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Issues of the Indian Service Sector – Classification of services, GDP, Outsourcing & Growth Rate

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Among fast growing developing countries, India is distinctive for the role of the service sector. Where earlier developers grew by exporting labor-intensive manufactures, India has relied to a greater extent on services.

Post Independence India was known to be the agrarian economy with major share of GDP coming from the Agriculture sector. After the crisis of 1991, under the leadership of PV Narasimha Rao and Finance Minister Manmohan Singh, India planned to open its economy. This resulted in a gradual shift for the Indian economy from an agrarian economy to service based economy. Today India is known to have maximum share of GDP coming from service sector and the least from agriculture sector. If we talk about employment, agriculture sector still leads the race with maximum employment, which somewhat proves negative for the economy as people are still stuck in less productive sector for no good reason.

The Indian Service Sector

Although there are other emerging markets where the share of services in GDP exceeds the share of manufacturing, India stands out for the dynamism of its service sector. India is 13th in services output. Some of the facts are as under:

  • The services sector provides employment to 23% of the work force
  • Sector is growing quickly, with a growth rate of 7.5% in 1991–2000, up from 4.5% in 1951–80
  • Largest share in the GDP, accounting for 55% in 2007, up from 15% in 1950
  • Information technology and business process outsourcing are among the fastest growing sectors, having a cumulative growth rate of revenue 33.6% between 1997–98 and 2002–03
  • Information technology and business process outsourcing contributed to 25% of the country’s total exports in 2007–08.

The growth in the IT sector is attributed to the following for the Indian economy:

  • Increased specialization
  • Availability of a large pool of low cost, highly skilled, educated and fluent English-speaking workers
  • Supply side is matched to the demand side by increased demand from foreign consumers interested in India’s service exports, or those looking to outsource their operations.

For the services sector, one of the key milestones was achieved when in the year 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world.

Classification Of Services

For the services sector we currently distinguish three groups of services which are elucidated as under:

  • Group I – is traditional services. It includes retail and wholesale trade, transport and storage, public administration and defence which tend to be slow growing which can be backed by the fact that their share in GDP has fallen in more advanced countries.
  • Group II–  is a hybrid of traditional and modern services consumed mainly by households. It includes services like education, health and social work, hotels and restaurants, and other community, social and personal services. Share of such services in GDP has risen in step with per capita income as per capita income is linked to the disposable income which is directly linked to the GDP.
  • Group III – is made up of modern services. This includes services like financial inter mediation, computer services, business services, communications, and legal and technical services. Share of modern services in GDP in the OECD countries particularly has risen significantly faster than per capita income.

Issues of the Indian Service sector

Irrespective of the fact that service sector has done many good for the Indian economy and has helped country grow at a rapid pace, there always have been doubts raised by the skeptics about the quality and sustainability of the increase in service-sector output. It is observed that employment in services is concentrated in the informal sector, personal services and public administration activities. This has limited spill over and relatively limited scope for productivity improvement thus making service sector not so favorable for the economy.

For many analysts, service sector downplay information technology and communications related employment. It is backed on the ground that these sectors are small and use little unskilled and semi-skilled labor which creates a negative implication in India which is a labor abundant economy and cannot actually move people out of low-productivity sector like agriculture. People are worried on the fact that the rapid growth of service-sector employment reflects the outsourcing of activities which was previously actually conducted by the manufacturing firms.

A question still left unanswered is about shifting of labor from agriculture directly to services so as to improve on productivity of the sector and help economy grow rapidly?


Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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