Revised Chap Rupa Chanda India\'s Services Sector PDF

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29Rupa ChandaIndia’s Services SectorTrends, Opportunities and ChallengesIntroductionThe Indian economy has undergone major macroeconomic andstructural reforms since the balance of payments crisis of 1991. Trade,FdI, and industrial policies have been liberalized. Many restrictionshave been completely...

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29 R u pa C h a n d a ................................................................

India’s Services Sector Trends, Opportunities and Challenges

Introduction The Indian economy has undergone major macroeconomic and structural reforms since the balance of payments crisis of 1991. Trade, FdI, and industrial policies have been liberalized. Many restrictions have been completely dismantled. Institutional, leg islative, and regulatory measures have been undertaken to improve macroeconomic management. The liberalization of the economy has helped put India on a higher growth trajectory, with the compound annual growth rate rising from 5.7 per cent in the 1990-2004 period to 7.5 per cent in the 200516 period (un national accounts Statistics).India has in fact been one of the fastest growing economies in the past two decades. The country’s external sector performance has also improved post-liberalization, with an increase in India’s share in world trade as well as FdI flows over the past decade. The ser vice sector has played an important role in enabling this improved economic performance during the post-reform period. Services have been the fastest growing sector of the Indian economy in recent years and have helped accelerate the overall growth rate of the economy. Services have also facilitated India’s integration with the world economy through trade and capital flows. The phenomenal growth and export performance witnessed in services like information technology (IT) and business process outsourcing (BpO) has placed India on the global map. Services have also helped improve productivity in other sectors of the economy, thus contributing to an improvement in the economy’s overall competitiveness. Revised and updated by the author July, 2020.

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Sections 2 to 5 provide an overview of the trends in growth, employment, trade, and capital flows in India’s service sector in recent years. They also highlight the case of specific services where India is highly competitive, Section 6 discusses the links between services and manufacturing and the value-added contribution of the services sector to manufacturing. Section 7 outlines the status of liberalization in services in India and the political economy challenges that have plagued this process. Section 8 highlights India’s international engagements in services in the context of multilateral and preferential trade negotiations. Section 9 highlights the adverse impact the Covid-19 pandemic has had thus far on India’s services sector as well as the new opportunities and challenges this pandemic is likely to create for services and which India should be in a position to address. The chapter concludes by discussing the sustainability of services-led growth in India and underlines the close link between the service sector’s prospects and the success of the overall economic reform process in India. Growth Trends in India’s Service Sector1 The service sector has exhibited phenomenal growth rates during the 1990s and 2000s. The sector’s compound annual growth rate (CaGR) has consistently risen over the decades, from 6.2 per cent during the 1980s to 7.3 per cent during the 1990s and further to 8.7 per cent during the 2001-16 period, exceeding overall Gdp growth throughout. In contrast, agriculture and industry have exhibited mixed performance, with the CaGR in agriculture declining from 3.5 per cent in the 1980s and stagnating at 2.9 per cent during the 1990s and the 2001-16 period while industry registered a decline in its CaGR from 7.9 per cent during the 1980s to 6.3 per cent in the 1990s, rising to 7.5 per cent during the 2001-16 period. Figure 29.1 illustrates these trends and the relative performance of the service sector. It highlights the role of services in raising overall economic growth in India. In average annual growth terms, however, services growth has decelerated from a peak of 10.1 per cent in the 2005-09 period to 7.9 per cent per year during the 2010-16 period, though still exceeding overall growth and growth in agriculture and industry. Table 29.1 provides theoverall as well as sectoral growth rates in India for the 2005 to 2016 period and the superior performance of services compared to the rest of the economy through the last two and a half decades and the deceleration following the global financial crisis.

