Conclusion

India is distinctive for the rapid growth of its service sector high-tech information technology, communication and business services in particular. However, whether the service sector provides a route out of poverty for the masses and thus a path to

31 Evidently, there has been some substitution away from unskilled labour over time. 12 economic development is disputed. Some say that the high skill and education requirements of modern service sector jobs make them an impractical destination for the rural masses. Others counter that as more skilled and educated workers graduate from manufacturing and traditional services, they open up economic space there for less educated workers capable of upgrading their skills. They argue that the skilledunskilled mix of the manufacturing and service sectors, each taken as a whole, is not as different as commonly supposed. Some say that much non-traditional service sector employment is little more than the outsourcing (relabelling) of activities previously undertaken in-house by manufacturing firms. Others counter that much of the growth of service sector employment represents job creation as opposed to outsourcing. We find little evidence that the growth of the service sector simply disguised manufacturing activity. Although it is probably still the case that even the most rudimentary jobs in the modern service sector, like basic data entry, require some high-school education (something possessed by only a third of the relevant cohort) while much employment in manufacturing does not, the data suggest that the skilledunskilled mix of labour in the two sectors is becoming increasingly alike. It is no longer so obviously the case that manufacturing is the exclusive destination for the vast majority of Indian labour moving into the modern sector and that modern services are a viable destination only for the highly skilled few.

While our analysis has been statistical, there is anecdotal evidence consistent with these conclusions. Polgreen (2009) describes how modern service sector jobs are now migrating from India s urban centres to its small towns and rural villages, creating employment for semi-skilled workers. While these workers may not have the mathematical training to work as computer programmers or the English fluency needed for employment in call centres, with some high school education, they are sufficiently numerate and have adequate facility in English to do basic data entry, read forms, and even write simple e-mail messages. The wages of these rural service sector workers are three to four times those available in agriculture but only half those of workers in Bangalore, where the competition for labour is more intense and living costs are higher. American trucking companies seeking to process their timesheets in India may not have the local knowledge to find rural workers to undertake the task but Indian companies like Rural Shores have been established to run service sector facilities in rural areas. These observations are consistent with the view that employment in modern service sector activity can be a route out of poverty not just for the few and not just for urban residents. They are also consistent with the conclusion that employment in modern services can be a useful supplement to employment in manufacturing as a route out of rural poverty. Sustaining economic growth and raising living standards, thus, will benefit from shifting labour out of agriculture into modern services as well as manufacturing and not just into the latter. To the extent that the expansion of both sectors continues to be constrained by the availability of skilled labour simply underscores the importance for India to continue to invest in labour skills

SERVICE SECTOR IN INDIA S ECONOMY: PERFORMANCE, PROBLEMS AND PROSPECTS Dr Seema Joshi * I. Background India continued to follow import substitution strategy (ISS) of growth during the period 1951-1980. The ISS with heavy industry first strategy with central planning created a plethora of controls, procedures, permits and bureaucratic restrictions (Parikh, 2002). The ISS, along with other factors landed us into economic crisis of 1990-91 (Bhagwati, 1993). The New Economic Policy of July, 1991 heralded a new era for India by introducing comprehensive reforms in industrial sectors as well as in services sector .It was expected that these policy measures would restore the health of the economy and put it on higher growth trajectory ((Jalan, 1991, 1992, Joshi and Little, 1996). As a consequence of the adoption of the New Economic Policy(NEP) of 1991, the growth rate of the Indian economy which stood at 3.5 per cent per annum during 1951-79, 5.0 percent per annum during 198091, in fact accelerated to 6.1 per cent per annum during 1992-2000 (IDR, 2002) .The economy has moved on from the Hindu Rate of Growth of 3.5% per annum of yesteryears to unstoppable India at 9 % per annum at present (Joshi, forthcoming). India emerged as one of the fastest growing economies of the world during the 1990s .The remarkable performance of India s economy is attributable in significant part to the spectacular dynamism shown by the services sector. Against this background, it would be every appropriate if we try to find out:

i. Firstly, what are the constituents of service sector in India? ii. Secondly, how this sector performed on growth and employment fronts? iii. Thirdly, what happened to service sector productivity in post 1980 period? iv. Fourthly, what are the policies adopted by the government of India to promote the services sector? v. Fifthly, what are the problems or challenges ahead in this sector? vi. Lastly, what are the prospects /potential for growth in this sector? A modest attempt has been made to answer the above-referred questions in the present paper. The paper is organized into seven sections. Section II gives the composition of service sector in India. Section III discusses the performance of services sector in India. Section IV focuses in brief on promotional policies of * Sir Ratan Tata Fellow (Senior Fellow) with Institute of Economic Growth, University of Delhi Enclave, North Campus, Delhi - 110007. E-mail: [email protected] and [email protected]. 3 Government of India. Section V points out the problems/challenges a head in this sector Section VI briefs about the potential for growth in this sector and Section VII concludes. II .Composition of Service Sector in India In India, the national income classification given by Central Statistical Organization is followed. In the National Income Accounting in India, service sector includes the following: 1. Trade, hotels and restaurants (THR) 1.1 Trade 1.2 Hotels and restaurants 2. Transport, storage and communication 2.1 Railways

