Making Service sector strong

Gudipati Rajendera Kumar Challenges in the service sectors

The opportunities in this fast-growing, employment-oriented, FDI attracting sector, with vast export-potential are striking. However, the challenges are also many:

• The major challenge in service sector was to retain the competitiveness and preserve the traditional service sectors such as shipping and tourism.
• Given the myriad activities in services, supporting its growth will require careful and differentiated strategies.
• One of the challenges in this area is to retain India’s competitiveness in those sectors where it has already made a mark such as IT & ITeS and Telecommunications.
• The challenge lies in making inroads into some traditional areas such as tourism and shipping where other countries have already established them, but where the potential for India is nevertheless very high.

• Spreading of domestic trade sectors such as education, banking and communication which also help in converting unemployment to employment ratios of population.
• Regulatory improvements will also be important as many domestic regulations and market access barriers could come in the way of fully tapping this growth accelerating sector.
• There are diverse sectors within services, the issues and policies cannot be separated into watertight compartments.
• It is one of the challenges before India’s services sector to broad base exports of services.

Problems related to service sector in India
• The output of many service sectors is hard to measure (public education, for example).
• Growth pattern in the service sector has not been uniform across all services in India.
• Some services have grown fast in terms of their share in GDP and also in terms of their share in trade and FDI (e.g., software and telecommunications services). But there are some services, which have grown fast but have not been able to improve their share in international transactions (e.g., health and education) while there are some services that have in fact witnessed a negative growth and also a low share in international transactions (e.g., legal services).

• Though there exists an overall industrial policy and agricultural policy in India, there is no integrated service policy.
Solutions
• Creating more competitive services markets by removing a wide range of internal and external policy distortions is vital for improving service sector productivity.
• complementary investments in physical infrastructure and human capital will also be necessary to achieve a strong service sector

Government initiatives
• In the last two years, the Ministry of Tourism has undertaken several initiatives to provide a further boost to the sector such as launch of new schemes like Swadesh Darshan and PRASAD(The National Mission for Pilgrimage Rejuvenation and Spiritual Augmentation Drive ) scheme,
• The International Tourism Mart is organized every year in North-Eastern States with the objective to highlight the tourism potential in the region
• The Make in India programme has identified twenty-five thrust areas from both services sectors and manufacturing sectors to provide major push to both the sectors.
• The policy initiatives like Start Up India, Stand Up India, Digital India ,Skill India, and fillips to manufacturing and infrastructure through fiscal incentives and concrete measures for transport, power, electricity, smart cities and efforts like improving the ease of doing business through a number of facilitatory initiatives are also likely to boost service sector in India.
Reasons for the growth of the services

sector contribution to the India GDP
• The contribution of the Services Sector has increased very rapidly in the India GDP for many foreign consumers have shown interest in the country's service exports.
• This is due to the fact that India has a large pool of highly skilled, low cost, and educated workers in the country. This has made sure that the services that are available in the country are of the best quality.

• The foreign companies seeing this have started outsourcing their work to India specially in the area of business services which includes business process outsourcing and information technology services.
• This has given a major boost to the Services Sector in India, which in its turn has made the sector contribute more to the India GDP.
Industrialisation is not the only

route to rapid economic development
• It is argued that industrialisation is the only route to rapid economic development for developing countries. The potential for explosive growth was seen only in the manufacturing sector.
• The new industrial revolution and digital technological changes have changed the growth drivers in developing and developed countries. These technological changes have enabled services to be the new driver of growth.

• The digital revolution, by lowering transaction costs in services and overcoming problems of asymmetric information, has made services more dynamic than in the past.
• The emergence of e-commerce platforms is an example of how digital revolution can lower transaction costs, increase productivity as well as make it more inclusive.
For many internet-based businesses or services, fixed up-front costs can be high initially, but once the physical infrastructure is in place, each additional customer, user, or transaction incurs very little extra cost.

• There is mounting empirical evidence that developing countries are relying more on services and less on manufacturing as drivers of growth and job creation.
• In the early 1970s, the relationship between the manufacturing labour share and income was far steeper than it is today, having followed a progressive erosion of the initial strength of this correlation over the past four decades.

Changed scenario
• The relationship between income and economic structure has shifted over time, with countries across the income distribution uniformly increasing the share of labour in service sectors.
• While global growth convergence in manufacturing was a clear and strong trend some decades ago, it is no longer as strong in recent decades. Services show stronger growth convergence in recent decades.

• A young population is generally more connected with technological changes.

Is services-led growth sustainable?
• Global trade in goods has never fully recovered since the global financial crisis of 2007-08. But this is not the case with global trade in services, which has exploded. These are structural and not cyclical changes.

• Globalization of services is the tip of the iceberg. Services, which account for more than 70% of global output, are still in their infancy. The long-held view that services are non-transportable, non-tradable, and non-scalable no longer holds for a host of services that can be digitized.

New opportunities for India
• The globalization of services provides new opportunities for India to find niches beyond manufacturing, where it can specialize, scale up, and achieve explosive growth.
• As the services produced and traded across the world expand with globalization, the possibilities to develop based on services will continue to expand. This pace of change will be rapid in line with the digital revolution. Global internet usage has grown globally. But this growth is much faster in developing countries. India alone adds one million new users every month to a booming mobile phone market.

• India’s demographic dividend should be an asset for the digital revolution and services-led growth. Job growth is important, as ten million more people will join the labour force every year in India. Agriculture and manufacturing create fewer jobs today compared to the past. But this is not the case with services.

Example : Take the example of mobile technology and examine its role in banking. Banking is currently concentrated in the urban areas, but cities are saturated with bank branches.
• On the other hand, 300 million rural people across 300 districts in India have no access to banking.

Expansion of digital technology can play a big role in improving rural access to banking.
• Financial inclusion can be achieved through last-mile connectivity. Services are spatially more neutral compared to manufacturing. So financial inclusion could in turn help medium-size cities, small towns and villages to become new drivers of growth.