Chapter-i introduction



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Chapter-VII

Sustainability of Services Sector
India’s emergence as one of the fastest growing economies in the 1990s is largely attributed to the rapid growth of its services sector. The services sector grew in this decade at an average of 7.9% per annum, far ahead of agriculture (3%) and manufacturing (5.2%). The contribution of services to gross domestic product (GDP) has been more than 50 % per annum since year 2000. The share of services sector in trade has also increased substantially. This growth has been accompanied by increasing foreign direct investment (FDI) approvals in services sector. Though these trends are mainly in line with global trends, two features are distinctive to India’s services sector.

First, in the period 1950s to 1990s the share of agriculture in GDP declined by about 25 percentage points while industry and services sector gained equally. The share of industry in GDP has stabilized since 1990 and consequently the entire subsequent decline in the share of agriculture in GDP has been picked up by the services sector. This trend of rising share of services in GDP and corresponding decline in the share of agriculture and manufacturing sector is seen in the growth process of high-income countries and generally not in developing countries. During the 1990s, the contribution of the services sector to the growth of GDP in India was nearly 46% in comparison to 54% in middle-income countries and 43% in least developed countries. The contribution of the services sector to the growth of GDP in China was 34%. Secondly, employment in services has not been in proportion to their rising share in GDP and trade in India. Employment in services sector has been in proportion to their rising share in GDP in rest of the world.

In 1999-2000 services contributed around 24% of employment in India. Services contributed to 30% in middle-income countries. It contributed 70% in Singapore and around 35% in Thailand. These features of India’s services-led growth cast doubts on its sustainability in the long run.

Growth in India’s services sector has not been uniform across services. While some sectors experienced a double-digit growth rate like communication and business services some have experienced a fall in their growth rates like railways, real states and dwellings. The sector that have witnessed negative growth rates and those that have experienced slow growth rate are also the sectors that have large potentials for generating employment like construction, transport and professional services. Prime drivers of growth were business services. It grew by almost 20%, communication services grew by about 13.6%, banking services grew by about 13% and hotels and restaurants grew around 9%. Among the services witnessing a decline in growth were railways, dwellings and real estate, legal services, public administration and defence services. In terms of share in GDP the most important services are wholesale and retail trade at 14% followed by community services at 8.4% and banking and insurance services at 7%. Growth of employment differed significantly across services in the period 1994-2000 as compared to 1983-1994. Growth of employment fell in community, social and personal services from 3.85% to 2.08%. Fall in employment in this sector has important implications for employment potential of the entire services sector since this sector witnessed a rise in its growth and share in GDP in the 1990s. Other sectors where employment growth fell are electricity, gas and water supply.

In 1999-00 the share of different services in employment was as follows:-


  • Trade, Hotels and Restaurants around 34%

  • Community, Social and Personal Services around 31%

  • Construction around 16%

  • Transport, Storage and Communication Services around 13%

The trends in employment elasticity of different services sectors have also changed considerably in the 1990s (Table 7.1). The trends show that employment elasticity in the economy declined sharply from 0.41 in the 1980s to 0.15 in the 1990s but it increased substantially in transport, storage and communication sectors. Employment elasticity has fallen in sectors that are growing faster and make a relatively higher contribution to GDP like community, social, personal services and financial services. Employment elasticity fell also in wholesale and retail trade, which provided maximum employment in the services sector.

Table: 7. 1 Trends in employment elasticity and growth in employment.

Sub-Sectors

Employment Elasticity

Annual Growth in Employment (UPSS) (%)

1983-84

to

1993-94



1993-94

to

1999-00



1983-84

1994-00

Trade

0.63

0.55

3.57

5.04

Transport, Storage and Communication

0.49

0.69

3.24

6.04

Financial Services

0.92

0.73

7.18

6.20

Community Social and Personal Services

0.50

0.07

2.90

0.55

Total

0.41

0.15

2.04

0.98

Source: Government Of India, 2001.

It is thus seen that though services have been the fastest growing sector in the last decade and have contributed more than 50% to GDP but still they provide less than 25% of total employment. Employment growth within the services sector has been uneven. Those services which have witnessed very high growth rates like business and communications services have a low share in GDP or employment. Employment elasticity has declined in most of the services with significant share in GDP like trade, community services and banking and insurance in the latter half of the 1990s.

This growth has three plausible explanations. First, sectors that have large potential for generating employment like construction transport and professional services have grown slowly. Faster growing sectors like services, communications and financial business services have a low potential for employment generation. In addition, employment elasticity has declined in the fast growing services like financial and community services. The rising productivity levels in the faster growing services themselves may be a reason for lack of growth in their employment potential. Because of the difficulty in measuring their output there are only few studies which have estimated productivity growth in services. One of these studies, by McKinsey & Co. (2001) estimates labour productivity in six segments of India’s services sector namely:-


  • Telecommunication

  • Software

  • Retail banking

  • Housing

  • Construction

  • Energy distribution and retail distribution

It finds that software services have the highest productivity levels followed by telecommunication, banking, and construction. These are also services that are growing faster and have high shares in GDP and employment. Higher labour productivity in these segments may have slowed down growth in employment in services. Communication and software services have witnessed an increase in their trade and therefore have grown substantially but they have a small employment potential. Therefore we can say that trade liberalization in services has not helped in generating large employment.

Services sector growth studies by Gordon and Gupta (2004) and Banga and Goldar (2004) empirically assess the reasons for the growth of India’s services sector in the 1990s conclude that both demand and supply factors have led to this growth. On the demand side the high growth of services output was mostly attributed to factors such as increasing input usage of services by other sectors, mainly manufacturing sector (higher domestic demand); higher foreign demand due to trade liberalization and high income elasticity for services. On the supply side, the increased trade in services following trade liberalization policies and other reforms in the 1990s induced this growth.

On the demand side Banga and Goldar (2004) show that the contribution of services input to output growth in manufacturing (organized) was about 1% in the 1980s and it increased to about 25% in the next decade. Gordon and Gupta (2004) show that the use of services sector input to industry increased by about 40% between 1979-80 and 1993-94. The role of elastic final demand for services is difficult to measure since it is difficult to split the growth in private final consumption expenditure into expenditure on goods and that on services. They use a rough estimate and conclude that there has been a sharp growth in the final demand for services in the 1990s.

On the supply side, the percentage share of exports of services vis-à-vis merchandise exports in GDP has steadily risen. The share of services in trade increased to 24.9% in 1998 from 19.3% in 1995. Services that contributed substantially to India’s exports in the early 1990s were transport, travel, communication and financial services. However, the composition of India’s exports of services has changed over the years. In the period 1990-95 and 1996-2002 the relative share of travel in exports has fallen from 39% to 23% and of transportation services from 24% to 15%. In contrast the share of software services has risen sharply from 34% to 60%. In fact, India has become a net foreign exchange earner in total services after 1997-98. Net foreign exchange earning services are mainly travel, communication and software services. India is a net importer in services like transport, management and financial services.

