Service Sector

Economy - Service Sector

• India’s services sector has not only outperformed other sectors of the Indian economy, but has also played an important role in India’s integration with world trade and capital markets.
• There is, however, a concern about the sustainability of a services-led growth process which largely stems from exports of skill-based services.
• The prevailing view is that for services growth to be sustained, the sector cannot remain dependent on external demand. It must also be driven by internal demand.
• More broad-based growth within the services is also required to ensure balanced, equitable and employment oriented growth, with backward and forward linkages to the rest of the economy.
• In this regard further infrastructural and regulatory reforms and FDI liberalization in services can help diversify the sources of growth within India’s services sector and provide the required momentum.
• In recent years, there has been a debate in the country regarding the selection of the sector which can lead the growth process in the country. This debate originated from the fact that the services sector contributed over 62 per cent in the GDP during the decade 2001–12.

India and Global Services

Services sector have been hit hard after the Great Recession among the western developed economies. Rather during 2017 there was a strong signal of recovery reported from this part of the world which had a positive impact on the services-oriented countries. Latest features about the services sector at global and India levels are as given below:

• As per the latest data4, 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.
• 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.
• Services export growth, both for World and India, which had dipped to negative territory in 2015 after an interregnum of six years from 2009, returned to positive territory in 2016.
• As per the latest WTO data for 2017 (first half) world’s services export growth was 4.3 per cent while it was 9.9 per cent for India (0.2 per cent for China and the highest 18.4 per cent for Russia).

Services Performance of India

Major feature of India’s services performance are as given below:

• Out of the 32 States and UTs, it is the dominant sector, contributing over 50 per cent of the gross state value added (GSVA) in 15 states and UTs. The major services in most of the states are trade, hotels and restaurants, followed by real estate, ownership of dwellings and business services.
• The GVSAs show wide variation in terms of share and growth of services—Delhi and Chandigarh are at the top with over 80 per cent share, while Sikkim is at the bottom with 31.7 per cent share.
• In terms of services GSVA growth, Bihar is at the top and Uttar Pradesh at the bottom with 14.5 per cent and 7.0 per cent growth respectively in 2016-17.

FDI Inflows into Services Sector

• FDI data from the Department for Promotion of Industry and Internal Trade shows that gross FDI equity inflows (excluding re-invested earnings) into the services sector witnessed a strong recovery during April-September 2019 following a decline in 2018-19.
• Gross FDI equity inflows jumped by 33 per cent YoY during AprilSeptember 2019 to reach US$ 17.58 billion, accounting for about two-thirds of the total gross FDI equity inflows into India during this period.
• The jump in FDI equity inflows was driven by strong inflows into subsectors such as ‘Information & Broadcasting’, ‘Air Transport’, ‘Telecommunications’, ‘Consultancy Services’ and ‘Hotel & Tourism’.

Trade in Services Sector

• RBI’s Balance of Payments data suggests that services exports during April-September 2019 maintained their momentum from 2018-19, with a growth (YoY) of 6.4 per cent.
• The jump in export growth of travel, software, business and financial services offset the contraction in export growth of insurance and other services (including construction, etc.)
• The robust growth in business services exports was driven by higher receipts for R&D services, professional and management consultancy services, and technical and trade related services.
• Trends in the composition of services exports over the past decade show that the shares of traditional services, such as transport, and value-added services, such as software, financial services and communications, have witnessed a decline.
• Meanwhile, the share of travel services has increased over the past decade and that of business services has risen slightly.
• The share of software services has declined by 4 percentage points over the past decade to reach 40 per cent of total services exports in 2018-19.
• Yet, India’s services exports remain concentrated in software services, accounting for twice the share of the second-largest component, business services.
• This has made the software sector, and therefore overall services exports, susceptible to changes in exchange rate, global IT spending, stringent USA visa norms, and rising cost pressures due to increased local hiring in export destinations.
• Even though global IT spending, as projected by Gartner in October 2019, is expected to accelerate in 2020, rising production costs and uncertainty related to Brexit and USA’s visa norms pose downward risks to India’s software exports.
• Services import growth (YoY) during April-September 2019 was 7.9 per cent.
• An increase in import growth for transport, software, communication and business services offset the contraction in imports of financial and insurance services and the slowdown in imports of travel services.
• Increased business services payments were primarily driven by professional, management and consultancy services and technical and trade related services.
• Besides software services, India runs a small trade surplus in travel, insurance and financial services.
• However, within travel services, India persistently runs a trade deficit in education services with education imports, i.e., expenditure incurred by Indian students traveling abroad for education purposes on tuition, room and boarding, reaching about US$ 3 billion in 2018-19.
• Adding to this other payments for education purposes such as fees paid for correspondence courses abroad, which constitute as payments for receiving education services abroad, there has been a marked increase in India’s education services imports in the recent years amounting to US$ 5.0 billion in 2018-19.
• From a long-run perspective, India’s focus on boosting services exports during bilateral trade negotiations augurs well for mitigating bilateral trade deficits with trading partners.
• Looking ahead, world trade volume for goods and services are projected to recover in 2020 following a deceleration in 2019.
• Global uncertainty, protectionism and stricter migration rules would be key factors in shaping India’s services trade ahead.