787 Figure 29.1

CAGR for GDP and its components for India: 1980s, 1990s and 2000s (%) 10.00 9.00

8.71

8.00 7.00 6.00

7.85

7.48

7.53 6.28

5.85 6.05

7.33 6.24

5.00 3.48

4.00 3.00

2.93 2.90

2.00 1.00 0.00 GDP

Agriculture 1980-90

1991-2000

Industry

Services

2001-16

Note: Services include construction Source: http://unstats.un.org/unsd/snaama/resQuery.asp&http://unctadstat.unctad.org/wds/ ReportFolders/reportFolders.aspx?sCS_ChosenLang=en(accessed October 1, 2018)

Growth performance within the service sector has, however, been uneven. The driving segments have been communication, banking and insurance, construction, and trade and distribution services, which grew at over 7 per cent in CaGR terms during the 2000-09 period, while services such as railways and public administration services grew at less than 4 per cent. In recent years, growth has picked up in a wider range of services, including air transport, public administration, real estate, professional and other services, alongside trade and distribution, communication and financial services which have maintained high rates of growth. Construction services have, however, witnessed a decline in growth, from an average growth rate of over 8 per cent in 2005-10 to 4.2 per cent in 2011-16. Transport and communication services have consistently registered the highest growth rates within the services sector (Economic Survey 2010-11 and 2015-16; un national accounts Statistics). These sub sectoral trends reflect differences in policies and regulations across different services, the role of rising incomes and domestic demand in driving growth in some service segments, and broader macroeconomic factors. The high growth rate of services has contributed to the sector’s rising share in the overall economy. Between 1980 and 2016, agriculture’s

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Table 29.1

Annual and average annual growth rate in overall and sectoral output, % 2005

2006

2007

2008

2009

2010

Gross domestic product (Gdp)

9.2

9.2

9.0

6.1

8.0

8.7

agriculture, hunting, forestry, fishing

5.2

4.2

5.8

0.0

0.9

8.7

Industry Services

8.7 11.1

12.3 10.0

9.1 10.3

4.0 9.5

9.7 9.9

8.5 8.7

2011

Average

2012

2013

2014

6.8

5.4

6.1

7.2

7.9

6.6

5.0

1.5

5.6

-0.2

0.7

4.9

6.3 7.7

4.5 7.0

4.2 6.9

8.6 8.9

2015

2016

10.2 9.0

200004

7.0 6.9

CAGR

200509

201016

19902000

200016

5.4

8.3

7.0

4.7

6.7

1.7

3.2

3.7

2.2

2.7

5.6 7.3

8.8 10.1

Note: Services include construction Source: http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_Chosenlang=en(accessed October 1, 2018)

7.0 7.9

5.0 6.4

7.0 8.1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Growth in Sectoral and Overall Output at factor cost and constant prices, 2005-16 (%)

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share in Gdp declined by nearly 30 per cent which was mainly offset by an increase of 23 per cent in the share of services. In 2016, services, including construction constituted 61.4 per cent of Gdp, up from 38.3 per cent of Gdp in 1980 (Economic Survey various issues and un national accounts Statistics). This trend contrasts withwhat is observedin many other developing economies, where the decline in the share of agriculture has been followed by a corresponding rise in the share of industry, in particular manufacturing, and later in services. The industrial sector has increased its share only marginally over this period in India. Thus, there has been a leapfrogging of the economy from dependence on the primary sector to the tertiary sector. Within the services sector, trade and distribution services account for the largest share followed by community, personal and social services and transport services (various issues of Economic Survey and un national accounts Statistics).Figure 29.2 shows the relative contributions of the primary, secondary, and tertiary sectors in India’s Gdp and the steady shift in this composition between 1980 and 2016 towards services. Figure 29.2

Composition of GDP across sectors (%) 120.00 100.00 80.00

38.32

41.37

49.31

54.09

57.86

61.43

23.26

23.40

60.00 17.67 40.00 20.00

22.18 22.90

44.06

36.55

22.74

27.83

23.16

18.88

15.19

2000

2005

2010

2016

0.00 1980

1990 Primary

Secondary

Tert iary

Note: primary: agriculture, hunting, forestry, fishing Secondary: Mining, manufacturing, utilities Tertiary: Services, construction Source: http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (accessed: november 20, 2018)

