Services

Service Sector of Indian Economy contributes to around 55 percent of India's GDP during 2006-07. This sector plays a leading role in the economy of India, and contributes to around 68.6 percent of the overall average growth in GDP between 2002-03 and 2006-07.

There has been a 9.4 percent growth in the Indian economy during 2006-07 as against a rise of 9 percent in the same during 2006-06. During this growth in Indian economy, the service sector witnessed a rise of 11 percent in the year 2006-07 against the 9.8 percent growth in 2005-06. The service sectors of Indian economy that have grown faster than the economy are as follows:

Information Technology (the most leading service sectors in Indian economy)

IT-enabled services (ITeS)

Telecommunications

Financial Services

Community Services

Hotels and Restaurants

There has been a 13 percent hike in the service sectors of trade, hotels, transport and communication in India's economy as compared to the 10.4 percent rise in the previous year. The financial services that comprise of banks, real estate, insurance, and business services witnessed a rise of 11.1 percent during 2006-07 against the 10.9 percent growth in the previous year. Service sectors including community, social, and personal services experienced a growth of 7.8 percent during 2006-07 as against 7.7 percent growth in the previous year.

The service sector of India has also witnessed a remarkable rise in the global market apart from the Indian market. It has experienced a rise of 2.7 percent in 2006 from that of 2 percent in 2004. The broad-based services in the trade sector has undergone a large-scale rise. A statistics concerning the
growth of India's service sectors are listed below:

The software services in Indian economy increased by 33 percent which registered a revenue of USD 31.4 billion

Business services grew by 82.4 percent

Engineering services and products exports grew by 23 percent and earned a revenue of USD 4.9 billion

Services concerning personal, cultural, and recreational had a growth of 96 percent

Financial services had a rise of 88.5 percent

Travel, transport, and insurance grew by 23 percent

The software services in Indian economy along with the export of products is growing at a massive pace and thereby witnessed an alarming rise of 35.5 percent and reached a lumpsome amount of USD 18 billion.

The IteS and BPO sectors grew by 33.5 percent and earned a revenue of USD 8.4 billion. The service sector of Indian economy has been the most high-powered sector in India's economy. It has also been focusing in various investments of late. As Indian economy is looking forward for more liberalization, sectors like banking are on its way to loom large and occupy a more significant position in India's economy.

The questions that are raised are whether an emerging economy like India will be able to sustain its growth momentum considering the current economic slowdown globally which has been the result of the subprime crisis. Unlike developed economies, India’s economic growth is not led by the financial services industry alone. Besides this, India’s exposure to the subprime crisis is almost negligible as compared to her US and European counterparts. Having said that, while rising inflation and interest rates are expected to slow down the economy a wee bit, in the long term the India growth story remains intact.


% share in GDP at constant prices FY07

Hotels & restaurants-1.5%

Communication-4.9%

Banking & insurance-6.7%

Real estate & business services-7.6%

As mentioned earlier, the current economic growth not led by only one component of the services sector, let us understand the factors that have fuelled growth and whether this growth is sustainable going forward.

Hotel and restaurants:

The tourism industry that includes hotels and restaurants has witnessed good times on account of increased passenger traffic (business and leisure). The same has been the result of government initiatives such as ‘Incredible India’ campaign, signing liberal agreements with various nations in the recent past that increased international traffic, increased investments to develop and open new tourists destinations and increased focus on development of infrastructure such as modernisation of airports and ports; all of which helped the industry to flourish. However, considering the high crude prices and general economic slowdown, the tourism industry is likely to take a back seat in the near future. The fact that this industry contributes merely 2% to the overall GDP, slowdown in this sector may not have a significant impact directly.

Real estate:

The development of the real estate sector has enabled the economy to sustain its growth momentum on account of the significant backward and forward linkages with crucial and critical sectors of the economy such as infrastructure, construction activity etc. Real estate sector development has been backed by both demand factors such as unfulfilled demand of dwelling units and lack of infrastructure and supply side factors such as increased rationalisation of tax structure, reduced borrowings cost and tax benefits to loan seekers, legislative measures like repeal of the Urban Land Ceiling and Regulation Act etc. However, correction in property prices is expected to result in slowdown in the growth of the income of the real estate developers. At a time when the cost of development has been inflated on account of higher cost of raw materials, selling or renting properties at lower prices are likely to hurt margins of the real estate developers. The correction in prices can be attributed to the fact that the property prices were overheated, which impacted buyers forcing them to either defer purchases or exit in case of lease agreements.

Business services:

Growth in business services led by exports, which include IT/ITES services have also significantly contributed to the overall growth of the service sector. The increased investments, growing consumption and the outsourcing boom boosted the growth of the software sector, apart from India being a preferred destination to outsource services on account of large English speaking skilled manpower. We believe that the sector has enough steam left which can drive future growth. Although the US economy is slowing down and the capital market crisis has and is likely to impact business for these software companies, the fact that they (the companies) are trying to increase exposure to other markets like Europe, Middle East and Asia-Pacific is likely to stand them in good stead going forward. Some of the software companies are also trying to focus on new segment of clients (like mid-size local banks in US and Europe) who in turn are looking to reduce costs through offshoring. On a macro perspective, on the back of economic benefits that it provides, the Indian technology offshoring business is expected to grow whether the US economy grows or slows down. This is because growing pressure on technology budgets is forcing US companies to outsource to low cost destinations like India.

Overall, considering the 8% contribution of the real estate and business services sector to GDP and crucial backward and forward linkages to other sectors, slowdown in real estate and business services may impact the economic growth in the short run. However, the booming retail sector and the need to improve and develop infrastructure to support growth of various industries will continue to give a further fillip to the growth of the real estate and business services. Hence, the long term view po