10s,India hada negatie trade -alance inserices-utfrom200&onwards,ithasa ositietrade-alanceinserices.

Inthe10s,sericestradecontri-utedto20%ofIndiastotaltrade.In2010,theshareincreased to:0.&%comaredtothe glo-alaerage of 2&%./rade insericesasa ercentage of !"# increasedfrom:.2%


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in10to1:.% in2010.9oweer, thisisstilllowcomaredto contri-ution ofserices sectorinIndias!"#.

Indiasshare inworldtradein sericeshasincreasedfromlessthanoneercenttooer:%-etween10and2010,whileitshareingoodstraderemainedconstantatoneercentduring the sameeriod. 8hile the worlds trade in serices is still dominated -y the deeloed countries,emergingeconomieslie'hinaandIndiaarenowamong thetotene7ortersand

imortersofsericesamong8/


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AlthoughIndiawantstodeeloasanowledge hu-there isno uniformityisthe;ualityandstandardofeducationandformaleducationdoesnotguarantee emloya-ility.

/hehighlightsreformmeasuresthatwillena-letheserices sectortonotonlytogrowatafastace-utalsocreate;uality emloymentandattractinestment.Itisimortantfora deeloingcountrylieIndiawithalargeandyoung oulationtogenerate;uality emloymentandmoeuthealuechain.Indianeedsriateinestmentsiney infrastructuresericessuch

astransort,energyandtelecommunications. Ifthereformsareimlementeditwillnotonlyenhancetheroductiity andefficiency ofthesericessector-utwillalsoleadtooerallgrowthoftheeconomy through-acwardandforwardlinages.ItwillenhanceIndiasglo-alcometitienessand tradein serices.

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