Detailed Analysis of service sector and its composition in India by Mehrreen

Detailed Analysis
Of Service Sector
And Its
Composition In
India
Subject :MOS
NAME: MEHRREEN
MBA-4
SUBMITTED TO : RAJANI PILLAI
Amity Global Business School,
Bangalore

Detailed Analysis Of Service Sector And Its Composition In India
Page No. 1
ABSTRACT
While India is distinctive among developing countries for its fast-growing
service sector, sceptics have raised doubts about the quality and
sustainability of this service-sectorgrowth and its implications for economic
development. .It shows consistent with the views of the sceptics, that while
growth of the sector has been unusually rapid, it started 15 years ago from
unusually low levels. That the share of services has now simply converged
to the international norm raises questions about whether it will continue
growing rapidly. In particular, whether service-sector output and
employment continue to grow in excess of international norms will depend
on the continued expansion of modern services (business services,
communication and banking) but, also, on the application of modern
information technology to more traditional services (retail and wholesale
trade, transport and storage, public administration and defense ). The
second aspect obviously has more positive implications for output than for
employment.
Service sector also shows that the modern services that are growing most
rapidly are now large enough where their future performance could have a
significant macroeconomicimpact. The expansion of modern service-sector
employmentis not simply disguised manufacturing activity. Finally, it shows
that the mix of skilled and unskilled labor in manufacturing and services is
increasingly similar. It is no longer obvious therefore that manufacturing is
the main destination for the vast majority of Indian labor moving into the
modern sector and that modern services are a viable destination only for
the highly-skilled few. The sector concludes that sustaining economic

Page No. 2
growth and raising living standards will require shifting labor into both
manufacturing and services.
SECTOR IN INDIA
Service Sector in India today accounts for more than half of India's GDP.
According to data for the financial year 2006-2007, the share of services,
industry, and agriculture in India's GDP is 55.1 per cent, 26.4 per cent, and
18.5 per cent respectively. The fact that the service sector now accounts
for more than half the GDP marks a watershed in the evolution of the
Indian economy and takes it closer to the fundamentals of a developed
economy.
Services or the "tertiary sector" of the economy covers a wide gamut of
activities like trading, banking & finance, infotainment, real estate,
transportation, security, management & technical consultancy among
several others. The various sectors that combine together to constitute
service industry in India are:
• Trade
• Hotels and Restaurants
• Railways
• Other Transport & Storage
• Communication (Post, Telecom)
• Banking
• Insurance
• Dwellings, Real Estate
• Business Services
• Public Administration; Defence

Page No. 3
• Personal Services
• Community Services
• Other Services
There was marked acceleration in services sector growth in the eighties
and nineties, especially in the nineties. While the share of services in
India's GDP increased by 21 per cent points in the 50 years between 1950
and 2000, nearly 40 per cent of that increase was concentrated in the
nineties. While almost all service sectors participated in this boom, growth
was fastest in communications, banking, hotels and restaurants,
community services, trade and business services. One of the reasons for
the sudden growth in the services sector in India in the nineties was the
liberalization in the regulatory framework that gave rise to innovation and
higher exports from the services sector.
The boom in the services sector has been relatively "jobless". The rise in
services share in GDP has not accompanied by proportionate increase in
the sector's share of national employment. Some economists have also
cautioned that service sector growth must be supported by proportionate
growth of the industrial sector, otherwise the service sector grown will not
be sustainable. In the current economic scenario it looks that the boom in
the services sector is here to stay as India is fast emerging as global
services hub.
India's growing market size
India’s technology and BPM sector (including hardware) is likely to
generate revenues of US$160 billion during FY16 compared to US$ 146.5