Thus, the growth of India’s services sector may be attributed to:-


  • Structural changes that have led to increase in usage of services

  • by other sectors.

  • Trade liberalization in services.

  • Other reforms carried out in the 1990s.

India’s services sector has witnessed tremendous growth in the last ten years but its employment potential has not grown proportionately. There has been no corresponding growth in manufacturing which is one of the largest consumers of services. This has cast doubts on the sustainability of services-led growth. Services that have increased their share in GDP and trade have small employment potential and their employment elasticity has fallen due to rising labour productivity. One possible reason for this lopsided growth in services is lack of a coherent policy with respect to services. Reforms at the sectoral level have evolved in an ad-hoc uneven manner due to lack of an integrated services policy. Liberalizing a particular service like retail trade will fall short of the desired impact if it is not supported by liberalization in real estate. Similarly, reforms in tourism will remain half measures unless corresponding reforms are undertaken in domestic air travel. Due to the large externalities of services it is important to provide services as efficiently as possible. The three services having the largest backward and forward linkages are trade, transport and construction. Transport (road, railways and air) and construction services have large external economies and linkages but in India these two sectors have been slow-growing. Improving these infrastructure facilities will not only enhance the country’s attractiveness to foreign investment but also improve the competitiveness of domestic investment. These sectors also have large potential for generating employment.

Trade in services can suffer from both external and domestic constraints. External constraints or trade barriers are mainly in the form of limits on foreign equity participation, recognition, licensing of provisions, immigration, labour market regulations and discriminatory treatment with respect to taxes, subsidies and other policies. Domestic constraints may result from infrastructure inadequacies, poor quality and standards, lack of clear-cut responsibilities between central and state governments and other policy-related disincentives. Given the large potential for trade in these services there is a need for specific policies and they should be designed to encourage trade in health and education sectors. In particular, given the low-cost quality treatment available in India there is a large scope for health tourism. India also has a competitive advantage in the practice of alternative medicine. These areas should be developed and exploited for trade opportunities. Since the health sector is on the concurrent list a number of regulations are imposed by the state governments. Though there is no cap on FDI in health services still the share of health services in total trade and FDI remains low (only 0.4% of FDI approvals in health). There is a need to have a clear-cut demarcation of responsibilities of Centre and State in this sphere. To improve trade in education services there is a need to study the system of regulation and accreditation of educational institutions in foreign countries and accordingly develop own accreditation system. To compete successfully with the existing reputed educational testing services such as GRE, GMAT and TOFEL, our reputed testing services such as CAT, GATE, JEE and others must upgrade and modernise. There is also a need to improve on educational database regarding number of educational institutions, their enrolments (domestic and foreign), faculty strength, financial sources and quality and accreditations.

There are services that are less than moderately liberalized or are restricted with high external trade barriers and low growth like legal professional services, accountancy and rail transport. These services also have a low share in exports, which reflects both domestic and external constraints to their trade. On the whole, infrastructure services like transport and construction are slow growing and have a low share in trade in spite of the efforts to lower external trade barriers to them. In other words high domestic constraints impede their growth and trade. In contrast, the financial infrastructure of India appears to be stronger and services like software, banking, insurance and telecommunications show low external trade barriers and high growth rates with high to moderate share in total exports. Health and education have experienced high growth rates and have a large potential for trade.

In trade liberalization of services the social costs involved also need to be considered. This is particularly relevant for the Indian economy given the employment dimension of the services sector. An argument put forward against trade liberalization in services is the displacement of labour towards sectors where an economy has competitive advantage. If these sectors lack large employment potential trade can lead to growth in unemployment. Some of the services that have traditionally been under the public sector like railways have surplus labour. Higher extent of trade liberalization in these sectors might result in large displacement of labour. Similar concerns also apply to sectors like retail distribution which employs a large number of unskilled labour. Displacement of labour in these sectors might cause considerable social unrest.

There is utmost importance to have a coherent and integrated services policy which is analogous to the industrial policy and agricultural policy resulting in systematic reforms in different services. Liberalization has to be in a phased manner accompanied by social policies in sectors that have surplus labour like retail and wholesale trade and railways. Full gains of trade liberalization in services will follow only if certain economy-wide efforts are made to make the general environment more conducive to trade and investments in services. Macroeconomic policies like high tariff rates, large fiscal deficits, and rigid labour laws adversely affect the competitiveness of services. Economy-wide efforts to improve the business environment and removing domestic constraints sustain the dynamism of India’s services sector.

Since the late 1980s much discussion has been taking place to assess whether the service led growth of the Indian economy is sustainable or not. Bhattacharya and Mitra (1990) stated that the deviation in growth rates of the three sectors may have negative impact on inflation, balance of payments and income distribution. Since there are strong linkages from services to industry the growth in manufacturing sector will give an impetus to services. To enhance growth synergies among sectors relatively stronger growth of services sector is undesirable as the input demand of services sector is industry intensive rather than agriculture intensive (Kaur, Bordoloi and Rajesh 2009). Growth in the manufacturing sector is also desirable for trade balance and employment generation (Papola 2005). India must develop its manufacturing whose multiplier effect and impact on job creation are significant to meet the challenges of demographic profile and reduce poverty (Li & Yang, 2008).

One of the critical issues that have been discussed in the literature is the role played by services in the growth process. Though, a forceful case is put forward that services can become the major driving force of economic growth but in case of India the sustainability of a service-led growth has been questioned by many (e.g., Mitra 1988, Bhattacharya and Mitra 1990 and Arunachalam and Kumar 2002). It has been argued that income from the service sector is growing much in excess of the demand generated for services by the commodity sector and since income might grow faster than employment in the organised services therefore service-led growth can have serious implications for inflation, income distribution and balance of payments. It is argued that this growth is not sustainable in the long run. This argument becomes stronger since economic theory suggests that a decline in the share of agriculture sector and manufacturing sector is a phenomenon that is generally associated with the growth process of a high-income economy and not a developing country.

To test the issue of sustainability of service-led growth in India Gordon and Gupta (2004) attempts to find out whether India is an outlier in this case by using cross-country data on sectoral shares in GDP and fitting a trend line. They find that the share of service sector in GDP is associated positively with per capita income. The countries with higher per capita income also have a larger share of services in GDP. In case of India they find that in 1990 share of India’s service sector in GDP was very close to the average share predicted by the linear relationship. By 2001 India’s share of services moved above the average share by as much as 5 percentage points as a result of rapid growth of services in India. In spite of this they do not find India to be an outlier at present. They argue that if different sectors in India grow at the average growth rates experienced in 1996-2000 then by 2010 the share of services would increase to 58 percent. This would bring size of India’s services sector relative to GDP closer to that of an upper middle income country even though India would still belong to the low income group.

