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Chapter 10. Services Sector (Indian Economy Summary)

10. Services 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. India’s liberalisation of services has been a challenging process in several sub-sectors, but clearly those services where integration through trade and FDI has gone further are also the ones that have exhibited more rapid growth along with positive spillovers on the rest of the economy.
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 liberalisation in services can help diversify the sources of growth withing 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. But the debate has been somewhat solved by the newly published Economic Survey 2014–15 in favour of the manufacturing sector. The Survey has gone to quote several empirical studies of recent times linking both services and manufacturing sectors to a great many real issues—potential to create employment, need of skilled and unskilled labour force, formality anf informality of the sector, etc. For this, the idea of ‘Make in India’ has acclaimed timely action from the government. Again, the importance of expanding the Railways and enhancing public investment in it have also been pointed out. These findings are also in line with several other studies of the recent times.

Global Scenario

The services sector has emerged as the most dynamic sector of the world economy, contributing almost one-third of world gross value added, half of world employment, one-fifth of global trade and more than half of the world FDI flows. A brief idea of the current trends in the sector follows below:

World Services GVA__________________

The global services performance are as given
• In 2015, in the US$ 69 trillion world gross value added (GVA), the share of services (at current prices), and growth rate (at constant prices), improved marginally to 63 per cent and 2.3 per cent respectively over 2014.
• In the last 14 years, the share of the services sector in world GVA has declined by 2.9 percentage points (pp). Among the world’s top 15 countries in terms of gross domestic product (GDP), the US ranks first, in both services GVA and overall GDP, China being second and Japan third.
• India ranked ninth in terms of overall GDP and tenth in terms of services GVA in 2015, climbing one rung in both rankings.
• Among these top 15 nations, in the period 2001-14, the maximum increase in services share to GVA was recorded by Spain (9.3 pp), followed by India (7.6 pp) and China (6.6 pp).
• Services sector has not recovered from the impact of the 2008 financial crisis (Brazil being exception).
• In India, the growth rate in the sector was estimated to be 8.8 per cent in 2016-17 with a slight deceleration in 2016–17 (for China it was at 8.0 per cent).

World Services Employment__________________

The global employment scenario in the services sector shows a mixed picture.
• As per the World Bank, the share of services in global employment has increased to 53 per cent in 2016 (from 35.9 per cent of 2001).
• Among the top 15 services producing countries, the share of services in employment is high, contributing more than two-thirds of total employment in 2015 in most of them (except India and China). India has the lowest share of 27.4 per cent.
• Of the 15 countries, in the last 14-year period (2001–15), China had the highest increase in the share of services employment (33.8 pp), followed by Brazil (17.0 pp) and Spain (14.3 pp). For India, the increase was by only 4.5 pp.
As per the ILO Report on “Global Employment and Social Outlook: Trends 2016”, job in the coming years will be mainly in the services sector though with lower rate.

Services Performance

Service sector was having a robust performance in India for the last decade and by 2014-15 its contribution in the GDP had reached the record level of 72.4 per cent. But in the last few years it has not been able to grow as good mainly due to unfavourable international environment. The present performance scenario for the sector is briefly highlighted below:
• In 2016-17 the sector is estimated to have a growth rate of 8.8 per cent (almost same as 2015-16), as per the 1st advance estimates of the CSO, released January 2017.
• India’s commercial services exports increased from US$ 51.9 billion in 2005 to US$ 155.3 billion in 2015 (WTO).
• The share of India’s commercial services to global services exports increased to 3.3 per cent in 2015 from 3.1 per cent in 2014 despite negative growth of 0.2 per cent in 2015 as compared to 5.0 per cent growth in 2014. This was due to the relatively greater fall in world services exports by 6.1 per cent in 2015 (WTO).
• As per RBI’s BoP data, India’s services exports declined by 2.4 per cent in 2015-16 as a result of slowdown in global output and trade. However, in H1 of 2016-17, services exports increased by 4.0 per cent compared to 0.3 per cent growth in the same period of previous year.
• Growth of net services, which has been a major source of financing India’s trade deficit in recent years, was (-) 9.0 per cent in 2015-16 and (-) 10.0 per cent in H1 of 2016-17 due to relatively higher growth in imports of services.
• Growth of software exports which accounted for 48.1 per cent share in services exports was 1.4 per cent in 2015-16 and 0.1 per cent in H1 of 2016-17.
• India’s tourism sector witnessed a growth of 4.5 per cent in terms of foreign tourist arrivals (FTAs) with 8.2 million arrivals in 2015, and a growth of 4.1 per cent in foreign exchange earnings (FEEs) of US$ 21.1 billion. In 2016 (January-December), FTAs were 8.9 million with growth of 10.7 per cent and FEE (US$ terms) were at US$ 23.1 billion with a growth of 9.8 per cent.