2.2 Transport by other means 2.3 Storage 2.4 Communication 3. Financing, Insurance, Real Estate and Business Services 3.1 Banking and Insurance 3.2 Real Estate, Ownership of Dwellings and Business Services 4. Community, Social and Personal services 4.1 Public Administration and defense (PA & D) 4.2 Other services III. Performance of Services Sector in India III.a Sectoral Composition of GDP Growth The analysis of the sectoral composition of GDP and employment for the period 1950-2000 brings out the fact that there has taken place tertiarization of the structure of production and employment in India. During the process of growth over the years 1950-51 to 1999-2000, the Indian economy has experienced a change in production structure with a shift away from agriculture towards industry and tertiary sector. The share of agricultural sector in real GDP at 1993-94 prices declined from 55.53% in the 1950 s to 28.66 % in 1990 s.The share of industry and services increased from 16%to 27.12% and 28.09% to 44.22% respectively during the same period. During the 1950 s it was the primary sector which was the dominant sector of the economy and accounted for the largest share in GDP. But the whole scenario changed subsequently, and especially in the 1980 s. The service sector output increased at a rate of 6.63% per annum in the period 1980-

81 to 1989-90 (i.e. pre-reform period) compared with 7.71% per annum in the period 1990-91 to 19992000 (i.e. post- reform period). The tertiary sector emerged as the major sector of the economy both in terms of 4 growth rates as well as its share in GDP in 1990s. It is to be noted here that while agriculture and manufacturing sectors have experienced phases of deceleration, stagnation and growth, the tertiary sector has shown a uniform growth trend during the period 1950-51 to 1999-2000 (Joshi, 2004, 2008a). The share of this sector in GDP further increased to 55.1% in 2006-07 .This sector accounted for 68.6% of the overall average growth in GDP in the last five years between 2002-03 and 2006-07(Economic Survey, 2006-07). III.b Employment Scenario The sectoral distribution of workforce in India during the period 1983 to 2004-05 reveals that the structural changes in terms of employment have been slow in India as the primary sector continued to absorb 56.67% of the total workforce even in 2004-05, followed by tertiary and industrial sectors (24.62% and 18.70%) respectively. There has been disproportionate growth of tertiary sector, as its share in employment has been far less when compared to its contribution to GDP. It is important to point out that, within the services sector employment growth rate is highest in finance, insurance, and business services, followed by trade, hotels and restaurants and transport etc. The community social and personal services occupy the last rank in growth rates of employment. Further, there was a sharp drop in labour absorptive capacity of growth in the economy (employment elasticity of growth) from 0.40 to 0.15 during post -reform period (1993-94 to 1999-2000) initially, reflecting the phenomenon of jobless growth. However, during 1999-2000 to 2004-05 period the employment elasticity

of growth registered an increase from 0.15 to 0.51.With the exception of one sub-sector of tertiary sector i.e. transport, storage, communication all other sub-sectors of services sector exhibited an increasing trend in employment elasticties and thereby overall elasticity of employment increased from 0.15 to 0.51 (Mitra, 2008). III.c Productivity Growth in Service Sector --Post-1980 Scenario Goldar and Mitra (G-M, 2008) point out in their recent paper that the process of acceleration in growth started in 1980s rather than in 1990s Of the 2.4 percentage point increase in the rate of economic growth that took place in the post-1980 period, about 40 percent is accounted for by a faster growth in TFP in services. The three sectors viz. agriculture, industry and services have witnessed acceleration in the growth rates of output, output per worker and total factor productivity (TFP) in the post -1980 period. However, the increase is more marked in case of services. Partially the spurt in growth rate is attributable to productivity growth in certain sub-sectors of services sector. It has been noticed by G-M (2008) that growth rate in output per man is highest in case of PA &D and other community social and personal services (4.2% p.a), followed by transport, storage ,communication (3.3 % pa), trade , hotels, restaurants (2.9%pa) and banking, insurance, real estate and business services. The acceleration in growth rate of output per worker in PA &D and other community, social and personal services might have resulted from the downsizing of the public sector because of privatisation and hikes in the salaries of the central and state government employees from time to time (i.e due 5 to accounting reasons). Whereas productivity growth in THR has derived stimuli from surge in demand for