Hansda (2001) addresses the issue of sustainability of service-led growth of India in terms of inter-sectoral linkages as emanating from input-output tables for 1993-94 for 115 activities at the disaggregated level. The results indicate that while services and agriculture do not share much inter-dependence. Industry is found to be most service-intensive with 70% of its activities being direct services-intensive. The inter-sectoral linkages are explored further by estimating Rasmussen indices of backward and forward linkages. The indices show that service sector is more growth-inducing as compared to other sectors in terms of backward and forward linkages. He therefore argues that growth in service sector will induce growth in other sectors such as trade, transport and construction. These sectors are found to have high domestic constraints and therefore require immediate policy reforms. Adequate infrastructure facilities will not only enhance the country’s attractiveness to foreign investment but will also improve competitiveness of domestic investment. Since these sectors have large potential for generating employment. Growth in these sectors will also help in resolving the dilemma of jobless growth in the services sector. Most of these services still have considerable restrictions on FDI limits. Emphasis should be now laid in improving growth of these services by reducing external as well as domestic constraints, which have been identified by the specialised studies.

Some economists caution that if the service sector bypasses the industrial sector then economic growth can be distorted. They say that service sector growth must be supported by proportionate growth of the industrial sector; otherwise the service sector growth will not be sustainable. It is true that in India the service sector’s contribution in GDP has sharply risen. The service sector has grown at a higher rate than industry which too has grown more or less in tandem. The rise of the service sector therefore does not distort the economy. The issue of sustainability of services growth, i.e., whether the lack of rise in the share of manufacturing sector and the corresponding shift to services is sustainable or not is further examined by Banga and Goldar (2004). In this regard the study estimates the impact of higher use of services input on productivity growth of manufacturing sector. They construct a multilateral total factor productivity index for 41 major industry groups for the period 1980-81 to 1999-00. Regressing the total factor productivity index on a set of explanatory variables including the ratio of services input to employment, the study finds a positive relationship between use of services input and industrial productivity. Their results show that the increase in use of services in manufacturing in the 1990s has favourably affected productivity in the manufacturing sector. In the light of this result the study argues that India’s service sector will be successful in creating its own demand since higher use of services in the manufacturing sector has not only lead to higher output growth in manufacturing sector but also improved productivity in the manufacturing sector.

It can therefore be said that India’s experience with respect to service-led growth may be unique but it cannot be regarded as an outlier as yet. Growth in services is found to be growth inducing and has led to higher productivity in the manufacturing sector in the 1990s and therefore it is possible for the service sector to sustain its growth. However, more research is required in this field to reach to any firm conclusions. It is emphasised that the ‘service economy’ is structurally different from economic system from the previous era of mass industrial production but it is crucial to note that the structural change does not necessarily imply that services become more important in final consumption. Services become ever more crucial to co-ordinate and control production processes of differentiated consumer products that are subject to economies of scale. Increased expenditure on producer services also enhances the efficiency of production by allowing higher level of specialisation in production. It can be derived that services are becoming more and more crucial to the growth process of an economy. They can not only sustain their own growth process but can also improve the growth rate of manufacturing sector by improving the efficiency of production.

Indian economy has been undergoing structural changes that generally accompany economic development over a longer period since independence. Acceleration in growth rate gave an impetus to these changes during the 1980’s and they have taken place at a faster rate in the post‐reforms period. The major characteristics of growth over the last three decades which distinguishes it from the experience of the earlier three decades consist not only a significantly higher rate but also few other important departures from the earlier pattern. Emergence of services as the major contributor to growth in GDP and eventually as the predominant sector of the economy is one such feature. Growing importance of the external sector with rapid growth both of imports and exports is another feature. Decline in the share of agriculture in GDP, which has been taking place in earlier decades as well took place at a much faster rate. Employment content of growth has seen a steep decline during this period.

There is the question whether the growth with the current structural characteristics will at all be sustainable in the medium and long run. It is commonly feared that economic growth primarily derived from services may not be sustainable in a developing country without attaining a significant degree of industrialisation. India has registered a reasonably high growth over a rather long period primarily sustained by services growth. Whether this could continue in future would depend on the composition of growing services in terms of whether they contribute to the capacity of the economy to develop especially in the commodity producing sectors of agriculture and industry.

Growth in services has led to higher use of services in manufacturing sector. This has in turn led to higher output and productivity growth in the manufacturing sector which implies that the service sector will be able to generate its own demand in the future. Studies also show that the growing dynamism of India’s service sector is to a large extent due to growing external markets for services and the gradual though partial liberalisation of domestic economy. Most of the studies on the Indian economy support the view that domestic reforms and higher liberalisation in terms of lowering of barriers to trade and allowing FDI have improved growth in the corresponding services. This increased external demand may also play an important role in sustaining the dynamism of services. To resolve the problem of lack of employment growth in services there is a need to achieve uniformity in the growth of different services. This becomes even more important if we consider the interdependency of different services. An important aspect of services is the ability to generate sizable external economies or diseconomies that are not reflected in the price signals. Also, closely linked is the problem of linkages, both backward and forward, with the rest of the economy and with its growth rate. Inefficiencies in services therefore can exert a multiplying effect on the economy as a whole and efficiency in providing services can make a considerable difference to the sectoral growth rates. For achieving higher efficiency in financial services like banking and insurance we need efficient IT-related services.

One of the probable reasons for lopsided growth in services is the fact that reforms in India at the sectoral level have evolved in an ad-hoc way. There has been no coherent overall policy for services in line with the industrial policy and agricultural policy. Consequently the depth and pace of reforms lack uniformity across sectors. Along with the national and international efforts to liberalise trade India also needs to undertake some domestic reforms like institutional and regulatory reforms so as to maximise the benefits of higher trade and FDI in services.

Assessment of performance of India’s different services shows that there exists some services which have low external barriers and high growth rate but these services have not been able to enjoy a suitable share in India’s exports of services. We find that health and education sectors have high potential for trade since they have low external barriers and high growth rates. This indicates substantial domestic constraints in these services.

