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Services Sector: A historical perspective

Jun 18, 2004

The services sector has emerged as the torchbearer of the Indian economy and its importance in the same is increasing with every passing year. In this backdrop, concerns have been raised regarding the sustainability of growth in the services sector and the likely impact it can have on an economy, which is witnessing a growing reliance on this sector. Before we delve deeper in to this aspect of the Indian economy, let us get a historical perspective of the various constituents of the economy and their performance over the years.

Agriculture, Industry and Services: Shares in GDP (%)
Source: Central Statistical Organisation.

The table above indicates the contribution of various sectors, namely agriculture, manufacturing and services to the GDP of the country at different periods of time in the last five decades. The table highlights the growing contribution of the services and the industrial sectors to the overall economy. While the growing contribution of the industrial sector is in line with the standard growth characteristics of a developing economy, the high contribution of the services sector is anomalous. What we are trying to indicate here is that, these high levels of services contribution to the economy is only observed in the status of economically developed countries. To that extent the Indian economic status is an aberration.

Sectoral and Overall GDP Growth Since 1990-91 (%)
Source: Central Statistical Organisation.

The table above indicates the performance of the services sector over the last decade and it indicates that despite the slowdown in the GDP growth over this period, the contribution from the services segment has only risen. This may be attributed to the fact that while the economy may have witnessed volatile growth trends in the last decade, the services sector growth has been rather stable and this has led to the steadily improving contribution by the same. The decade between 1990 and 2000 has been of significance for the services sector.

The services sector entered the decade of 1990s with a growth of 5.3%, which was lower than the GDP growth of 5.6% in 1990-91. In 1991-92 however, due to the balance of payments crisis when both agriculture and industry encountered a negative growth, services posted a positive growth of 4.8%, ensuring an overall GDP growth of 1.3%. During 1994-95 to 1996-97, when the economic growth stood in the 7% region, growth in services also ruled over 7%. In the subsequent years till 2001-02, the services growth remained higher than those of the other sectors barring 2000-01 when it was lower at a mere 4.8% primarily gravitated by the negative growth in non-bank financial companies. Overall, the services sector posted a growth of 7.6% in 1990s up from 6.6% in 1980s.

As per the Economic Survey, 2000-01, liberalisation of the economy in the 1990s and encouragement of private investment in industry and infrastructure have induced sustained high growth in services sector. A rapid increase in expenditure on public administration and defence, social services, and rural extension services also has an impact on the growth of services sector. Besides, IT software and services has emerged as one of the fastest growing segments of the economy with a compound annual growth of over 50 per cent during 1990s.

Another reason that could be attributed to the rapid growth in the services sector could be the rising reliance of the manufacturing sector in the services sector. With the increasing complexities of modern industrial organisations, manufacturing activities have become more and more service intensive, both upstream (e.g., design and R&D) and downstream (e.g., marketing and advertising). Competitive advantage of a firm now depends more on providing specialised services like financing and after-sales facilities than on production, which has increasingly become routinised.

Coming back to the question of the direction and sustainability of the services sector growth, we believe that the Indian services sector has strong potential to maintain growth rates seen in the last decade and probably even outstrip it going forward. This optimism stems from the fact that strong growth has been witnessed in established sectors like travel and tourism, financial services and IT sector, as well as emerging sectors like telecom, insurance and healthcare. Moreover, we expect the same to be continued going forward. Having said that, we still believe, that in order to realise the full potential of the services sector, the industrial sector needs to be promoted to its maximum potential. Since the services sector is not a significant employment generator, the industrial sector can act as a fuel for the services sector by providing a growing populace of consumers that are increasingly demanding different range of services.

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