Service Sector in Indian Economy

PRESANTETION ON SERVICE SECTOR IN INDIAN ECONOMIC

PRESANTED BY:Chaudhary Suresh (0805) Dayma Hiral (0806) Dave Ravi (0807) Desai Ajay(809)

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Introduction Overview Reasons for growth Current scenario Activity comprising the service sector Service –before and after liberalisation Comparison Impact of service sector Sectoral growth Major service sectors Trends in service ,GDP and WPI Employment and service sector Service tax Effect of U.S. recession

SERVICE  Service 

is Intangible

It is an economic activity that does not result in ownership

 Creates

value for the customer

Providers of services constitutes the Tertiary sector of Indian economy

OVERVIEW-INDIAN SERVICE SECTOR ► India

stands out from other emerging economies because its growth has been led by the service sector. ► The Sector constitutes a large part of the Indian economy both in terms of employment potential and its contribution to national income ► The services sector contributes more than half of the GDP in India, i.e., 55.8%(2007-08)and 60.7% as per the recent data. ► The Service exports in India have grown up from US $ 19.1 billion to US $ 73 billion in 2006. ► The sector covers a wide range of activities.

REASONS FOR GROWTH OF SERVICE SECTOR ►

Both demand and supply factors have led to this growth.

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On the demand side, the high growth of services output was mostly attributed to factors such as increasing input usage of services by other sectors, mainly manufacturing sector (i.e. higher domestic demand); higher foreign demand due to trade liberalization; and high income elasticity for services.

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On the supply side, the increased trade in services following trade liberalization policies and other reforms in the 1990s induced this growth.

Cont.. ► ► ► ► ► ► ► ► ► ► ► ►

Economic affluence Changing role of women Cultural changes It Revolution Conservation of natural resources Development of markets Unbundling corporations Increased consciousness of health care Economic liberalization Migration Export potential Service tax

CURRENT SCENARIO  Services sector in future providing about 70 per cent of the new job opportunities in the economy  Share of agriculture in total employment already falling, in the coming years, the share of services would increase  New employment possibilities in the services sector are construction, trade, transport, storage, financial services, communication and personal services  Employment in manufacturing would also expand, but its contribution to the total increase in employment would only be around 17 per cent. Thus, given the employment trends as emerging from diverse sources and the employment potentials at the sectoral levels, it may be argued that a broadbased high growth of GDP would lead to higher employment in the economy, with services sector playing a lead role.

ACTIVITIES COMPRISING THE SERVICE SECTOR (a)  Trade` (b)  Hotels and restaurants (c)  Transport including tourist assistance activities as well as activities of travel agencies and tour operators (d)  Storage and communication (e)  Banking and insurance (f)   Real estate and ownership of dwellings (g)  Business services including accounting; software development; data processing services; business and management consultancy; architectural, engineering and other technical consultancy; advertisement and other business services (h)  Public administration and defence (i)   Other services including education, medical and health, religious and other community services, legal services, recreation and entertainment services (j)  Personal services and activities of extra-territorial organizations and bodies.

SERVICE-BEFORE AND AFTER LIBERALISATION ►

Before liberalization Services was the residual sector drawing refugees from agriculture

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The share of services in GDP was 28.2% in 1950s and it rose consistently over the period of the five decades and stood at 44.3% in the 1990s.

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The service sector's share finally rose from 43.69 per cent in 1990-91 to 51.16 per cent in 1998-99.  Service sector’s share in 2008-09 is 56%

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Between 1996 and 2005- the triple impact of India’s external liberalization, domestic economic reforms and the rise of a global market for skilled services facilitated by information technology makes itself felt, share of services in India’s GDP grew from just over 40% to about 54%.

COMPARISON OF SERVICES AS A SHARE OF GDP WITH OTHER COUNTRIES S

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s

a s

s

h

a r e

o

f

G

D

8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0 U n it U n it M ex ed S ed K ic o ta te in g d s om

R us In d i a sia n Fed e ra t io n

B ra z il

C h in a

P

i n

2 0 0 5

IMPACT OF SERVICES SECTOR ON OTHER MACROECONOMIC VARIABLES Looking at the magnitude of services growth and its inter-linkages with other sectors of the economy, it is important to understand the impact of services sector on other macroeconomic variables. The following issues have been studied: (i)

Whether the robust growth of the services sector has added a dimension Stability to India's GDP growth. (ii) Whether there has been a growing complementarily between services and industrial sectors of the economy. (iii) Whether the services sector also experienced 'jobless' growth like other commodity-producing sectors. (iv) Whether high growth of services sector had any inflationary impact on the economy. (v) Whether the imposition of services tax has boosted the Government’s effort at mobilizing more resources

SECTORAL GROWTH PERFORMANCE OF INDIAN ECONOMY Before understanding this first point let us see, the sectoral growth performance of Indian Economy. There have been considerable increases in the service sector during last two decades, and looking in the trend of last five years the GDP have increased to 8%.