such services with a subsequent expansion in these activities. Part of the productivity growth in the services sector might be an outcome of application of IT services (Goldar and Mitra, 2008). Despite increase in growth rate of labour productivity in service sector, measurement of service sector output and productivity are still debatable issues. IV. Policy Measures for the Development of the Services Sector In post-1991 period, there were several measures undertaken by the government to develop services sector, especially through deregulation of some sub sectors of services sector. Foreign direct investment (FDI) varying between 26 per cent (in print media) to 100% in information technology (IT) sector, business process outsourcing (BPOs),e-commerce activities, infrastructure etc.) has been permitted . There are several other promotional measures taken by the government to sustain the growth of the services sector. For example, having realized that in knowledge- intensive world driven by IT , integration with global economy cannot take place without making quality telecom services accessible at affordable prices , a large number of steps like launching of National Telecom Policy 1994, New Telecom Policy 1999, Broad Band Policy 2004 etc were undertaken. In addition to this, a number of promotional measures have been taken up in IT and ITES (Information Technology Enabled Services) segment, trade, tourism, banking and insurance and real estate sectors (For details see Joshi, forthcoming). India has emerged as a top destination for off shoring as per Global Services Location Index 2007. There is a lot of scope for future expansion as only 10 % of the potentially addressable global IT/ ITES market has been realized. The remaining 90% (worth $300 billion) remains to be tapped as per An Approach

to the 11 th Five Year Plan (Joshi, 2007). V. Problems/Challenges Ahead The sustainability of impressive growth of Indian economy has been questioned in the wake of some challenges in the form of lack of social infrastructure, physical infrastructure; IT infrastructure (Joshi, 2008b, 2006a), agricultural and industrial sector reforms, rupee appreciation and US sub-prime crisis, etc. Besides, challenges in the field of IT and ITES like rising labour costs, rapid growth in demand for talented manpower/quality staff, high attrition rate, outsourcing backlash etc are some other limiting factors (Joshi, 2008a, 2006). The growth of IT and ITES is having social, economic, health, ethical and environmental implications also (Joshi, 2006b, 2008c). Further, delay in the promotion of conducive business environment and good governance will unable us to catch up with the global giants in terms of world wide presence and scale. It is also important to point out here that the measurement of output , productivity , nonavailability of data or availability of data after a time lag are other problems confronted with in case of services . The 6 problem gets further compounded because of the entry of new species of services (like IT, ITES etc ) and lack of development of concepts on the one hand and non-inclusion of unpaid households on the other. Further, quality of each unit of the same service varies from the other. Therefore, it is too difficult to achieve the same level of output in terms of quality as has been pointed out in Cowell (1984). Further, quality improvements stemming from the application of new technologies are extremely hard to measure.

VI. Prospects for Growth in the Services Sector One of the major drivers of service sector growth in the post globalization era in India is the IT and ITES sector. That is why NASSCOM (2005) says that, The IT and BPO industries can become major growth engines for India, as oil is for Saudi Arabia and electronics and engineering are for Taiwan. Saudi Arabia s oil exports accounted for 46% of GDP in 2004; Taiwan s electronics and engineering exports accounted for 17% of GDP in the same year. . India s IT and BPO industries could account for 10-12% of India s GDP by 2015 (NASSCOM, 2005, p.80). According to NASSCOM (2005), India s offshore IT and BPO industries hold the potential to create over 9 million jobs by 2010, 2.3 million direct jobs and 6.5 million indirect / induced jobs says NASSCOM. The revenue generation from total software and services segment is likely to touch $ 60-billion mark by 2010 as per NASSCOM estimates. In addition, there is a huge potential for growth in the services sector because of increase in disposable income, increasing urbanization, growing middle class, a population bulge in the working age groups providing demographic window of opportunity, and emergence of a wide array of unconventional /new services like IT, ITES, new financial services (ATMs,credit cards) and tourism services (eco-tourism, health tourism) etc. VII. Conclusion To sum up, the present paper provides a brief overview of performance, prospects and problems encountered by the services sector in India s economy. It is heartening to note that India is called the services hub of the world. The traditional perception of India stands changed today from a land of beggars , snake charmers and cyber coolies of yesteryears to a land of knowledge workers ---Thanks to IT and ITES(Joshi, 2006b). Telecom and ITES-BPO revolution have already hit the shores of India. A number of sector specific measures have been taken up by the government of India to promote IT and ITES and other

sun-rise sectors like telecom, organised retail, hospitality, entertainment and financial services sectors. That is why; the futurists are very optimistic regarding the bright future and performance a head of the sector. That optimism is well reflected in the following words of Mr Kamal Nath, Minister of Commerce and Industry which were a part of his speech at World Economic Forum, no . The question for CEOs the world over is

longer should my company go to India? , but rather can my company afford not to be in India? .On the tourism front, it is Incredible India, but on the economic front, it is clearly Opportunity India .