Regional Outlook__________________

A regional differentiation is found in India regarding the sector –
• Out of the 33 states and union territories(UT) for which data was available, the services sector was the dominant sector contributing more than half of the gross state domestic products (GSDP) in 21 states and UTs and more than 40 per cent in all states except Sikkim and Arunachal Pradesh. The major services in most of the states are trade, hotels and restaurants, followed by real estate, ownership of dwellings and business services.
• Out of the 23 states and UTs for which data is available for 2014–15, Delhi is at the top in services GSDP with a share of 87.5 per cent followed by Maharashtra at 63.8 per cent, with growth rates of 8.2 per cent and 5.7 per cent respectively.
• Puducherry had the highest services growth at 16.3 per cent followed by Meghalaya at 13.2 per cent, owing to increase in growth rate of high weighted sectors like trade, hotels and restaurants and real estate and business services in the case of the former and other services in the case of the latter.
• Jammu and Kashmir had the lowest services growth at 2.0 per cent, mainly due to low and negative growth in most of the sectors except public administration. Bihar’s services sector growth was among the fastest with a consistent double-digit growth in the last seven years due to high growth in the high weighted sectors like trade, hotels and restaurants, and real estate and business services besides transport by other means.

Consultancy Services__________________

Consultancy services are emerging as one of the fastest growing service segments in India, overlapping. A large number of consultancy firms and individual consultants are operating in India at various levels across the sectors.
Technical consulting constitutes about two-thirds of the total consulting market, while management consulting constitutes about one-third. Technical consulting in India, which mainly consists of engineering consulting, is much stronger than management consulting in terms of the number of players, consulting capabilities and size of consulting firms. The Indian management consulting market, on the other hand, is mainly captured by large size foreign multinational consulting firms. Though there are huge opportunities for the growth of the Indian consulting industry, there are some key inhibitors like low brand equity, inadequate international experience of Indian consultants working abroad, lack of local presence, lack of strategic tie-ups, low competency image, lack of market intelligence on consulting opportunities abroad and lack of a strong competency framework of consultants that improves quality in delivery of consulting assignments. The GoI has taken many initiatives to help the industry –
(i) Marketing Development Assistance and Market Access Initiative schemes;
(ii) Guidelines on broad policies and procedures for selection, contracting and monitoring of consultants; and
(iii) Initiatives aimed towards capacity development of domestic consultants and sensitisation of client organisations.
Recent initiatives taken by the GoI such as Make in India, development of smart cities, skill development, along with the focus on improving industrial policies and procedures, have opened up a plethora of opportunities for consultants.
The key areas with enormous potential for Indian consultancy firms are: building of urban & transport infrastructure, power generation, renewable energy, electricity transmission & distribution, roads & bridges, water supply & sewerage, IT & telecom, health care and manufacturing. Emerging sectors such as bio-technology, nano-technology and other advanced disciplines also offer tremendous opportunities to consultants. Consultancy services can also look forward to deriving revenues from newer services and newer geographies with Big Data, cloud, M2M and Internet of Things becoming a reality.