With respect to slow growing services which have low share in exports like professional services, legal, postal and accountancy etc. We find that these services have restricted liberalisation. Both external and domestic constraints restrict growth in these services. Some of the important external and domestic constraints that have been identified by specialised studies and which need to be removed are: With respect to legal services, many of the domestic policies need to be altered. For example, the Indian law which prohibits formation of partnership with enrolled professionals of foreign countries in legal services limits the scope for an Indian firm to build its capacity to advice on foreign law or international law or in a newly developed area. This needs to be suitably altered. Prohibition on partnership with multi-disciplinary knowledge prevents capacity building in areas where technology progresses beyond comprehension of lawyer. Restrictions on joint ventures or establishment of firms in India by foreigners should therefore be relaxed but since this would be a major reform strategically it would be better to delay it by few years. In accountancy services, India does not yet have large firms with international visibility. There is a need to embrace international accounting standards and reporting requirements. The process of adoption should be treated as urgent and concomitant changes should be undertaken in domestic statutory legislation.

Though there exists a strong case for trade liberalisation of services one should not forget that growth is not the sole objective of an economy. Therefore social costs of trade liberalisation of services should also be considered. For the Indian economy this issue becomes even more relevant given the employment dimension of services sector. Services sector in 1999-2000 employed almost 68 percent of urban employment. One of the arguments that is put forward against trade liberalisation is displacement of labour towards sectors where an economy has competitive advantage. However some of the services sectors that have traditionally been under public sector like railways, postal services etc. are saddled with excessive labour and higher trade liberalisation in these sectors might result in large displacements of labour. Similar concerns are also found in sectors like retail distribution sector that employs large number of unskilled labour. Displacement of labour in these sectors might cause lot of social unrest. Trade liberalisation in these sectors therefore must be undertaken in a phased manner accompanied by appropriate policies to curb unemployment. Thus trade liberalisation policies have to be supported by complementary social policies so as to avoid substantial social costs that might undermine the support for reforms.

Limited empirical research exists in the area of services in India. What remains the biggest hurdle in future research on trade and investment in services is the lack of reliable, timely and easily interpretable data. The data that is more widely available do not currently encompass all forms of trade in services, in particular intra-firm trade in services is not recorded. What is required is trade data on services at a more disaggregated level which is consistent with value-added and employment data and is comparable across time. Efforts should therefore be made to develop a suitable database for furthering empirical research in this field.

There is a dire need to formulate an Index of Services in order to have a coherent policy on services. Appropriate measures to estimate output in services need to be identified and by attaching suitable weights to disaggregated services, index for services can be formulated. Given the heterogeneity of services formulation of separate indices can also be considered. Along with the above policy insights it must be kept in mind that full gains of trade liberalisation in services can be acquired by an economy only if certain economy-wide efforts are made to make general environment more conducive to trade and investments in services. Macroeconomic policies like high tariff rates, large fiscal deficits and rigid labour laws may have as adverse effect on competitiveness of services as on goods. Excessive regulations, discretion in the allocation of licenses and permits, corruption and poor quality of infrastructure could adversely affect the growth of services sector. Studies have shown that business environment in India is not very competitive as compared to other developing countries (Dollar and Goswami 2002). The regulatory and administrative burdens are considerably high and so are the labour market restrictions. This points to the need for regulation in services which arises primarily from market failures attributable to natural monopoly and inadequate consumer information. Strong and financially independent regulators and economy-wide efforts to improve business environment can go a long way to sustain the dynamism of India’s services sector.



Chapter-VIII

CONCLUSION
The trends in regional disparities in India over a period of 30 years have been examined and there are wide variations in economic performances of states and the differences have only increased over time. Economic reforms have not delivered on employment front as much as they have delivered on the GDP front. Level of change in employment has not been as large as in GDP. Services have increased their share in GDP from 36 percent in 1972-73 to 45 percent in 1993-94. It further rose to 59 percent in 2009-10 but the corresponding increase in employment share has been much slower from 15 percent in 1972-73 to 21 percent in 1993-94 and to 27 percent in 2009-10. Continuation of this pattern of structural changes has serious implications not only for equity but also for the sustainability of a high growth rate as well. Growth of services sector has been more uneven and has been generally higher in the better developed states, particularly during 2000s thus resulting in increasing divergence among states in their levels of economic development. The rise in regional inequality during the 1990s and 2000s is largely due to a sharp rise in inequality in the services sectors. The rising relative size and interlink ages of services sectors with the economy also contributed to rising inequality in this period. In the absence of adequate growth in other sectors of the economy, the services sector in the long run would be adversely affected by demand constraints and its performance would then depend upon the uncertainly in demand from the rest of the world through exports. The process of growth is accompanied by dual skill over effects i.e. growth in manufacturing sector improves growth in service sector since it creates additional demand for services which arises due to structural changes that makes contracting out cheaper and more efficient for manufacturing sector's growth. Services sector, in turn leads to higher growth in manufacturing sector since it to leads to higher demand for new products and brings about improvement in productivity of manufacturing sector. Also as production of services requires inputs from other sectors, there could be supply constraints due to slowdown in the growth of productive capacity in the rest of the economy.

It is found that inter-state disparities in rates of GSDP growth increased during the 1990s over 1980s. In the period after 2000 while some of the poorer state have experienced a faster than average growth but growth of some of the developed states has slowed down during this period. Although it is still much higher than it was before the reforms. Inter-state variations in rates of GSDP growth are found to be strongly associated with the pace of services growth during 1980 to 2010. A high aggregate growth rate is generally accompanied by increasing disparity. A deregulated policy regime can lead to an increase in disparities as the developed regions have a competitive advantage and government policies favouring poorer regions are no longer in operation on the one hand while on the other hand disparities may also decline as the regions get opportunities to freely utilise their comparative advantage.

Accelerating economic growth is closely linked to growth in service sector of the Indian economy at the present juncture is receiving greater attention. It is therefore very important for an economy to provide services as efficiently as possible and this may require not only increasing investments in services but also continuously improving on them through improved technology and many of the developing countries that are undertaking domestic reforms in their service sector and liberalising services do not have a well integrated policy for the sector. The opportunities in this fast growing employment-oriented, FDI attracting sector, with vast export-potential are striking. Keeping in mind the importance of services in the growth process, it is essential to have a well-defined service policy in line with agriculture and industrial policies. Reforms in services should therefore be an outcome of well-integrated policy for services and should be undertaken in segmental manner maintaining the balance between growth of different services sector because the sustainability of a relatively high GDP growth of the recent years driven by growth of the services sector alone would be difficult to maintain over a long horizon.

The Indian states had strong tendencies to diverge in per capita income over the period. An important finding is that the rate of divergence has increased considerably during the post-reform period relative to the pre-reform one. This signifies that the on-going economic reforms since 1991 have led to an increase in the regional disparities in income. The states were moving only towards their differing steady-state income levels. Hence it may be argued that the observed differences in per capita incomes have been due to dispersion in the steady-state levels among the states, which was found to be due to differences in production structures and physical, social and economic infrastructure among them.