Page No. 4
billion in FY15, implying a growth rate of 9.2 per cent.
The contribution of the IT sector to India’s GDP rose to approximately 9.5
% in FY15 from 1.2 per cent in FY98.
TCS is the market leader, accounting for about 10.1 per cent of India’s
total IT & ITeS sector revenue
The top five IT firms contribute over 25 per cent to the total industry
revenue, indicating the market is fairly competitive.
(Updated on Dec, 2016)
BACKGROUND
The services sector is not only the dominant sector in India’s GDP, but has
also attracted significant foreign investment flows, contributed significantly
to exports as well as provided large-scale employment. India’s services

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sector covers a wide variety of activities such as trade, hotel and
restaurants, transport, storage and communication, financing, insurance,
real estate, business services, community, social and personal services,
and services associated with construction.
Market Size
The services sectoris the key driver of India’s economic growth. The sector
contributed around 66.1 per cent of its Gross Value Added growth in 2015-
16, thereby becoming an important net foreign exchange earner and the
most attractive sector for FDI (Foreign Direct Investment) inflows.!
According to a report by leading research firm Market Research Store, the
Indian telecommunication services market is expected to grow by 10.3 per
cent year-on-year to reach US$ 103.9 billion by 2020.
The Indian digital classifieds industry is expected to grow three-fold to
reach US$ 1.2 billion by 2020,driven by growth in horizontal classifieds like
online services, real estate and automobiles.#
Out of overall services sector,the sub-sector comprising financial services,
real estate and professional services contributed US$ 305.8 billion or 20.5
per cent to the GDP. The sub-sector of community, social and personal
services contributed US$ 188.2 billion or 12.6 per cent to the GDP.
Investments
The Indian services sector has attracted the highest amount of FDI equity
inflows in the period April 2000-March 2016,amounting to about US$ 50.79
billion which is about 17.6 per cent of the total foreign inflows, according to
the Department of Industrial Policy and Promotion (DIPP).

Page No. 6
Some of the developments and major investments by companies in the
services sector in the recent past are as follows:
 Online food ordering and delivery service firm Swiggy, owned by
Bundl Technologies Private Limited, has raised US$ 15 million in a
fresh funding round led by Bessemer Venture Partners along with
existing investors SAIF Partners, Norwest Venture Partners, Accel
Partners, and Apoletto Asia.
 Meru Cab Company Pvt Ltd, the Mumbai-based radio cab service,
has raised Rs 150 crore (US$ 22.37 million) from Brand Capital, the
investment arm of Bennett Coleman and Co, which will be used to
fund advertising and provide user incentives including discounts and
loyalty schemes.
 Vistra Group Ltd, a Hong Kong-based professional services provider,
has acquired IL&FS Trust Company Ltd, India’s largest independent
corporate trust services provider, which will enable Vistra to expand
the platform to provide a broader suite of corporate and fiduciary
services and thereby gain a foothold in the Indian corporate services
market.
 Pink Blue Supply Solutions Pvt. Ltd, a clinical supplies provider, has
raised Rs 1.5 crore (US$ 0.22 million) in a seed round of funding from
TermSheet.io, a transaction-focused service provider for start-ups
and investors, which will be used to ramp up technology, improve
customer experience and operational capabilities, put in place smart
supply chain management across hospitals and clinics, and hire
larger teams.

Page No. 7
 Of Business, an online marketplace for business-to-business (B2B)
commerce, has raised US$ 5 million in series A funding round led by
Matrix Partners India, which will be used to expand the team and
build a technology platform for small and medium enterprises
(SMEs).
 Shuttle, an Indian bus aggregator platform headquartered in
Gurgaon, has raised US$ 20 million in Series A funding from Light
speed, Sequoia India and Times Internet Ltd.
 Indian logistics platform Rivigo has raised US$ 30 million in debt and
equity in Series B financing round, led by SAIF Partners. The firm
aims to use the raised funds to achieve its target of scaling 10 times
in the next 12 months.
 Taxi service aggregator Ola plans to double operations to 200 cities
in current fiscal year. The company, which is looking at small towns
for growth, also plans to invest in driver eco-system, such as training
centers and technology upgrade, besides adding 1,500 to 2,000
women drivers as part of its pink cab service by women for women.
Government Initiatives
The Government of India recognizes the importance of promoting growth in
services sectors and provides several incentives in wide variety of sectors
such as health care, tourism, education, engineering, communications,
transportation, information technology, banking, finance, management,
among others.
Prime Minister Narendra Modi has stated that India's priority will be to work
towards trade facilitation agreement (TFA) for services, which is expected
to help in the smooth movement of professionals.