790

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The service sector’s contribution to overall employment has risen, though this has not been commensurate to the growth in services output. according to IlO estimates, services share in employment rose only slightly from 21.6 per cent to 23.8 per cent between 1991 and 2001. according to the 2010-11 Economic Survey, the tertiary sector’s share of employment increased only modestly by 4.2 per cent between 1993-94 and 2007-08 while during the same period, its share in Gdp increased by over 10 per cent, implying a low employment elasticity. although India features among the leading services producer countries, the share of services in its employment was the lowest at 28.7 per cent in 2014 whereas the share of this sector in other leading service producer countries was around two-thirds. This share increased by a mere 4.7 per cent between 2001 and 2014 and in 2017 accounted for 33.5 per cent of employment (World Bank database; Economic Survey 2010-11, Table 10.1; Economic Survey 2015-16 (Vol. 2), Table 7.1 and Figure 7.1). Most of this employment has been concentrated in trade and distribution, construction, hotel and restaurants, and community and personal services segments. The employment trends further reveal that very rapidly growing service segments such as communication and financial services have had relatively lower employment elasticity, indicating that their growth has mainly been based on productivity gains and technological improvements. It is worth noting that Indian data on services output and employment are subject to problems of data collection, disaggregation, and coverage. India’s Wholesale price Index (WpI) does not capture services while the Consumer price Index fails to cover it fully. an experimental price index has been developed by the dIpp for selected services such as air, telecom, banking and port services. The aim is to initially use this service price index as a complement to the WpI and later to merge it with the WpI. There are efforts underway to improve statistical measurement and coverage of services under the aegis of a national Statistical Commission. Trade in India’s Service Sector2 The contribution of services to India’s trade and FdI flows has also been growing over the past decade, facilitating India’s integration with the world economy. India’s services exports have steadily grown from a mere $2.9 billion in 1980 to $6.7 bn in 1995, rising to $16.7 billion in 2000 and growing more than tenfold to $183.9 billion in 2017. Services imports have also risen significantly, from $2.9 billion in 1980 to $10.2 billion in 1995, rising to $19.2 billion in 2000 and further to $154 billion in 2017. India has moved to a slight services trade surplus over

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the years, which has in part helped offset its otherwise persistent and growing trade deficit in goods. India’s services exports grew at an average annual growth rate of 23.5 per cent during the 1996-2005 period second only to Ireland and compared to 15.3 per cent for China. however, there has been a deceleration over the 2005-17 period, with the average annual growth rate of India’s services exports declining to 9.9 per cent, reflecting the overall slowdown in the world economy post the 2008 financial crisis and mirroring growth trends in other countries such as Ireland and Singapore. It is worth noting, however, that China’s services exports registered similar growth during this latter period at 9.6 per cent, reflecting a narrowing of the gap between the two countries in growth performance. In CaGR terms, India’s services exports grew the most rapidly among all countries at 11.1 per cent over the 2005-17 period and exceeded the sector’s CaGR for output and overall exports during this same period. as a result, the share of services in India’s total exports has risen from 18.1 per cent in 1995 to over 37.7 per cent in 2017. These trends highlight the export-oriented nature of services growth in the Indian economy as well as India’s growing competitiveness in the world services market and its liberalization of services imports, especially in the post 2000 period Figure 29.3

CAGR for Services Exports for Leading Services Exporters: 1995-2005, 2005-17 (%) 6.47 5.97