The results suggest that economic policy measures for improving physical, social and economic infrastructure can have significant effect on long-run growth potential as well as convergence across states. Since the observed divergence in per capita income across the states have been due to variations in their steady-states targeting public investment in infrastructure for the states with lower steady-state levels could improve overall growth performance and reduce regional imbalance. Unless appropriate steps are taken to correct disparities in the spread of infrastructure through regional policies and inter-governmental transfers, divergence in per capita incomes across states will continue to widen. The existing policy of transferring proportionately larger amount of funds to relatively poorer states appears to be in the right direction. Efficient utilization of these funds by the states for infrastructural development could help in a great way to improve their overall growth performance and reduce regional disparities in development. The on-going economic reforms that have led to an increase in regional disparities in income need appropriate modification if the policy makers are really interested in reducing regional disparities in development in the country.

The acceleration in the growth of the services sector in India was due to fast growth in communications, banking services, business service, IT and community services. The remaining sectors grew at a constant or trend growth rate. The challenges in this area are to retain India's competitiveness in those sectors where it has already made a mark such as IT and ITES and Telecommunications. Their deeper and broader use in the domestic sectors would also have potential to increase the efficiency and productivity of other goods and services. The globally traded services such as financial services, health care, education accountancy and other business services, where India has a large domestic market but only a very small part of the full potential has been tapped so far. 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. The challenges also lies in making inroads into some traditional areas such as tourism and shipping where other countries have already established themselves but where the potential for India is nevertheless very high.

Since there are diverse sectors within services, the issues and policies cannot be separated into water tight compartment. These challenges and issues could further strengthen the services sector which is the driving force for India to realize double digit growth potential both overall and at state level, while providing more and better job to help achieve more inclusive and balanced growth.

Services are looked at sceptically in our country and it is claimed that they are no more than add on to manufacturing. This conventional attitude needs to be changed for good. In the US the share of manufacturing in GDP is around 23 per cent and share of services is more than 70 per cent. It is also reflected in employment pattern. Future investment and job creation in India will not be driven mainly by manufacturing. Indeed manufacturing may yield relatively few jobs in our country. Its result being companies can triple production without hiring a single new worker but a huge number of jobs will be created in service industries. It will also soak up the bulk of investment.

There are some universal trends in employment patterns which we cannot afford to ignore. Newer technologies will need fewer people in manufacturing. On the other hand more jobs will be created in services, sub-contracting and unorganized sector. Traditional trade demarcations may not have the same place in a modern economy. Flexibility in operations is needed and knowledge will be required for employees. There is no doubt that a large number of illiterate and semi-literate workers in our industry will face problems as a result of it. There will be increase in the requirement of part time and temporary workers. Activities will get specialized and a large number of specialized vendors and sub-contractors will constitute manufacturing networks. As location of industries will no longer be decided by the government and will be based on economic choices so employees will have to be prepared for relocation.

Industry clusters will emerge and all areas will not get equal investment or equal job opportunities. Indian industrialists will be very unwise to focus on manufacturing alone in given scenario. Government needs to shift its thinking to create institutional structures that encourage private investment in services and remove road blocks and delays. These steps will create far more jobs than public sector investment.

In response to the declining share of agriculture in national income, a shift in the occupation of the rural population away from agriculture and towards those sectors that are growing most rapidly will have to be encouraged. Such an occupational shift from agriculture to services has already started. But the proportion of the work force in agriculture is still far greater than the proportion of agriculture in the national income. Obviously, greater attention is to be paid in managing the shift from an agricultural economy to one that is dominated by services. The growth of services such as those related to tourism or transport in the rural areas can be supported by families who find the returns from agriculture inadequate. Steps would have to be taken to increase the potential of the rural population to benefit from the growth of services. The handicap of an inadequate awareness of technology would need to be overcome by not only increasing the availability of education in rural areas but also ensuring that it overcomes the requirements of modern services. Effective instruments will also need to be created to pool rural capital so as to enable investment in high technology services, including linking up directly with global financial and communication networks. Such a transition may not be very smooth but certainly not impossible if preferred steps are undertaken with a vision for future development.

The study bears several important policy implications in designing an appropriate growth strategy. It highlights that the sustainability of a relatively high GDP growth in recent years driven by growth of the services sector alone would be difficult to maintain over a long horizon. This is because in the absence of adequate growth in other sectors of the economy, the services sector in the long run would be adversely affected by demand constraints and its performance would then depend upon the uncertainty in demand from the rest of the world through exports. Also, as production of services requires input from other sectors, there could be supply constraints due to slow down in the growth of production capacity in the rest of the economy (Rakshit 2000). Storm (1997) arrives at a similar conclusion that if a step up in manufacturing exports is to contribute to non-inflationary acceleration of GDP growth; it needs to be supplemented by adequate policies aimed at raising agricultural output.

A critical problem facing India’s economy is the sharp and growing regional variations among India’s different states in terms of poverty, availability of infrastructure and socio-economic development. Four low-income states namely Bihar, Madhya Pradesh, Odisha and Uttar Pradesh are more than one third of India’s population. Severe disparities exist among states in terms of income, literacy rates, life expectancy and living conditions.

The five-year plans, especially in the pre-liberalization era attempted to reduce regional disparities by encouraging industrial development in the interior regions and distributing industries across states but the results have not been very encouraging since these measures. It in fact increased inefficiency and hampered effective industrial growth. After liberalization, the more advanced states have been better placed to benefit from them, with well developed infrastructure and an educated and skilled work force which attract the manufacturing and service sectors. The governments of backward regions are trying to reduce disparities by offering tax holdings, cheap land and focusing more on sectors like tourism which although being geographically and historically determined can become a source of growth and develops faster than other sectors.

The government should take steps to develop the informal segment especially that in the tertiary sector as in the Report of Special Group on Employment Generation 2002. In 1999-2000 only 8.34 per cent of the total labour force was employed in the organized sector and the remaining 91.66 per cent was absorbed in the unorganized sector. Besides it there is sufficient empirical evidence which indicates that a large segment of informal sector workers are employed in tertiary activities. As Mitra’s (1994) study shows, in around 70 per cent of the Class I cities i.e. each with a population of 1,00,000 and above, tertiary activities accounted for more than 60 per cent of the informal sector. Further Hemmer and Mannel (1989) and Sithuraman (1981) also found that 75 per cent of the informal sector was located in tertiary activities by adopting sector specific strategies because employment generation through this sector is also the least cost option (ILO 1991).

