UNIT 3 DEVELOPMENT OF SERVICE

SECTOR
Structure
3.1 Introduction
3.2 Service Sector: Concept and Role
3.3 Important Services Sectors in India
3.4 Factors Contributing to the Growth of Service Sector
3.5 Challenges of Service Sector
3.6 Measures for Promotion of Service Sector
3.7 Let Us Sum Up
3.8 References and Suggested Readings
3.9 Check Your Progress - Possible Answers

INTRODUCTION
In the previous two chapters you read about role of public and private sector in
Indian economy. Unlike these two sectors there is another sector called the service
sector which now a days plays an important role in Indian Economy. This unit
will deal in detail with the tertiary or service sector. The tertiary sector is now
the largest sector of the global economy as well as of Indian economy. It is also
the fastest-growing sector. It is also known as the service sector or the service
industry. It is one of the three economic sectors, the others being the secondary
sector and the primary sector.For the last 30 years there has been a substantial
shift from the primary and secondary sectors to the tertiary sector in all
industrialized countries. The service sector consists of the "soft" parts of the
economy. It is composed of various activities where people offer their knowledge
and time to improve productivity, performance, potential, and sustainability. The
basic characteristic of this sector is the production of services instead of end
products. Services (also known as "intangible goods") include attention, advice,
experience, and discussion. The service sector includes retail, banks, hotels, real
estate, education, health, social work, transport, computer services, recreation,
media, communications, electricity, gas and water supply.

Examples of service sector employment include: Government , Healthcarel

hospitals, Public health, Waste disposal, Education Banking, Insurance, Financial
services, Legal services, Consulting, News media Hospitality industry (e.g.
restaurants, hotels, casinos), Tourism, Retail sales Franchising, Sales and Real
estate

After studying this unit you should be able to:

Explain the concept and role of service sector
Examine the factors contributing for rapid growth of service sector
 Discuss the contribution of service sector to economic growth Development of Senrice
Sector
Describe various challenges of service sector
Narrate various measures required for the promotion of service sector
- - - -- -- - - - - -

3.2 SERVICE SECTOR: CONCEPT AND ROLE

3.2.1 Service Sector in India: Meaning and Composition
The tertiary or service sector provides a service, not an actual product. Services
or the "tertiary sector" of the economy covers a wide gamut of activities like
trading, banking & finance, infotainment, real estate, transportation, security,
management & technical consultancy among several others.

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. :Finance, 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

3.2.2 Growth of Service Sector in India

India is the 4th largest economy and 2nd fastest growing major economy of the
world today. India ranks 50 out of 117 economies in terms of competitiveness.
Its rank is 15th in service sector of the world. Strong growth across sectors
promises not just to beat back the recession blues but also cement India's position
as a 1t:ading growth center in Asia alongside China. FDI in India are flowing into
mainly three service sub sectors : Telecommunicationequipments and services,
Financial services (banking and non banking) and Hospitality industry. More
than 1x0decades of opening up has produced new dynamism in India People
force of India is growing fast. India is the largest English speaking country in the
worlcl. Therefore India has experienced hyper growth of its service sector. It is
illusti-atedin Figure -1. India exports software to 102 countries. India's potential
for the IT sector is really immense. It has great future.
Role of Public, Private and
Service Sectors in
Development

Figure 1: Growth of service sector

Service Sector in India today accounts for more than half of India's GDP.
According to data for the financial year 2006-2007, the share of services, industry,
and agriculture in India's GDP is 55.1 per cent, 26.4 per cent, and 18.5 per cent
respectively.The fact that the service sector now accounts for more than half the
GDP marks a watershed in the evolution of the Indian economy and takes it
closer to the fundamentals of a developed economy. There was marked
acceleration in services sector growth in the eighties and nineties, especially in
the nineties. While the share of services in India's GDP increased by 2 1 per cent
points in the 50 years between 1950 and 2000, nearly 40 per cent of that increase
was concentrated in the nineties. While almost all service sectors participated in
this boom, growth was fastest in communications, banking, hotels and restaurants,
community services, trade and business services. One of the reasons for the
sudden growth in the services sector in India in the nineties was the liberalization
in the regulatory framework that gave rise to innovation and higher exports from
the services sector.
The boom in the services sector has been relatively "jobless". The rise in services
share in GDP has not accompanied by proportionate increase in the sector's
share of national employment. Some economists have also cautioned that service
sector growth must be supported by proportionate growth of the industrial sector,
otherwise the service sector grown will not be sustainable. In the current economic
scenario it looks that the boom in the services sector is here to stay as India is
fast emerging as global services hub.
3.2.3 Contribution of Service Sector to Economic Growth
The service sector has unprecedented growth in India over last sixty years. The
sectoral share of service sector has increased from 29% in 1950s to 57% in
2009. But the share of agriculture in GDP has decreased from 55% to 17% during
the same period. It is seen from the following table.
Table 1: Sectoral Share of GDP in India