Internal Trade__________________

It refers to the movement of goods and services across different geographical regions in the country. It includes self-employed and persons engaged in both wholesale and retail trade. Presently internal trade is governed by a diversity of controls, multiple organizations and a plethora of orders. This has resulted in a fragmented market, hindering the free flow of goods within the country, higher transportation costs and in general a lower level of efficiency and productivity. Unhindered flow of goods and services is an essential pre-requisite for building a common market that will promote growth, trade across regions and also enable specialization and higher levels of economic efficiency. Major highlights of the sector are as follows:
• The trade and repair services sector grew by 10.7 per cent in 2014–15.
• A report by KPMG-FICCI – late 2015, put the overall size of the Indian retail sector at Rs. 40 trillion in 2014 and projected it to reach Rs. 70 trillion by 2020 with a compound annual growth rate (CAGR) of 9.6 per cent.
• The penetration of modern retail is expected to reach 18 per cent from the current 9.8 per cent in this period, driven by the increasing appeal of modern retail among shoppers as well as changes in shoppers’ expectations and behaviour.
• It will be a key sector for skill of 58 million people by 2022 and accounting for 14 per cent of the incremental human resource and skill requirement from 2013 to 2022. With organized retail penetrating the smaller towns and cities, there would be a need for skilled manpower in this sector.
• As per the AT Kearney’s Global Retail Development Index (GRDI) report, India’s retail trade ranking has risen to 15 from 20 in 2014, mainly due to solid expansion in retail sales and strong prospects for future GDP growth. India’s retail market is expected to grow to US$1.3 trillion by 2020, making India the world’s fastest-growing major developing market.
• Real estate availability could be the biggest barrier to retail expansion in India since it has four times the population of the United States but just one-tenth of the mall space. This market still has a long way to go as online remains just 0.5 per cent of the total retail market, internet penetration is just 20 per cent of the population, and infrastructure needs to improve significantly.
• As per the ASSOCHAM-Deloitte report (April 2015), E-commerce market has grown steadily from US$ 4.4 billion in 2010 to US$ 13.6 billion in 2014. Online travel accounts for nearly 61 per cent of e-commerce business while e-tailing constitutes about 29 per cent. Some estimates indicate that companies will spend between US $1 billion and US $2 billion on e-commerce-related infrastructure over the next five years.
• No official data is available on the direct selling/multi-level marketing (MLM) sector. According to a KPMG-FICCI study (December 2015), the direct selling market in India has grown at a CAGR of 16 per cent over the last five years from Rs. 41 billion in 2009–10 to Rs. 75 billion in 2013–14. Total employment in this sector is around 5.8 million. There is at present no separate legislation for regulation of direct selling activities, hence they come directly under the purview of the Prize Chits & Money Circulation Schemes (Banning) Act 1978, administered by the Department of Financial Services. As it is a banning act, there is no provision for differentiating the genuine direct selling business from banned pyramid/money circulation schemes, and this has resulted in alleged harassment/ criminal action against the industry. An inter-ministerial committee was constituted on 12 November 2014 to examine the need for a separate legislation for this sector. Based on the decision taken in the last meeting, a draft guidelines is under examination.

Research & Development (R & D) Services

The Research & Development sector of India grew by 20.8 per cent in 2012–13 and contributed 1.4 per cent of GDP (old method). As per the CSO’s new method, there is no separate head for R&D. It is a part of the professional scientific & technical activities including R&D classification which grew at 3.1 per cent and 23.4 per cent respectively in 2014–15 and 2015–16 (Ministry of Commerce & Industry, Feb. 2017).
India’s R&D expenditure has been low – the STO (Science, Technology and Innovation) Policy, 2013 aims to raise it to 2 per cent of GDP with enhanced participation of the private sector.
Findings of the Global Competitiveness Report 2016–17 are as given below –
(a) India’s capacity for innovation has been lower than that of many countries like the USA, the UK, South Korea, and even South Africa.
(b) Even in quality of scientific research institutions, India scores lower than China and South Africa. This is also exhibited through its poor score on university–industry collaboration on R&D as compared to some other BRICS (Brazil, Russia, India, China and South Africa) nations like China and South Africa.
(c) In terms of patents granted per million population, India fares badly compared to other BRICS countries. In terms of company spending on R&D also, India ranks below China. Only in terms of availability of scientists and engineers, does India score better or is equal to other BRICS countries.
The Government of India has taken many initiatives in recent times to promote the R&D sector in India –
(i) The weighted tax deduction of 200 per cent for R&D expenditure.
(ii) Establishment of the AIM (Atal Innovation Mission) in the NITI Aayog. This will be an innovation promotion platform involving academics, entrepreneurs, and researchers and draw upon national and international experiences to foster a culture of innovation, R&D and scientific research in India. The platform will also promote a network of world-class innovation hubs.
(iii) SETU (Self Employment and Talent Utilization) programme, aimed at setting up world class technology business incubators to promote start-up business in India coupled with Start-up-India, Make in India.
(iv) IMPRINT (Impacting Research Innovation and Technology), a Pan-IIT and IISc joint initiative to develop a roadmap for research to solve major engineering and technology challenges in ten technology domains relevant to India.

