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Services: Going strong - Views on News from Equitymaster
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  • Oct 8, 2003

    Services: Going strong

    The services sector, which has been powering growth in the Indian economy since the last decade, seems set to register strong growth in FY04 as well. A recent survey conducted by the Confederation of Indian Industries (CII) on the growth of the services sector in the country in the first half of the current year indicates that the services sector continues to exhibit strong growth. Out of the 11 sectors that were surveyed, while 5 sectors recorded strong growth of over 20%, an equal number reported growth of over 10%. One sector (leasing) however reported a negative growth.

    Going by the findings of this survey, if one were to identify sectors that stand out among others in terms of growth, we could zero in on telecommunications, housing finance, project consultancy and software exports. These sectors have recorded strong growth in the first half of the year and are expected to do the same in the second half too. Among the sectors mentioned above, the telecom sector, especially in the cellular segment, has exhibited strong growth (140%) in 1HFY04. Although this growth is on a smaller base, the potential of this sector is immense as the teledensity in the country is at a miniscule 5%, compared with around 20% in China.

    The housing finance industry is another sector that has witnessed strong growth in the first half of the current financial year. Strong demand for housing coupled with cheap financing options has fueled strong growth (35% in 1HFY04) in this sector. With rising disposable incomes and prevalence of soft interest rates, growth in this sector is expected to be strong going forward. To put things in perspective the current shortfall in dwelling units is estimated at 19 m units. Hence there is a huge latent demand that needs to be addressed.

    With strong emphasis on infrastructure projects like roads, housing and telecom, the project consultancy sector too has been witnessing strong growth in the current year. Growth has been robust at 43% during 1HFY04. As prospects of basic infrastructure sectors improve in the coming years, this (project consultancy) sector too is likely to witness strong growth.

    Another sector that has seen strong growth (40%) has been the software services sector. While it is not clear from the survey results whether IT enabled services (ITES) have been included in the same, we believe that strong growth in ITES segment may have led to this growth. Going forward, as more global corporations outsource their software services to low-cost destinations like India, the prospects of Indian companies providing such services look promising. Also, as Indian software service companies improve upon their domain competencies and make their way up the software value chain, growth seems in the offing for the software sector in the country, thus boosting growth of the services sector.

    The tourism industry has also witnessed growth (13%) in this period due to increase in tourist arrivals in the country. With economic activity expected to pickup, the strong growth of the above-mentioned sectors is likely to be sustained. However a word of caution, the services sector depends heavily on basic infrastructure like electricity and communication infrastructure for maintaining operations, and unless the state and central governments lay greater emphasis on developing infrastructure, the full potential of the Indian services sector may never be realised.



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