Source: Reserve Bank of India, Handbook ofstatistics of Indian Economy, 2008-

09and Government of India, Economic Survey, 2009-10, New Delhi
 Development of Service
Sector

Figure 2: Sectoral share in GDP of India (2004-2009)

Sourc:e: RBI Bulletin, 2010
It is also observed from the following table -2 that the growth rate of service
sector among three sectors is very startling. The growth rate of service sector
was only 4.5% in 1950-51, but it has increased to 10.8% in 2007-08. But the
growth rate of agriculture has decelerated to 1.6% in 2008-09.

Table 2: Sectoral G rowth 1 :ates During the Planning Period

1980- 1990- 2000- 2007- 2008-
81 91 01 08 09
Agriculture 2.1 4.4

Industry 5.3 6.8

Senrices 4.5 6.6

GDlPatFC 3.5 5.8

Sourc:e: Sankar Acharya and Rakesh Mohan , India b Economic Performance

and (7hallenges,2010, and Reserve Bank of India, Hundbook of Statistics on
Indian Economy, 2008-09
I
It is also observed from the following figure -3 that the growth rate of industry is
fluctuating and growth rate of agriculture is decelerating. But the growth rate of
service sector is adversely affected by the recent global slowdown.
Role of Public, Private and
Service Sectors in
Development

Figure 3: Growth Rate of Three Sectors

Source: RBI Bulletine, 2010

It is noticed from the following table -3 that the contribution of service sector
has been consistently rising from 29% to 68 % in 2007, after which it declines
due to world financial crisis. But the contribution of agriculture has fallen to
only 7%over the years.
Table 3: Contribution of Different Sector to GDP Growth
Sectors 1950-51 1960-61 1990-91 2000-01 2007-08 2008-09

Agriculture 34.9 48.2 23.8 21.1 11.5 7.0

Industry 35.5 29.2 35.2 29.0 20.2 29.3

Services 29.6 22.6 41 .O 49.8 68.3 63.6

Source: Sunil Jain and T N Ninan, Servicing India b GDP Growth and Sankar
Acharya & Rakesh Mohan, India b Economy- Pevormance an&allenges, New
-I

Delhi, 2010

The following table -4 depicts the growth rate and share of service sub-sectors
of India. The share of all service sector except legal and real estate services have
been consistently rising from 29%to 68 % in 2007, after which it declines due to
world financial crisis. But the contribution of agriculture has fallen to only 7%
over the years.
 4: Growth Rates of Ser vice sub sf :tors and rheir Shares in GDP Development of Service
Sector
Sewice sub sectors 19506~
1 1970s
Trade
Hotels/Restaurants

Railways
Other Transports
Storage
Communication

Banking
Insurance
Real Estate
Business services
Legal services
Public admn & defence
Personal services
Community services
Other services

Figure in parenthesis represents the share in GDP

Source: CSO, National Accounts Statistics, 2009 and Jin Jordon and P Gupta,
20 03, Understanding India S service revolution, 1MF working papers

When we analyze the quarterly growth rate of different sub sectors, it is found
that community and social services are fluctuating at a lower level during 2007
ant1 2009. But the highest growth is registered by financing, insurance and real
estate, followed by trade, hotel, transport and communication. After global
financial crisis construction and trade, hotel and transport sector had quicker
recovery than financing and insurance sector of India.

'
Figure 4: Growth Fllictuations in the Sewice Sub Sectors

Source: RBIBulletin. 2010

 Public, Private and
Service Sectors in
3.2.4 Contribution of Service Sector to Employment
Development 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. Even though there
has been substantial growth of service sector after the globalization,
commensurating to its growth, the employment absorbing capability of the service
sector is slow. It is found that during 1990s although the service sector growth
was from 42 percent to 48 percent of GDP, during the same period, the
employment share of the services actually declined by about one percentage
point during the decode. In other words, it can be concluded that while activity
has shifted to services, employment creation in services has lagged far behind.