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. One can see the problem looking at market shares. India’s share of world exports of services, after surging in the mid-2000s, has flattened out.
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. Since Asia has slowed down more rapidly, India’s exports of manufactures should have been more affected. Furthermore, in 2015, the rupee has depreciated strongly against the dollar which should have helped India’s exports of services.
These developments have longer-term implications. 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.
China’s global market share in manufacturing exports beginning in 1991 and India’s global market share beginning in 2003 were roughly similar. The magnitude of the challenge becomes evident when examining China’s trajectory over the last fifteen years.
To achieve a similar trajectory, 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__________________

Following important decisions were taken at the 10th session of the WTO Ministerial Conference held in Nairobi, Kenya (15–18 December 2015).
(i) Implementation of preferential treatment in favour of services and service suppliers of least developed countries (LDC) and increasing LDC participation in services trade;
(ii) 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.
(iii) India, together with 20 other members have notified preferential treatment to LDCs in services trade. India has offered this in respect of:
(a) Market access
(b) Technical assistance and capacity building; and
(c) Waiver of visa fees for LDC applicants for business and employment.
In February 2017, India made a presentation a proposal to the WTO for a global pact to boost services trade. The proposal—Trade Facilitation in Services (TFS)—is mainly aimed at ‘ensuring’—easier norms for movement of foreign skilled workers/professionals across borders for short-term work; portability of social security contributions; reasonable fees for immigration; cross-border insurance coverage; boosting medical tourism; and publication availability of relevant information for cross-border supply of services. World Bank data shows the growing share of services in the world economy, the sources said, adding, however, that global trade flows in services remain subject to numerous border and behind-the-border barriers (Ministry of Commerce & Industry).

Bilateral Agreements__________________

The bilateral agreements signed by India in recent times are:
(i) 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 mid-2015.
(ii) 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.
(iii) 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 reforms in the services sector is as follows:

Trade and Transport Services__________________

Some constraints in these sectors include restrictions on inter-state movement of goods which could ease with the adoption of the model Agriculture Produce and Marketing Committee (APMC) Act by many states; the Multimodal Transportation of Goods Act 1993 which needs revision to ease the existing restrictions on transportation and documentation through different modes of transport, particularly restrictions in the Customs Act, which do not allow seamless movement of goods; and restrictions on free movement of cargo between Inland Container Depots (ICDs), Container Freight Stations (CFSs) and Ports.

Construction Development__________________

In this sector, bottlenecks result from continuation of restrictions under the Urban Land Ceiling and Regulation Act (ULCRA) in some states namely Andhra Pradesh, Assam, Bihar, and West Bengal, which have not yet repealed it and the confusion in the process required for clearance of buildings even after the repeal of ULCRA by passing of the Urban Land(Ceiling and Regulations) Repeal Act 1999 by the other states.
There is also lack of clarity on the role of states as facilitators in the land acquisition policy resulting in increasing number of court litigations adding to risk profile of builders/projects thereby restricting lenders from extending finance to such builders/ projects.
There are also restrictions on floor area ratio (FAR) in many states; and other restrictions like the application of bye laws/regulations and its exemptions, e.g., increase in FAR which varies from project to project and is sometimes discriminatory. Obtaining environment clearance is another major hindrance.

Accountancy Services__________________

While the accountancy professionals were hitherto allowed to operate either as a partnership firm or as a sole proprietorship firm or in their own name since the Indian regulations do not permit exceeding 20 professionals under one firm, the emergence of Limited Liability Partnership (LLP) structure is likely to address this impediment. However, the number of statutory audits of companies per partner is restricted to 20.
FDI is also not allowed in this sector and foreign service providers are not allowed to undertake statutory audit of companies as per the provisions of the laws in India. There are also domestic regulations like prohibition on the use of individual logos for partnership and single proprietorship accounting firms. These regulations need to be relaxed and streamlined to facilitate tie-ups and penetrate foreign markets given the potential for exporting these services by the outsourcing mode.