Three major service sectors that have seen remarkable growth are communication, transportation and financial services.

Indian scenario-Services and inflation

On the contrary, an examination of the NAS (National accounts statistics) and price data indicates that the contemporary growth process is characterized by the co-existence of high services growth with low and stable inflation ,thanks to the credible monetary policy, which has kept the inflationary expectations at bay.

Trends in Services, GDP and WPI – Growth and Share (percent) GDP growth

Services growth

Share of services in GDP

WPI index

1971-72 to 1980-81

3.16

4.22

40.69

-

1981-82 to1990-91

5.64

6.44

44.38

-

1991-92 to 1995-96

5.38

6.67

47.97

7.99

1996-97 to 2000-01

5.92

8.03

51.68

5.08

2000-01 to 2004-05

6.30

7.95

56.28

-

2008-09

7.9

8

56

-

IS SERVICE SECTOR GROWTH A“JOBLESS GROWTH”?? ►

The concern that the acceleration in GDP growth in India in the post-reform period has not been accompanied by a commensurate expansion in employment has received a focused attention from the policy makers.

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It is generally argued that the growth in services sector is a ‘jobless growth’.

EMPLOYMENT AND SERVICES SECTOR – NOT SO 'JOBLESS' 

India’s share of employment growth in the tertiary has been higher than in manufacturing sector on Usual Principal Status (UPS) basis. In the decades of eighties and nineties, the fall in the share in employment in agriculture sector has been increasingly absorbed by the tertiary sector.



However, in 2004-05 compared to 1999-2000, there is a change with the fall in employment share of the agriculture sector being absorbed both by the manufacturing and tertiary sectors with a higher share for the former.

THE TABLE PROVES THE ABOVE FACT

While the recent rise in share in employment growth in manufacturing sector is a positive development, the importance of services in employment creation needs to be noted, particularly when India is competitive in many laborintensive and skill-intensive services and there is a huge market even now.

Total employment (both organized and unorganized sector) trends as captured in the NSSO surveys are indicative of the fact that services sector has recorded a relatively faster growth in employment

SERVICE TAX-A SOURCE OF REVENUE The number of services being taxed in India has increased progressively from 3 in 1994-95 to about 92 in 2006-07 . ► The services tax was imposed at the rate of 5 percent, this has now been increased to 12 per cent. ► There has also been a substantial growth in assesses base, which increased from 3,493 in 1994-95 to 7, 74,988 in 2004-05. ► The collection of the services tax revenue has witnessed a substantial expansion since 1994-95, rising from Rs. 407 crore in 1994-95 to Rs. 23,000 crore in 2005-06. ►

Services tax revenue as a percentage of total tax revenue has also increased substantially from 0.4 per cent in 1994-95 to 6.2 per cent in 2005-06 and is expected to reach 7.8 per cent in 2006-07 . The growth in services tax collection has equally been impressive. Growth in services tax revenue has been facilitated both by increase in rate of taxation as well as increased number of services being taxed. In more recent years, after recording a higher growth of 91.4 per cent in 2003-04, the growth in services tax collection has come down to 62 per cent in 200506,which is also by and large, impressive.

SERVICE SECTOR-COMPONENT OF INDIRECT TAXES  

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Further, services tax is emerging as an important component of indirect taxes. The share of services tax in indirect taxes has increased more than twenty-folds from a mere 0.6 per cent in 1994-95 to 13 per cent in 2005-06 . On the contrary, following the rationalization of duty structure, the share of indirect taxes has decreased over the years. Thus, it appears that falling share of custom duty has been amassed by the services Almost 60 per cent of the GDP is contributed by the services sector alone. The growth in absolute quantum of GDP and higher proportion of services sector therein holds promise for a larger revenue generation.

EFFECTS OF U.S. RECESSION ON INDIAN SERVICE SECTOR ►

Not much effect as Indian Service Sector’s boom attributed to the hike in internal consumption and the per capita income of Indian lot.

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Certain sectors led by IT/ITES which make substantial amount of export to US are incurring losses.

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However, impact of US led recession which clicked from the sub prime crisis would be partial and somewhat of short span on our economy.

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Services like tourism, health care education, engineering, communication, transportation, finance, IT, banking will continue it boom.

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