If the services sector is properly developed along with the other two important and basic sectors the existing strong complementarily amongst the three sectors will increase in the near future, it can become instrumental in employment generation and individual prosperity as it combines the multiple sectors of technology and manufacture. The introduction of newer technologies necessitates skill up gradation in all three sectors, which would further accelerate the growth of the services sector. The agriculture sector might witness more intense use of IT than what it is doing now, be it in the use of remote sensing through satellite for regular monitoring of crops, social conditions, water resources, weather forecasts through satellites and ground borne systems or in the use of modern communications to be in contact with markets. Similarly in the industrial sector the reorientation of skills from a lower to a higher level will became almost a necessity with the use of sensors, modern electronics and IT. Consequently the growth of skilled and professional services would alleviate the acute problem of the educated unemployed. Former President Abdul Kalam and YS Rajan (1998) highlight the complementarity of the three sectors in the following words:-

“A country like India cannot hope to build its future on the services sector alone though it can be and will be a major component of the economy. India cannot afford not to build its strengths in agriculture for reasons of food and nutritional security nor can it afford to ignore manufacturing strengths for reason of economic and national security. Based on the strength of these two sectors it can build a major economic infrastructure for the services sector and use it to generate great wealth and employment for her people.”

In India the distribution of natural resources has itself created large severely underdeveloped regions in the country which have been recently brought into sharp focus. The problem needs to be addressed by well thought out strategies including deliberate transfer of resources to underdeveloped regions. This is vital because proper grants of all regions of the country are essential for its prosperity in terms of political and social systems and for the economic viability of the nation itself.

Like other developing countries India also suffers from the acute and explosive problem of regional imbalances. The first three Five Year Plans were directed towards achieving the objective of higher growth rates. Scarcity of resources and efficiency of investment often made it imperative for decision makers to concentrate developmental efforts in those segments of the economy and those regions of the country where the rates of return were expected to be high. This type of implementation of planned development programmes resulted in widening regional imbalances in the levels of development and in strengthening of the dualistic structure of economy.

Despite robust economic growth, India continues to face many major problems. The recent economic development has widened the economic inequality across the country. Despite sustained high economic growth rate approximately 80% of its population lives on less than $2 a day (PPP). Even though the arrival of Green Revolution brought an end to famines in India and 40% children under the age of three are underweight and a third of all men and women suffer from chronic energy deficiency.

Organized retail has the potential for reducing inefficiencies and improving the productivity of the retail sector. Studies have shown that in the US, organized retail contributed one-fourth of the rise in productivity growth in the period 1995–99. However, in India organized retail is less than 4% of the total retail sector. It is expected that organized retail by forming linkages with the agriculture sector can lead to productivity growth. Working with organized retail can encourage farmers to improve yields by enabling them to obtain quality supplies, adopt superior farm technology and practices, access timely credit at reasonable rates and bypass unproductive intermediaries. The tie-up with organized retail may drive small/medium enterprises to become more efficient in order to meet the stringent delivery conditions of the retail market.

Private labelling is the creation of brands in the name of modern retailers, and it has already begun in India in the food and grocery and apparel segments and is expected to expand rapidly. Small-scale manufacturers will be the major beneficiaries of private labels. Retail services, if they become more organized have the potential for improving not only their own productivity but also the productivity of other sectors especially agriculture, which is marked by low productivity growth. In order to increase the size of the organized sector and to encourage people to shift from unorganized retailing to organized retailing, the following policy directions should be considered:-



  • The retail sector in India is severely constrained by the limited availability of bank finance. Suitable lending policies need to be designed that will enable retailers in the unorganized sectors to expand, employ better technology, and improve efficiencies. Policies that encourage unorganized sector retailers to migrate to the organized sector by investing in space and equipment should be encouraged.

  • The government must actively encourage the setting up of co-operative stores to procure and stock commodities from small producers. This will address the dual problem of limited promotion and marketing ability, as well as market penetration, for the retailer. The government can also facilitate the setting up of warehousing units and cold chains, thereby lowering capital costs for small retailers.

  • With 3.6 million shops retailing food and employing 4% of the total workforce, the food-retailing segment presents a focused opportunity for the government to catalyze growth and employment. Provision of training in handling, storing, transporting, grading, sorting, maintaining hygiene standards, maintaining refrigeration equipment, packing, etc. is an area where the government can play a proactive role. This could give a substantial boost to the productivity of this sector.

  • Quality regulation, certification, and price administration bodies should be created at district and lower levels for the upgrade of the technical and human interface in the rural to urban supply chain.

  • Competition generates productivity. Calibrated and gradual exposure to competition may lead to productivity spill over effects as domestic organized retailers learn ways of building effective supply chains from the foreign retailers. Some competition has already been induced by the government by allowing entry to foreign firms selling single-brand products. However, domestic organized retailers need to acquire a threshold size to have productivity gains from competition. Incentives to increase the size of domestic retail firms need to be designed.

To sustain the growth of software services, targeted policies and strategies are needed. The sector is already at the frontier of the world and there is a need to capitalize on the gains that growing domestic and external demands offer. The following are some recommendations for sustained improvements for productivity growth:-

  • With the changing global situation, especially after the slowdown in the growth rate of advanced countries, the nature of demand for software services (especially IT-BPO) has also begun to change. A recent National Association of Software and Services Companies–Everest research report shows that the outsourcing needs of buyers are changing with companies focusing on value drivers (integrated delivery models offering scale and value and speedy implementation), minimizing risks, and re-evaluating the sourcing model (re-thinking captive versus supplier mix, evolving risk-reward relationships with vendors, and opting for outcome-based pricing). It is important for IT-BPO services providers to build a strong and unmatched value proposition for themselves in specific, focused, niche segments. Super-specialization segments now need to be explored. Policy incentives need to be built for encouraging IT-BPO services to enter such specialty segments.

  • IT-BPO services are not only increasing their depth by entering super-specialty segments, they are also increasing in width by bringing new areas into their ambit, e.g., legal process outsourcing, clinical research outsourcing, mobile applications, energy efficiency, and climate change. These are new areas that require massive investments and knowledge creation. It is recommended that the government takes initiative and encourages IT firms to enter these areas by creating policy incentives.

  • Along with entering new segments and climbing up the value-chain, what is also needed for the sustained productivity growth of the sector is innovation. In line with providing incentives for R&D activities for the manufacturing sector, the government should also focus on developing incentives for innovations in IT services. Collaborative research between industry, academia, and government needs to be encouraged.

  • The government can give direct support through greater outsourcing and moving away from low-value, high-volume back-office jobs and customer support activities, and instead moving towards higher value offerings by BPO services providers. The government role in expanding the domestic BPO industry is expected to be critical, as it can boost domestic business by taking forward programs such as e-governance and connectivity. This will further increase the growth of the domestic market and inject productivity growth into the economy.