Manufacturing vs. Services

• All the focus being on the manufacturing exports in India has distracted attention from what might be a no less noteworthy development.
• In past few years, it is India’s exports of services that has changed in the most significant, and perhaps alarming, way.
• What makes this development puzzling is that in recent years the composition of Indian exports of services is more favourable than that of Indian exports of manufactured goods. More of the former goes to the United States, and more of the latter to Asia.
• Realising India’s medium-term growth potential of 8-10 per cent will require rapid growth of exports.
• How rapid this should be is suggested by comparing India’s export performance in services with China’s performance in manufacturing at a comparable stage of the growth surge.
• India’s competitiveness will have to improve so that its services exports, currently about 3 per cent of world exports, capture nearly 15 per cent of world market share. That is a sizeable challenge, and recent trends suggest that a major effort at improving competitiveness will be necessary to meet it.

Global negotiations

India aims to position itself as a key player in world services trade. To promote services exports, the government has taken a number of policy initiatives – SEIS (Service Exports from India Scheme) for increasing exports of notified services from India; organising GES (Global Exhibitions on Services); and SCs (Services Conclaves). Besides, some initiatives in sectors like tourism and shipping have also been taken in this regard. Given the potential of India’s services exports, services-sector negotiations both at multilateral and bilateral and regional levels are of vital importance to India. Some of the recent negotiations are as given below.

WTO negotiations

Though, the 11th Ministerial Conference (MC) of the WTO ended without a Ministerial Declaration or any substantive outcome, India saw certain favourable outcome from the 10th MC of the multi-lateral trade body

1. Implementation of preferential treatment in favour of services and service suppliers of least developed countries (LDC) and increasing LDC participation in services trade;
2. To maintain the current practice of not imposing customs duties on electronic transmissions (e-Commerce) until the next Ministerial Conference to be held in 2017.
3. India, together with 20 other members have notified preferential treatment to LDCs in services trade. India has offered this in respect of:
   1. Market access
   2. Technical assistance and capacity building; and
   3. Waiver of visa fees for LDC applicants for business and employment.

Bilateral Agreements

The bilateral agreements signed by India in recent times are:

1. Comprehensive bilateral trade agreements signed, including trade in services, with the governments of Singapore, South Korea, Japan and Malaysia. An FTA in services and investment was signed with the Association of South East Asian Nations (ASEAN) effective since mid2015.
2. India has joined the RCEP (Regional Comprehensive Economic Partnership) pluri- lateral negotiations. The proposed FTA includes the 10 ASEAN countries and its six FTA partners, viz. Australia, China, India, Japan, South Korea and New Zealand. The RCEP is the only mega-regional FTA of which India is a part.
3. India is also engaged in bilateral FTA negotiations including trade in services with Canada, Israel, Thailand, the EU, the EFTA (European Free Trade Association), Australia and New Zealand. Dialogue is under way with the US under the India-US Trade Policy Forum (TPF), with Australia under the India-Australia JMC (Joint Ministerial Commission), with China under the India-China Working-Group on Services, and with Brazil under the India-Brazil Trade Monitoring Mechanism (TMM).