Legal Services__________________

In this sector, FDI is not permitted and international law firms are not authorised to advertise and open offices in India. Foreign service providers can neither be appointed as partners nor sign legal documents and represent clients. The Bar Council is opposed to entry of foreign lawyers/law firms in any manner. Indian advocates are not permitted to enter into profit-sharing arrangements with persons other than Indian advocates.

Education Services__________________

These come under the Concurrent List with multiple controls and regulations by central and state governments and statutory bodies. Regulations of minimum of 25 acres of land to establish a medical college restricts the setting up of medical colleges in cities like Delhi. Patient load factor regulations related to establishment of new medical colleges also need to be in tune with present day equipment-intensive patient care and modern practices and procedures of medical education.

The Need For Reforms

Indian services sector have the potential to garner higher economic benefits to the country. But there are many issues 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. There is also need for promotional activities for service exports like,
(i) setting up a portal for services,
(ii) showcasing India’s competence also in non-software services in trade exhibitions, c) engaging dedicated brand ambassadors and experts.
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,
(i) amendment to the definition of royalty to include payment of any rights via any medium for use of computer software,
(ii) tax administrative measures to tackle delay in refunds,
(iii) introducing VAT (value added tax) refund for foreign tourists, and
(iv) addressing the issue of bank guarantees based on past performance to avail of export promotion benef its in services.

Sectoral Issues __________________

Area-specific policy hurdles to the services sector are also there. Together with the general issues, these area-sepcific bottlenecks do not allow the sector to realise its real potential. The major ones in this area are being outlined below.
Tourism and hospitality sector: As per the latest data of world tourism, India’s tourism has not been competitive enough to attract tourist due to several reasons, such as,
(i) India’s share in world tourist inflows was only 0.64 per cent in 2012 (rank 41), while that of the USA was 6.47 per cent (rank 2) and China 5.57 per cent (rank 3).
(ii) India’s share in world tourism expenditure is relatively higher at 1.65 per cent (rank 16) implying that foreign tourists spend relatively more in India.
(iii) Singapore, a small country, attracted 11.10 million tourists in 2012, while a large country like India attracted only 6.97 million foreign tourists during 2013.
Some suggested measures in this area, as per the Economic Survey 2014–15, are:
(i) creating world class tourism infrastructure even by PPP;
(ii) addressing multiple taxation issues;
(iii) skill and etiquettes training to cater to the needs of tourists;
(iv) special focus on cleanliness at tourist sites and safety of tourists;
(v) using the MGNREGA for creating permanent assets like tourism infrastructure and facilities;
(vi) organising mini India cultural shows on a daily basis at important tourist sites that will not only attract tourists but also generate employment for Indian artists; and
(vii) implementing urgently visa on arrival and E visa facilities at 9 airports to 180 countries barring 8 ‘prior reference’ countries (this decision has already been taken).
Port services: Indian ports are not world-class ports and lack the necessary draft. As a result, ‘third-generation ships’ are not able to enter the harbour and goods have to be offloaded outside in smaller ships, adding to costs. If India can develop world-class airport infrastructure and metros, there is every reason to attend the concerns of the port services. Its immediate focus should be on—
(i) building world class ports providing world class services that will also help the trade sector by reducing costs and turnaround time in ports, and
(ii) reducing port charges which are considerably higher.
Shipping, shipbuilding and ship repairs: Indian ships in the carriage of India’s overseas cargo has fallen sharply and Indian ships are ageing, too. Government-owned shipyards like Visakhapatnam are facing problems like declining orders. India’s shipbuilding industry has the capacity and expertise but is functioning below capacity. Some of the suggested steps to boost the sector are:
(i) need to replace our ageing ships with new ones,
(ii) increasing shipping fleet (with prices falling on account of global slowdown),
(iii) a special financing mechanism needs to be developed.
(iv) utilising India’s shipbuilding and repairs yards and enhancing their capacity (as India needs to replace many old ships and growing ship repairs business in the world).
Railways: The FDI policy of Railways sector restricts FDI in rail transport, except in mass rapid transit systems. FDI and privatisation in the railways could be the next big ticket reforms. A proposal has been initiated by Indian Railways, for making suitable changes in the existing FDI policy in order to allow FDI in railways, to foster creation of world class rail infrastructure. The proposal envisages—
(i) allowing FDI in all areas of the rail sector except railway operations.
(ii) even in railway operations, FDI is proposed in PPP projects, for suburban corridors, high speed train systems, and dedicated freight lines.
While privatisation of railways has been successful in some countries like Japan, it has failed in some others like the UK. So this proposal needs to be examined carefully and quickly to allow privatisation and inflows of FDI in areas where it is feasible.