Page No. 8
The Government of India has adopted a few initiatives in the recent past.
Some of these are as follows:
 The Government of India plans to significantly liberalise its visa
regime, including allowing multiple-entry tourist and business visas,
which is expected to boost India's services exports.
 Mr Ravi Shakar Prasad, Minister of Communication and Information
Technology, announced plan to increase the number of common
service centres or e-Seva centres to 250,000 from 150,000 currently
to enable village level entrepreneurs to interact with national experts
for guidance, besides serving as a e-services distribution point.
 The Central Government is considering a two-rate structure for the
goods and service tax(GST), under which key services will be taxed
at a lower rate compared to the standard rate, which will help to
minimize the impact on consumers due to increase in service tax.
 By December 2016, the Government of India plans to take mobile
network to nearly 10 per cent of Indian villages that are still
unconnected.
 The Government of India has proposed provide tax benefits for
transactions made electronically through credit/debit cards, mobile
wallets, net banking and other means, as part of broader strategy to
reduce use of cash and thereby constrain the parallel economy
operating outside legitimate financial system.
 The Reserve Bank of India (RBI) has allowed third-party white label
automated teller machines (ATM) to accept international cards,

Page No. 9
including international prepaid cards, and has also allowed white
label ATMs to tie up with any commercial bank for cash supply
Road Ahead
Services sector growth is governed by both domestic and global factors.
The sector is expected to perform well in FY16. The Indian facilities
management market is expected to grow at 17 per cent CAGR between
2015 and 2020 and surpass the $19 billion mark supported by booming
real estate, retail, and hospitality sectors. The performance of trade, hotels
and restaurants, and transport, storage and communication sectors are
expected to improve in FY17. Loss of growth momentum in commodity-
producing sectors had adversely impacted transport and storage sectors
over the past two years. The financing, insurance, real estate, and
business services sectors are also expected to continue their good run in
FY17. The growth performance of the community, social and personal
services sector is directly linked with government expenditure and we
believe that the government will remain committed to fiscal consolidation in
FY16.
(Exchange Rate Used: INR 1 = US$ 0.0149 as on September 21, 2016 )
Role of Service Sector in Economic Development
In any country economic development depends on the growth and
evolution of the three sectors of the economy. However in recent years the
service sector growing at a very faster rate in the developing countries and
is contributing a major share in terms of output, income and employment.
Even the productivity per worker is becoming higher in service sector when
compared to agriculture and industrial sectors.Already the service sector is

Page No. 10
dominant in the developed countries. If agriculture sector is stagnant, new
service activities are emerging and adding to the service sector making the
economyto grow. Hence service sector is playing a major role in economic
development of any country.
The importance of the services sectorcan be gauged by its contributions to
different aspects of the economy.
Business include both domestic trade as well as foreign trade. Trade as a
service sector activities facilitates the exchange of the goods and services
between producers and consumers.Domestic trade refers to the exchange
of goods and services with in the country. Which provides income and
employment to the people who have engaged in this activities. Foreign
trade plays a major role in the development of the country. Imports of
machinery and equipment which cannot be produced in the initial stages at
home are essential. Such imports which either help to create new capacity
in some lines of production or enlarge capacity in the other lines of
production are called developmental imports. The imports which are made
in order to make a full use of the productive capacity are called
maintenance imports.
Finance as a service sector activity plays an important role in undertaking
any economic activities. Finance refers to funds of monetary resources
required by individual, business houses and the government. People needs
funds to meeting their current requirement or day to day of expenses for
buying capital goods. A business house require funds for paying wages
and salaries, for buying raw materials, for purchasing new machinery or
replacing an old one etc. Government needs funds to provide various