Restrictions and Regulations

• One major issue in services is the domestic barriers and regulations.
• Domestic regulations, in strict WTO terms, include licensing requirements, licensing procedures, qualification requirements, qualification procedures, and technical standards but here other restrictions and barriers are also considered.
• While there are many domestic regulations in our major markets, which deny market access to us and therefore need to be negotiated at multilateral and bilateral levels, there are also many domestic regulations in India which hinder the growth of this sector.
• Since domestic regulations perform the role of tariffs in regulating services, there is need to list the domestic regulations in India which need to be curbed to help growth of the sector and its exports, while retaining those which are necessary for regulating the sector at this stage.
• An indicative list of some important domestic regulations in India which need to be examined for suitable policy reforms9 in the services sector is as follows:
  • trade and transport services
  • construction development
  • Accountancy services
  • legal services
  • education services

The need for reforms

• Indian services sector have the potential to garner higher economic benefits to the country.
• But there are many issue both general and sector specific including domestic regulations hinder the growth prospects of the services sector.
• If these issues are addressed deftly the sector could lead to exponential gains for the economy.
• The need of policy reforms in this regards are outlined in the following way:

General Issues

There are some general issues related to the policy framework which hamper the healthy growth and expansion of the services sector in the country. They are broadly related to the following areas:

Nodal agency and marketing:

Despite having strong growth potential in various services sub-sectors, there is no single nodal department or agency for services. An inter-ministerial committee for services has been set up to look into this. But services activities cover issues beyond trade and a more proactive approach and proper institutional mechanism is needed to weed out unwanted regulations and tap the opportunities in the services sector in a coordinated way.

Disinvestment:

There is plenty of scope for disinvestment in services PSUs under both central and state governments. Speeding up disinvestment in some services-sector PSUs could not only provide revenue for the government but also speed up the growth of these services.

Credit related:

The issues here include ‘collateral free’ soft loans to support the sector’s cash needs and possibility of considering even export or business orders as collateral for credit-worthy service firms.

Tax and Trade Policy related:

These include use of ‘net’ instead of ‘gross’ foreign exchange criteria for export benefit schemes, the issue of retrospective amendments of tax laws like, 

1. Amendment to the definition of royalty to include payment of any rights via any medium for use of computer software,
2. Tax administrative measures to tackle delay in refunds,
3. Introducing VAT (value added tax) refund for foreign tourists, and
4. Addressing the issue of bank guarantees based on past performance to avail of export promotion benefits in services.

Outlining future

With plenty of opportunities, the services sector is like an uncharted sea. As yet, its potential has not been tapped fully by India. A targeted policy of removing bottlenecks in major and potential services can result in large dividends in the form of higher services growth and services exports, which in turn can help in pulling up the economy to higher growth levels. The future actions in the sector can be outlined as given below:

1. India’s services sector, which showed resilient growth after the recovery of the global economy following the global financial crisis, has been showing subdued performance in recent times. Despite the slowdown, the prospects continue to be bright for many segments of the sector.
2. In future, government’s focus on the following are expected to provide impetus to logistics services—
   
   1. infrastructure development,
   2. favourable regulatory policies like liberalisation of FDI norms,
   3. increasing number of multimodal logistics service providers,
   4. growing trend of outsourcing logistics to third party service providers, and
   5. entry of global players.
3. Though shipping services are at a low key at present, with increased imports of POL (petroleum, oil and lubricants) for stocks build up to take advantage of low crude oil prices, containerisation of export and import cargo and modernisation of ports with private sector participation, recovery of the shipping and port services sector can be expected.
4. The prospects for Indian aviation services have improved following—
   
   1. the fall in prices of aviation fuel, which accounts for nearly 40 per cent of the operating expenses of airlines in India;
   2. liberalisation of FDI policies in civil aviation; and
   3. strong growth in passenger traffic – expected to continue in the near future.
5. The outlook for the retail industry remains positive as India continues to remain an attractive long-term retail destination despite the various challenges faced by the sector. Following initiatives are expected to give a fillip to the sector—
   
   1. allocation of Rs. 1000 crore to technology and start-up sectors,
   2. promotion of cashless transactions via RUPay debit cards, and
   3. growth of e-commerce.
6. Government’s focus on the tourism sector including easing visas by eTV and building tourism infrastructure could help in the recovery of the tourism sector.
7. Despite challenges in the global market, the Indian IT industry is expected to maintain double or near-double- digit growth as India offers depth and breadth across different segments of this industry, such as, IT services, BPM, ER&D, internet and mobility and software products.
8. In the telecom sector, the introduction of 4G which could be a game changer and inclusion of fibre optic connectivity which will tremendously increase the reach and bandwidth along with greater use of mobiles in government’s social sector programmes could give a further boost to this fast growing sector.

Several relevant and contemporary suggestions have been articulated by a Working Paper of the Ministry of Finance by late February 2016. Dealing with the sectors like tourism, shipping and port, IT and software the advices are deeper and effective