  • The Indian software services sector has the potential to emerge as an IT hub in the region. But for that to happen, it is important for the government to provide opportunities within its various bilateral Free Trade Agreements. Concessions for IT service providers can be negotiated to increase exports and investments in other countries. Low-value end services can be outsourced to these countries and attempts can be made to develop supply chains.

Efforts are required to improve both demand-side and supply-side factors in these services sectors. On the demand side specific policies are required to improve domestic and external demand, and on the supply side targeted policies are required to boost productivity growth.

Higher sustainable growth is creating greater demand for financial savings. The Indian banking sector faces many challenges with the economy possessing one of the highest growth rates in the world. Not only does the banking sector require increased penetration to reach out to a wider customer base but it also has to provide the best value to customers in terms of service levels and transparency. Indian banks will have to find ways to optimize each customer relationship as they compete with global players with deep pockets and deep customer insights. To help banks improve their productivity and efficiency and provide much needed support to the industry, recommendations are the following:-



  • Banks not only need to invest in infrastructure but they also need to leverage information technology to find more innovative ways to reach customers, such as utilizing new delivery mechanisms, economizing on transaction costs, and providing better access to the under-served. Electronic transactions substantially improve the efficiency of banking systems because they are faster in comparison with paper-based transactions. To help banks undertake these costs, more deregulation is required.

  • Another critical challenge is the hiring and retaining of talent in the face of stiff competition from private institutions. Banks will also have to invest in new skill development and training. The government can provide vital support in this respect. As the share of public-sector banks is the highest, skill development and training of staff needs to be undertaken at regular intervals to keep them up-to-date with the latest technologies and customer care programs.

  • Indian banks need to build on existing capabilities and also add new ones. This poses a more serious managerial challenge given the dynamic environment in which banks will be forced to continuously learn and reorient themselves while adopting new technologies for risk management, building innovative service mechanisms of delivery, and improving customer care. The consolidation of banks can prove to be an effective tool to achieve this objective. Banks with similar operations have an incentive to merge, thereby eliminating overlapping branches and freeing back office, administration, and marketing resources. Productivity gains from the implementation of new technologies would also be enhanced due to the incurring of large initial investments compared to the scale of operations. This may also lead to risk diversification, which is more relevant for smaller banks concentrated in particular regions serving niche markets. As banks merge and grow bigger they would be in a much better position to introduce customized financial instruments. The government can play a vital role in this through strategic policy intervention.

A clear danger is that the current pattern of skill-intensive growth will be accentuated. Increasing inequality of income is paralleled by increasing regional inequality. These trends can create political instability, or lead to growth that peters out, leaving a wealthy class connected with the global market economy, and significant numbers of poor people.

One of the features of the Indian development model was its ability to balance different interests through formal democratic processes as well as informal political bargaining, albeit at the cost of higher growth. The challenge now is to create a new social contract that softens the growth-equity trade-off so that both can be better achieved. As has been the case for a long time in India, social stratification does act as an inhibitor to equity. Many of the poorest parts of India with the worst human development indicators have high proportions of tribals or dalits (former untouchables). Interestingly, the software industry provides an example of what is possible. Initially, the view of computer science as a cerebral activity with high social status made it attractive for upper castes in India, especially in the South, where quota systems had restricted access to government jobs for the highest castes. Over time, however, the industry has attracted entrants from all backgrounds. Global competition has promoted a meritocratic relatively egalitarian culture in the industry. Women too are increasingly drawn into a specialty that does not suffer from the traditional social constraints associated with other disciplines such as civil and mechanical engineering. In general growth and urbanization have begun to chip away at traditional manifestations of social stratification. It will be important for policies to be designed that improve access to education through targeted subsidies and supply increases, rather than increased use of quotas.

Agriculture remains one of the biggest challenges for India’s future development though it must be recognized that agricultural modernization cannot be a substitute for growth in labour-intensive manufacturing. After the diffusion of the Green Revolution which introduced high-yielding varieties of several cereal crops along with increased fertilizer use and irrigation agricultural growth has slowed. Part of the problem is that farmers have been locked into growing low-value crops by the existing physical and organizational infrastructure and political arrangements. New investments are required throughout the agricultural value chain but these also require innovations in risk management and adjustment assistance that have been slow to develop especially for agricultural producers.

Individual bureaucrats, visionary entrepreneurs and enterprising politicians together played a role in previous agricultural development as did foreign expertise (Kohli and Singh, 2005). Clearly a concerted approach to revamping this dimension of development strategy is required for India. Many of the changes required have to do with relaxation of controls but others require institution building which is more difficult.

Improvements in agricultural growth and rural development more broadly will address some of the concerns with respect to inequality and have a value from that perspective as well. While rural development through road building, better telecommunications connections and investments in health and education can help to create non-agricultural rural employment but it remains the case that urban, industrial employment must increase dramatically. As agricultural productivity increases labour will be freed up and must be absorbed into industry and services. Given the limitations of services as an employer of unskilled labour, Indian policy reform must be geared toward creating the conditions for large-scale labour-intensive manufacturing for the domestic as well as the international market. This may be the single most important change needed in India, for sustained growth – it represents a very traditional but logically sound goal for development strategy. The problem has been in agreeing on and implementing a set of policies that will support this goal. Microeconomic reforms of labour markets, small-business finance, industrial and vocational training and land use policies are all likely to be needed (e.g., Kelkar, 1999; Srinivasan, 2007; Panagariya, 2008. The urgency of creating job-friendly growth is highlighted by India’s demographic dividend which will give it a bulge in the working-age population.

To the extent services growth is led by sectors like transport and communication a relatively large subsector of services it can sustain high overall growth in the medium term. In the long run however the infrastructure services would have to induce faster growth in industry to sustain a high aggregate growth.

There are inequalities arising out of occupation and location specificities which have also increased. The share of agriculture has substantially declined in GDP but not in workforce, so agriculture non‐agriculture disparity in per worker income has sharply increased. Incomes of wage earners have grown at much slower rate than of the owner of capital. Rising share of the organised sector in output but not in employment has further widened the already large income disparities between those engaged in the two sectors.

Inter regional disparities in spite of some poorer regions doing better lately continue to be large. Increasing disparities are no doubt likely to be a source of social discord but will also threaten the sustainability of high economic growth as increasing income inequality would result in a demand constraint.