Page No. 11
services to its subject. Finance institutions provides funds to various groups
of people forvariety of activities. In this process the service sector activities
provides income and employment to the people of a country.
In the previous days this sector is responsible for distributing the output of
the primary and secondary sectors for the intermediate and final
consumption and also for the providing a variety of services to producers
as well as consumers. Trade, transport and storage activities ensure
distribution of goods and services where and when needed by consumers.
Business and financial services facilitate mobilization of resources and their
development in the activities of different sector of the economy.
Service sector activities generally require relatively less capital investment
than activities in other sectors.But a majority of these activities also require
relatively less space for operations service sector is a knowledge intensive
sector and substantial HRD inputs are the necessary for developing most
of the services sector activities.
Reasons for the Growth of Service Economy
(a) The Lag in Growth in Labour Productivity in Services:
Part of the explanation for the growth of services is attributed to the slower
growth of labour productivity, as measured by volume of output per
employee,that is, the amount of labour required to produce a given volume
of output in other sectors of the economy like manufacturing, fell more
rapidly than in services. Lower output per man in services was the major
explanation for the shift in employment into the service sector.

Page No. 12
A number of reasons why this was so, included:
a) A greater decline in hours worked per man in service than in industry.
(b) A more rapid increase in the quality of labour in industry than in
service.
(c) A difference in the physical capital per worker available in industry
compared with service.
(d) More rapid technological change in industry than in service; and that
industry benefited more from scale economies.
The weakness with these suggestions is the problem of measuring output
changes in services.
(b) The Growth in Intermediate Demand from Firms:
Another part of the explanation for the growth of services is attributed to the
growth of intermediate demand from firms (i.e. providing inputs to
manufacturing and other sectors of the economy). Specialist firms have
been set up to provide services previously carried out by existing firms (e.g.
engineering services,personal services). Alternatively specialist firms have
been set up to provide new services (e.g. data processing).
Business buyers have always used an array of services like accounting,
construction, banking, insurance, legal, research, advertising, public
relations, training, transport, and shipping and consultancy services. As
advanced economies have developed so too have markets for service
provision.
Companies and other organizations increasingly rely on the services of
specialists because of the complexity of economic organization and to
obtain the economies involved in the division of labour: technological and

Page No. 13
competitive pressures require the use of services to keep up-to-date in a
constantly changing environment; organizations are able to retain their
flexibility by hiring in services which provide ‘use’ without ‘ownership’; time
pressures and lack of available internal resources encourage organizations
to use outside services rather than having services provided internally.
(c) The Growth in Final Demand from Consumers:
Another part of the explanation for the growth of service is attributed to the
growth of final demand from consumers. As society gets wealthier and as
the marginal utility derived from additional increments of goods declines,
then people turn to services expenditures.
This argument therefore rests on the assumption of a relationship between
income and spending patterns on goods and services. Consumers spend
increases in income on travel, recreation, education, health care and
similar services rather than on cars and clothing.
Other elements of the growth of final demand from consumers include
changed life-styles, more leisure time, longer life expectancy and the
increasing complexity of life. Technological developments mean more
goods-which require specialist service in fields like motor cars,
stereophonic equipment,video equipment and home computers. Affluence
and more discretionary income allow consumers to delegate tasks to
others; this delegation of responsibility generates new types of services
and service organizations.
For example, part of the increase in employment in services is due to the
transfer of certain kinds of households jobs (not shown in conventional
employment or output measures) into the officially paid and recorded

Page No. 14
workforce (e.g. welfare services). Services formerly provided unpaid by
household members are now provided by institutions recognized in official
statistics.
A summary of some of the reasons for the growth of consumer service
industries is given in the below table:

