It is that Sector of the economy, which deals with the tertiary activities comprising of service providers, the financial services, household services and the personal services etc. Service sector shows the change in the fundamental structure of the economy by way of contribution to the national income, Employment potential, Growth rate, Financial potential. Service sector is one of the most significant sectors of the Indian economy contributing nearly 66.1 per cent of the GDP in 2014-15. The sector has come to play an increasingly dominant role in the economy accounting for 72 per cent of the overall average growth in GDP. While the Indian economy grew at the rate of 7.3 per cent in 2015, services grew at an impressive rate of 10.3 per cent.

Trends in growth

• The services growth was led by trade, repair, hotels & restaurants, public administration and defence.
• Trade, hotels, transport and communication grew by 10.7 per cent
• Financial services (comprising banking, insurance, real estate and business services) grew by 7.9 per cent.
• Community, social and personal services grew 7.8 per cent against 7.7 per cent.

Service Exports[1]

• The growth of the Indian services sector has not only been confined to the domestic market. It is also reflected on its trade front. India’s share in the global trade of services has increased from 2 per cent in 2004 to 3.2 per cent in 2014.
• With significant moderation in foreign tourist arrivals (FTAs), travel receipts with a 12.9 per cent share in services exports in 2014-15, witnessed a decelerated growth of 4.1 per cent in H1 of 2015-16 compared to 13.5 per cent in 2014-15 and 18.0 per cent in H1 of 2014-15.
• Transportation services export growth was negative at - 17.0 per cent in H1 of 2015-16 as against a growth of 0.6 per cent in 2014-15 and 7.6 per cent in H1 of 2014-15, reflecting the slowdown in international trade.
• Growth in professional and management services clocked up to 9.4 per cent in H1 of 2015-16 from negative growth of - 6.9 per cent in 2014-15 and - 6.7 per cent in H1 of 2014-15.

Reason for the growth of service sector 

Service sector has expanded relentlessly in the part decade (almost 9%). The reasons for this are: -

1.   Explosion in IT caused an upsurge in telecom software, finance & banking industry.

2.   Due to globalization of business and changing tastes of people, there is a boom in the entertainment industry, retail trade, fast food industry, consumer goods industry etc.

3.   Stagnation in agriculture and a slower growth in manufacturing industries has pushed the service sector in the form of investment divergence.

4.   Apart from this the restrictive economy including the license Raj, closed economy, barriers in terms of International trade, unfriendly labour laws and the reserved list policy restricted the growth of industry whereas no such controls were there for service sector which provided a further ground for its growth in India.

Importance of service sector

• In 1950-51, the contribution of this sector is GDP was 31.8%. The share of services in GDP has gone up by 12.8 percentage points from 36 percent in 1980 to 48.8 percent in 2001 further to 66.1% in 2014-15.
• In the past 10 years the service sector has grown by more than 8% annually thereby contributing to the economic growth rate. The sector has come to play an increasingly dominant role in the economy accounting for 70 per cent of the overall average growth in GDP for past few years.
• According to estimates 1 in every 2 Indians earn their livelihood by providing service.
• Service sector is also important from the part of view of raising the revenue of the government through service tax. The revenue from service tax stands at 2.15 lakh crore and is more than the revenue from central excise. Ease of collection and low evasion possibilities make service tax more bankable. With the addition of more services and a gradual increase in rates to the current 14 per cent, the share of service tax in indirect taxes has been increasing. From about 12 per cent in 2005-06, it moved up to 31 per cent in 2014-15. With the rollout of GST (Goods and Services Tax), the service tax rate is expected to be bumped up further.
• Software exports is a well-known success story, India is now an important venue for many tasks in services such as financial accounting, call centres, processing insurance claims, and medical transcription.
• The services sector has also been attracting a large amount of foreign investment. Of total FDI in India from 2000-2015, 53% has been in services sector. In 2015 the FDI in services sector amounted to US$ 16.4 billion. Similarly, a large portion of domestic investment is also going into the services sector.