It must also be noted that the high and increasing inequalities leading to growing dualism for example between agriculture and other sectors and between organized and unorganized sectors with large differences in productivity. It would also lead to supply side constraints to growth in terms of availability of wage‐goods and inputs and intermediates for production in the formal sector. Increasing asymmetry between income and employment shares of agriculture is likely to pose a serious problem for growth as well as livelihoods. If the continuing decline in the share of agriculture in GDP is not accompanied by a significant decline in workforce share, it will not only lead to widening of disparities and stagnation in purchasing power with large mass of rural population, but can even lead to an absolute decline in incomes of agricultural workers if agricultural growth is negligible or negative. Raising agricultural growth and productivity is no doubt very important but the need to shift a large part of agricultural workforce to non‐agricultural activities is rather urgent.

Linked with the structural transformation of workforce is the larger issue of employment. The post‐reform economic growth has failed to deliver on employment front inspite of its being highly successful in delivering on GDP front. A high growth has not been able to generate employment even at a rate achieved with less than half GDP growth rate in the past. Part of the reason lies in technology which has become less employment intensive across economic activities and product groups but a good part of the reason lies in the structure of growth.

Most services especially those which have dominated India’s economic growth in recent years are highly capital intensive and India’s exports have become increasingly less labour intensive because of the compulsions of international competitiveness to use more efficient capital intensive technology. Most growth has been derived from sectors and activities that have low employment potential. A service‐led and export‐led growth is highly unlikely to improve the employment intensity. A faster growth of the manufacturing industry along with a greater domestic orientation of production is therefore necessary for growth to ensure a reasonably high rate of employment growth.

A scheme has been launched for development of nationally and internationally important destinations and circuits through mega projects. So far 38 projects have been identified out of which 23 have been sanctioned. The mega projects are a judicious mix of heritage and cultural, spiritual, and ecotourism in order to give tourists a holistic experience. In order to meet the huge skill gap in the hospitality industry the Government has put in place a multipronged strategy which includes strengthening and expanding the institutional infrastructure for training and education.

Besides this other steps are being taken for skill training of youth in the hospitality sector and providing skill certification. While the general security situation has improved considerably. To strengthen the National Tourism Policy 2002’s critical pillar of Safety the Government has adopted the Code of Conduct for ‘Safe and Honourable Tourism’ on 1 July 2010.

Along with the continuation of promotional efforts under the Incredible India campaign the Government has introduced the Visa-on-Arrival (VoA) scheme for tourists from five countries namely Singapore, Finland, New Zealand, Luxembourg, and Japan on a pilot basis with effect from 1 January 2010. During January–December 2010, a total of 6549 VoAs were issued under this scheme. The VoA scheme has been extended to the nationals of Cambodia, Vietnam, Laos, and Philippines with effect from 1 January 2011 and Myanmar and Indonesia from 25 January 2011. Despite these efforts there is a lot more to be done given the potential of this sector. In fact at 11.5 per cent the share of travel in India’s exports of commercial services in 2008 is relatively lower than that of many other exporters of services and half the shares of the USA, EU and China

Some issues related to the warehousing sector include increasing high quality storage capacity as well as the numbers of trained samplers and graders addressing issues like:-


  • Storage loss due to deterioration of the produce during storage.

  • Lack of provision for dealing with cases where stocks are pledged with banks and the depositor either absconds or refuses to take delivery.

  • Delay in delivery and deposit of stocks due to extension of ‘no-entry’ zones in cities.

  • Levy of property tax on warehouses and high fees by ports.

The National Housing Bank (NHB) established with the objective of promoting housing finance institutions both at local and regional levels has conceptualized the reverse mortgage loan product exclusively for covering house-owning senior citizens. It has introduced the residential real estate price index (RESIDEX), which is an initiative towards providing the housing finance sector with an index which reflects the trends in the prices of residential properties across the country.

The global economic crisis impacted the Indian real estate industry significantly. However, various measures taken by the Government to boost the demand for residential properties as also the relaxation in provisioning requirements by the RBI for banks and NHB for Housing Finance Companies (HFCs) has minimized the impact of economic crisis on this sector. The sector has started recovering following the increasing activity in the Indian economy however with a fundamental difference. Customers are now going for need- based purchases rather than investment based on the euphoria and hype witnessed in 2007 and 2008.

The Government has been supporting the IT and ITES sector in many ways. This was continued in the 2010-11 Budget with policies like Government expenditure for improving IT infrastructure and delivery mechanism reduction in surcharge from 10 per cent to 7.5 per cent for IT companies and Government’s E-Governance plan. There are some issues in the IT-ITES sector which need attention. These include shifting from low-end services to high- end services like programming in the light of competition in BPO from other countries and policies in some developed countries like UK to employ locals addressing data protection issues as half of offshore work does not come to India concluding totalization agreements with target countries to resolve the social security benefits issue as is being done now and increasing the coverage and depth of IT and ITES services in the domestic sector.

There is need to tap outsourcing in niche areas like actuarial and accountancy services as there is good scope for outsourcing actuarial services and accountancy services to India including setting up back offices. But Indian service providers need high-quality training in tax laws of US and other countries besides laws related to insurance, pension, etc. Tie-ups to overcome the weakness of small size of domestic accountancy firms can also help India’s accounting sector grow manifold.

Some initiatives that could be taken in the construction sector include using the standard contract document for all domestic civil engineering projects, setting up consortiums to bid effectively for international projects and resolving the issue of precondition in most of the overseas tenders floated by clients wherein equipment to be supplied by the contracting company has necessarily to be sourced from an approved list of suppliers from developed countries. Another area that needs consideration is the possibility of a double guarantee avoidance treaty on the lines of the double taxation avoidance treaty as overseas clients insist on bank guarantees to be issued under the contract being routed through a local bank operating in the country of project execution which results in Indian contracting companies being called upon to pay the bank guarantee charges to Indian banks as also to the local overseas banks which issue the final end guarantees to the client, based on the counter guarantees from the Indian banks.

Given the myriad activities in services supporting its growth will require careful and differentiated strategies. The opportunities in this fast-growing, employment-oriented, FDI attracting sector with vast export-potential are striking. However there are many challenges:-



  • 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. Their deeper and broader use in the domestic sectors would also have a dramatic potential to increase the efficiency and productivity of other goods and services.

  • The second challenge lies in making inroads into some traditional areas such as tourism and shipping where other countries have already established them but the potential for India is nevertheless very high.

  • The third challenge is in making forays into globally traded services in still niche areas for India, such as financial services, health care, education, accountancy, and other business services where India has a large domestic market and has also shown recent signs of making a dent in the international market, but only a very small part of the full potential has been tapped.

There are also challenges related to collecting better data and developing a better co-ordinated strategy to pull together all the dispersed information. 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. Since there are diverse sectors within services, the issues and policies cannot be separated into watertight compartments. Addressing these challenges and issues could further strengthen the services sector which is the driving force for India to realize double-digit growth potential, both overall and at state level, while providing more and better jobs to help achieve more inclusive and balanced growth.

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