Page No. 15
SERVICE SECTORS INCLUDES :
COMPOSITION OF SERVICE SECTOR IN INDIA (2015-2016)
The Gross Value Added (GVA), which broadly reflects the supply or
production side
of the economy,registered an increase in the growth rate from 5.4 per cent
in 2012-13 to 7.1 per cent in 2014-15. In the current year, the growth in
GVA is likely to increase to 7.3 per cent, as per the Advance Estimates
(AE) released by the Central Statistics Office (CSO), affirming the positive
trends in the economy indicated by GDP growth.
Growth in the agriculture sector in 2015-16 has continued to be lower than
the average of last decade, mainly on account of it being the second
successive year of lower- than-normal monsoon rains. Growth in the

Page No. 16
services sector moderated slightly, but still remains robust; while the
acceleration in manufacturing growth compensated for it .
The farm sector has experienced two years of low growth on account of
two consecutive years of deficient south-west monsoon (June-September)
rainfall, the only fourth such occurrence during the last 115 years (source;
National Council of Applied Economic Research). The post monsoon
(October-December) rains also turned out to be below normal. Among the
agriculture and allied sectors,crops including fruits and vegetables account
for about 61.0 per cent of the GVA; the rest by the allied sectors consisting
of livestock products, forestry and fisheries. As per the information of the
Department of Agriculture, Cooperation and Farmers Welfare for 2015-16,
the production of foodgrains and oil- seeds is estimated to decline by 0.5
per cent and 4.1 per cent respectively; while the production of fruits and
vegetables is likely to increase marginally. As per the AE, a brighter picture
is expected to emerge from the allied sectors, with a growth exceeding 5.0
per cent in 2015-16, which would have provided some impetus to rural
incomes during the year.

Page No. 17
Growth in industry is estimated to have accelerated during the current year
on the strength of improving manufacturing activity (Table 1.2). The private
corporate sector, with an around 69 per cent share of the manufacturing
sector,is estimated,from available data of listed companies,to grow by 9.9
per cent at current prices in April- December 2015-16. The Index of
Industrial Production (IIP) showed that manufacturing production grew by
3.1 per cent during April- December 2015-16, vis-à-vis a growth of 1.8 per
cent in the corresponding period of the previous year. The ongoing
manufacturing recovery in the current year is aided by robust growth in
petroleum refining, automobiles, wearing apparels, chemicals, electrical
machinery and wood products and furniture. Apart from manufacturing, the
other three segments of the industry sector, i.e. electricity, gas, water
supply and related utilities, mining and quarrying and construction activities,
are witnessing a deceleration in growth.
The importance of sustaining the revival can be seen from the fact that
manufacturing activity contributed only 17.4 per cent (at 2011-12 prices) to
the total value addition in the economy ; but accounted for more than a
third of the production of output. The difference between the output and
GVA contributions has not been so stark in any other sector. This indicates
that manufacturing provides the demand base for the products of many
other growing sectors of the economy, thereby creating substantial
backward linkages.

Page No. 18
More than half of the Indian economyis the services sector.Being the main
driver of the economy, the sector contributed about 69 per cent of the total
growth during 2011- 12 to 2015-16; in the process expanding its share in
the economy by 4 percentage points from 49 to 53 per cent. One of the
major services, domestic trade, is a highly disaggregated sector with a
substantial informal sector presence in numerical terms. As per the NSSO
(National Sample Survey Office) Survey on Unincorporated Non-
agricultural Enterprises (excluding construction) in India, out of the
estimated universe of 5.8 crore such enterprises in 2010-11,2.1 crore were
involved in trading activities. It is noteworthy that the trade and repair
services contributed almost as much to GVA as the crop sector in 2014-15.
The hospitality sector seems to be strengthening with the private corporate
sector in the hotels and restaurant segment growing by 26.5 per cent at
current prices during April-December 2015, as per the available data on