United States United Kingdom Singapore Japan

3.38 7.38 5.05 5.38

Ireland

10.59 11.15

10.46

4.15 3.88 9.29

China 0.00

22.67

5.76 7.60

Germany France

28.64

11.10

India

5.00

10.00

14.90 15.00

2005-17

20.00

25.00

30.00

35.00

1995-2005

Note: 1995-2005 figures are based on BpM5; 2005-17 figures are based on BpM6. For netherlands, 2010-17 data has been usedas 2005-09 is unavailable. Source: http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_Chosenlang=en (accessed October 1, 2018)

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Figure 29.4

Share in world services exports and imports for India: selected years (%) 4.00 3.44

3.50 2.98 3.00 3.00

2.97

2.32

2.50 1.96

2.00 1.50 1.00

0.77 0.67

0.56

0.70

0.50 0.00 1980

1990

2005 Exports

2010

2017

Imports

Note: 1980, 1990 figures are based on BpM5; 2005, 2010, 2017 figures are based on BpM6 Source: http://www.unctad.org/Templates/page.asp?intItemId=1890(accessed October 1, 2018)

Rapid growth in ser vices trade has led to India’s increased penetration of the world services market over the past two decades, reflecting India’s growing competitiveness in global services, especially in the post 2000 period. India’s share in world services exports has risen from less than 1 per cent in the 1980s and 1990s to 1.9 per cent in 200, 2.9 per cent in 2010 and was 3.44 per cent in 2017. Its share in world services imports has similarly increased from 0.7 per cent in 1990 to 2.3 per cent in 2005 and further to nearly 3 per cent in 2017. India’s services exports have in general grown much more rapidly than its merchandise exports. Further, India’s penetration of the world services markets not only exceeds that for goods but has also risen more rapidly, particularly in the latest decade. Figures 29.5 and 29.6 illustrate the relatively superior performance of services exports compared to merchandise exports, with services export growth peaking during the boom period prior to the global financial crisis

793 Figure 29.5

India’s Average Annual Growth Rate of Goods and Services Exports, 1980-2017 (%) 30.00

27.27

25.00

5.00

18.77

14.07

15.00 10.00

19.22

19.10

20.00

9.25

8.05

6.85 4.98

4.73

0.00 1980-90

1990-2000

2001-05

Goods

2005-10

2010-17

Services

Note: 1980-2005 figures are based on BpM5; 2005-17 figures are based on BpM6 Source: http://www.unctad.org/Templates/page.asp?intItemId=1890(October 1, 2018)

Figure 29.6

India’s Share in World Exports of Goods and Services, 1980-2017 (%) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

3.44 2.98 1.96 1.55 0.77 0.42

0.52 0.56

1980

1990

1.09 0.66

2000 Goods

1.75

1.01

2005

2010

2017

Services

Note: 1980, 1990, 2000 figures are based on BpM5; 2005, 2010, 2017 figures are based on BpM6 Source: http://www.unctad.org/Templates/Page.asp?intItemID=1890 (accessed October 1, 2018)

Thus, the evidence clearly indicates India’s competitiveness in services relative to goods. This is also supported by estimates of India’s revealed comparative advantage (RCa) in services versus goods, which show that between 1990 and 2017, the RCa for services increased by

794

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around 50 per cent while that for goods declined by around 17 per cent. Figure 29.7 illustrates the trends in India’s RCa for services relative to goods Figure 29.7

India’s RCA in Goods and Services Exports, 1980-2017 1.80

1.63

1.60

1.62

1.60

1.47

1.40 1.20 1.00

1.07 0.98

0.89

0.84

0.84

0.81

0.80 0.60 0.40 0.20 0.00 1990

2000

2005 Go ods

2010

2017

Services

Note: 1990, 2000 figures are based on BpM5; 2005, 2010, 2017 figures are based on BpM6 Source: Based on unCTad handbook of Statistics online http://unctadstat.unctad.org/wds/Report Folders/reportFolders.aspx?sCS_ChosenLang=en (accessed October 1, 2018)

There has been a shift in the structure of India’s services exports away from traditional services such as transport and travel towards other com...