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:
(i) 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.
(ii) In future, government’s focus on the following are expected to provide impetus to logistics services—
(a) infrastructure development,
(b) favourable regulatory policies like liberalisation of FDI norms,
(c) increasing number of multimodal logistics service providers,
(d) growing trend of outsourcing logistics to third party service providers, and
(e) entry of global players.
(iii) 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.
(iv) The prospects for Indian aviation services have improved following—
(a) the fall in prices of aviation fuel, which accounts for nearly 40 per cent of the operating expenses of airlines in India;
(b) liberalisation of FDI policies in civil aviation; and
(c) strong growth in passenger traffic – expected to continue in the near future.
(v) 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—
(a) allocation of Rs. 1000 crore to technology and start-up sectors,
(b) promotion of cashless transactions via RUPay debit cards, and
(c) growth of e-commerce.
(vi) 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.
(vii) 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 & mobility and software products.
(viii) 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.
As per the Economic Survey 2016-17, the growth prospects of the services sector has slowed in recent times caused by several external and domestic reasons. The Nikkei/Markit Services PMI (Purchase Manager’s Index) for India was at a high of 57.5 in January of 2013 which fell down to 46.7 in November 2016 from 54.5 in October 2016. However, it increased marginally to 46.8 in December 2016. The Baltic Dry Index (BDI) an indicator of both merchandise trade and shipping services, which showed some improvement up to 18 November 2016 (at 1030) declined to 910 on 13 January 2017.
1. Rupa Chanda, in Kaushik Basu and Annemie Maertens (eds) ‘Services-led Growth’ The New Oxford Companion to Economics in India, Vol. II (New Delhi: Oxford University Press, 2012), pp. 624–32.
2. For a detailed description See Ministry of Finance, Economic Survey 2014–15, Vol. 1. Though, the theme of the analysis has been included in this book itself, in the Chapter-9 ‘Industry and Infrastructure’.
3. India Development Report 2012–13 (New Delhi: Oxford University Press, 2013), pp. 116–31.
4. Economic Survey 2016-17 & 2015-16; Ministry of Commerce & Industry, GoI, N. Delhi.
5. Economic Survey 2016-17, Government of India, ministry of Finance, N. Delhi, Vol. 1, pp.159-160.
6. Ministry of Finance, Economic Survey 2015–16,
pp. 167–68.
7. Ibid.
8. Ibid.
9. H.A.C. Prasad and R. Sathish, Working Paper No. 1/2010-DEA on ‘Policy of India’s Services Sector, 2010’ with updates from concerned Departments and Institutions, as quoted in, Ministry of Finance, (New Delhi: Government of India, Economic Survey 2013-14, p. 228).
10. H.A.C. Prasad, R. Sathish, and Salam Shyamsunder Singh (2014), working paper 1/2014-DEA on ‘Emerging Global Economic Situation: Opportunities and Policy Issues for Services Sector’ and updates from some ministries and institutions, as quoted in, Ministry of Finance, Economic Survey 2013–14 (New Delhi: Government of India, 2017), p. 190.
11. Ministry of Finance, Economic Survey 2015–16, and Economic Survery 2016-17.
12. A working paper by H.A.C. Prasad and S.S. Singh: ‘India’s Services Sector: Performance, Some Issues and Suggestions’, Department of Economic Affairs, Ministry of Finance (New Delhi: Government of India, 2016).

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