Page No. 19
listed companies. The different segments of transport services are giving
mixed signals. The key indicators of railways, i.e. net tonne kilometers and
passengerkilometers,contracted modestlyduring the first three quarters of
the current year. In contrast, passengers handled by civil aviation, cargo
handled by civil aviation and cargo handled at major ports registered
growth rates of 16.5 per cent, 5.9 per cent and 3.2 per cent respectively
during the same period. The sales of commercial vehicles grew by 8.5 per
cent during the period, indicating pick-up in road freight transport.
Like in 2014-15, financial, insurance, real estate and professional services
together are estimated to achieve double-digit growth this year. Real estate
and professionalservices account for as much as 71.0 per cent of the GVA
of these services. The corporate entities in the real estate sector and
computer-related activities recorded growth at current prices of 1.0 per cent
and 11.7 per cent during April- December2015.Financial sector indicators,
i.e. aggregate bank deposits and bank credits, grew by 10.4 per cent and
9.8 per cent respectively as on November 2015.
As per the advance estimates for 2015- 16, the growth rate of public
administration, defence and other services has decelerated, but remains
reasonably high (Table 1.2). Public sector has a monopolistic presence in
public administration and defence,while it accounts for about 44 per cent of
the GVA of ‘other services’ that mainly include health, education, social
work, arts and entertainment and personal services. One of the key
indicators for these sectors is the union government revenue expenditure,
which grew by 2.8 per cent during April- December 2015 as compared to
9.0 per cent in April-December 2014 .

Page No. 20
Quarter-wise growth
Tracking quarter-wise dynamics helps in identifying short-term growth
patterns and assessing the near-term outlook. In the third quarter (Q3) of
2014-15, a GVA growth of only 1.7 per cent was realized in the
manufacturing sector, adversely affecting industrial growth (Table 1.4). As
per the IIP, the production of consumer durables plummeted by more than
20 per cent during the quarter. This was a one-off moderation in overall
manufacturing, which got corrected in the fourth quarter (Q4) and its GVA
growth bounced back to 6.6 per cent. However, the aforementioned
moderation created a positive base effect for Q3 of the current year, taking
advantage of which factory sector growth strengthened. This gets reflected
in the spike in industrial growth in Q3 of the current year. But for this, the
industry and services sectors and total GVA followed a smooth trajectory of
growth in the current year.

Page No. 21
TRENDS IN SERVICE SECTOR
Key 2017 trends:
1. Machine learning will be the biggest disruptor for big data analytics in
2017.
2. Making data science a team sport will become a top priority.
3. IoT use cases will push real-time streaming analytics to the front
burner.
4. The cloud will sharpen Hadoop-Spark "co-opetition."
5. Security and data preparation will drive data lake governance.
 Real Change is Coming to Real-time Intelligence in 2017 with GPUs
 Graphical Processing Units (GPUs) are capable of delivering up to
100-times better performance than even the most advanced in-
memory databases that use CPUs alone. The reason is their
massively parallel processing,with some GPUs containing over 4,000
cores, compared to the 16-32 cores typical in today’s most powerful
CPUs. The small, efficient cores are also better suited to performing
similar, repeated instructions in parallel, making GPUs ideal for

Page No. 22
accelerating the compute-intensive workloads required for analyzing
large streaming data sets in real-time.
 The Cloud will get “turbo-charged” performance with GPUs
 Amazon has already begun deploying GPUs, and Microsoft and
Google have announced plans. These cloud service providers are all
deploying GPUs for the same reason: to gain a competitive
advantage. Given the dramatic improvements in performance offered
by GPUs, other cloud service providers can also be expected to
begin deploying GPUs in 2017.
 GPU-accelerated databases will achieve enterprise-class capabilities
 Certain enhancements in security and availability that are expected in
2017 will build on the foundation of the GPU’s proven performance
and scalability to make their use enterprise-class. For security,
support for user authentication, and role-and group-based
authorization will make GPU acceleration suitable for applications
that must comply with security regulations, including those requiring
personal privacy protections. For availability, data replication with
automatic failover capabilities will make GPU-accelerated databases
sufficiently reliable for even the most mission-critical of applications.

Page No. 23

Detailed Analysis of service sector and its composition in India by Mehrreen

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