Services sector exports

The services sector with a share of 55.2 per cent in India’s gross value added continued to be the key driver of India’s economic growth contributing almost 72.5 per cent of gross value added growth in 2017-18. While the growth of this sector in 2017-18 is expected to be at 8.3 per cent, the growth in services exports and net services were robust at 16.2 per cent and 14.6 per cent respectively in H1 of 2017-18. The Government has taken many initiatives in the different services which include digitization, e-visas, infrastructure status to Logistics, Start-up India, schemes for the housing sector, etc. which could give a further fillip to this sector.

As per the UN National Accounts Statistics data, India’s ranking improved from 14th position in 2006 to 7th position in 2016, among the world’s 15 largest economies in terms of overall GDP. Among these top 15 economies, China (9.8 pp) recorded the highest increase in services share to Gross Value Added (GVA) during 2006-16, followed by India (7.1 pp) and Spain (7.0 pp). In 2016, services GVA growth rate (at constant prices), was highest in India at 7.8 per cent followed by China at 7.4 per cent. As per the ILO’s estimates, among the top 15 economies, the services sector accounted for more than two-thirds of total employment in 2016 in most of them except India and China, with India’s share of 30.6 per cent being the lowest. While China had the highest increase in the share of services employment (10.2 pp) during the period 2006 to 2016, increase in India was 5.2 pp (Figure 1).

Services export growth, both for World and India, which had dipped to negative territory in 2015 after an interregnum of 6 years from 2009, returned to positive territory in 2016. As per the latest World Trade Organization (WTO) data for first half of 2017, services export growth for the World was 4.3 per cent (average of Q1 and Q2) and robust at 9.9 per cent for India, though the highest growth was registered by Russia at 18.4 per cent. China’s growth was at 0.2 per cent. As per the World Investment Report 2017 published by United Nations Conference on Trade and Development (UNCTAD), following a surge in foreign investment in 2015, global FDI flows fell by 2 per cent in 2016, to US $1.75 trillion, amid weak economic growth. Global FDI flows are projected to increase by about 5 per cent in 2017. The services sector accounted for two thirds of global FDI stock in 2015, though a large part of this relates to affiliates of primary sector and manufacturing multinational enterprises (MNEs) that perform services-like activities, and fall under services as a default category. The share of services in total value of announced Greenfield projects increased to 58.2 per cent in 2016 from 54.1 per cent in the previous year.

FDI in India’s Services Sector

Though there is ambiguity in the classification of FDI in services, it is the combined FDI share of the top 10 service sectors such as financial and non-financial services falling under the Department of Industrial Policy & Promotion (DIPP)’s services sector definition; as well as telecommunications; trading; computer hardware & software; construction; hotels & tourism; hospital & diagnostic centres; consultancy services; sea transport; and information & broadcasting that can be taken as the best estimate of services FDI. However, these could include some non-service elements. The share of these services is 56.6 per cent of the cumulative FDI equity inflows during the period April 2000-October 2017 and 65.8 per cent of FDI equity inflows during 2017-18 (April-October). If the shares of another 5 services or service-related sectors like retail trading, agriculture services, education, book printing and air transport are included, then the total share of FDI equity inflows to the services sector would increase to 58.5 per cent and 69.6 per cent respectively for the above two periods. In 2016-17, FDI equity inflows to the services sector (top 10 sectors including construction) declined by 0.9 per cent to US$ 26.4 billion, though the overall FDI equity inflows grew by 8.7 per cent. However, during 2017-18 (April-October), the FDI equity inflows to these services sector grew by 15.0 per cent, as compared to 0.8 per cent growth in total FDI equity inflows, mainly due to higher FDI in two sectors i.e. Telecommunications and Computer Software and Hardware.

In the last three years, the Government has undertaken a number of reforms to ensure that India remains an increasingly attractive investment destination, which include announcement of National Intellectual Property Rights (IPR) policy, implementation of GST, reforms for ease of doing business that resulted in improving India’s ranking by 30 position. The scale of reforms can be gauged from the fact that during this period, 25 sectors also including services activities and covering 100 areas of FDI policy have undergone reforms. FDI policy provisions were radically overhauled across sectors such as construction development, broadcasting, retail trading, air transport, insurance and pension. At present, more than 90 per cent of FDI.