Table 5: Share of sewices sector in employment and capital formation (In

percent to Total)

Year Employment Gross Capital Formation

1965-66 18.1 46.1

1970-71 20.0 43.7

1980-81 18.9 44.0

1990-91 24.4 41.2

1999-2000 23.5 39.6

Source: Hansda (2002)
As far as employment is concerned, it can be commented that India's service
sector growth is jobless growth as compared to other development countries,
where share of service sector in employment is substantial.
In this section, we discussed the concept and role of service sectors, contribution
of service sector to economic growth and contribution of service sector to
employment. Now answer the questions in check your progress 1.
Check Your Progress 1
Note: a) Write your answer in about 50 words.
b) Check your answer with possible answers given at the end of the unit
1) What are the service sectors to which FDI flows are significant?
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
2) Which service sectors are fluctuating after the global financial meltdown?
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
46
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Role of Public, Private and during 2008-09. The net profit of old private and new private banks rose by
Service Sectors in
Development
21.8% and 12.1% respectively during 2008-09.

3.3.2 IT and Software Sector

The Indian information technology (IT) industry has played a major role in placing
India on the international map. India is witnessing resurgence in the service
sector most dramatically in IT sector, Bio Technology etc. Some Indian firms in
IT business have become world-beaters. Ipdia is meeting almost 70 % of
worldwide BPO demand. Multinational firms come to India for lower cost and
ultimately stay here for quality. The Indian IT sector is growing rapidly and it
has already made its presence felt in all parts of the world. The industry is mainly
governed by IT software and facilities for instance System Integration, Software
experiments, Custom Application Development and Maintenance (CADM),
network services and IT Solutions. IT has a major role in strengthening the
economic and technical foundations of India. Indian professionals are setting up
examples of their proficiency in IT, in India as well as abroad. The sector can be
classified into 4 broad categories - IT Services, Engineering Services, ITES-
BPO Services, E Business. IT Services can further be categorized into Information
Services (IS) outsourcing, packaged software support and installation, systems
integration, processing services, hardware support and installation and IT training
and education.

The ITIITES industry provides direct employment to the about 2.23 million and
indirect employment to the 8 million people. Due to the high demand of India's
vaunted IT outsourcing sector, companies have been forced to raise wages by 10
to 15 per cent. IT sector is dynamic sector which is continuously evolving. As
per NASSCOM, IT exports in business process outsourcing (BPO) services
attained revenues of US $48 billion in FY 2008-09 and accounted for more than
77 percent of the entire software and services income. Over the years India has
been the most favourable outsourcing hub for firm on a lookout of offshore their
IT operations. The factors behind India being a preferred destination are its
reasonable priced labour, favourable business ambiance and availability of expert
workforce.

SECTOR

?6

Figure 5: Size of IT Service Sector

Top Software Companies in India

There are number of software companies in India which have been doing well.
However, some of the top Indian software companies can be listed as:
 Tata Consultancy Services MphasiS
Wipro Limited IBM India
Infosys Patni Computer Systems
HCL Technologies L&T Infotech -
Tech Mahindra i-flex Solutions

In this section, we discussed some of the important services sectors in India in

tjhe areas of financial sector and IT and software sector. Now, answer the questions
i ~ check
n your progress 2.

, Check Your Progress 2

Note: a) Write your answer in about 50 words.
b) Check your answer with possible answers given at the end of the unit
1) What are the new private banks in India?

.......................................................................................................................
211 What are different types of insurance in India?

.......................................................................................................................
3) What are the constituents of capital market in India?
Role of Public, Private and 4) What are the factors contributing for the success of IT sector of India?
Service Sectors in
Development .......................................................................................................................

3.3.3 Indian Telecom Industry

Indian Telecom Industry is the fifth largest and fastest growing in the world. It
has provided 110.01 million connections. It is currently expected to contribute
nearly one percent to India's GDP. The subscriber base has grown by 40% in
2005 and is expected to reach 250 million in 2007. Over the last 3 years, two out
of every three new telephone connections were wireless. Consequently, wireless
now accounts for 54.6% of the total telephone subscriber base, as compared to
only 40% in 2003. Wireless subscriber growth is expected to grow at 2.5 million
new subscribers every month in 2007. The wireless subscriber base skyrocketed
from 33.69 million in 2004 to 62.57 million in FY 2004 -2005. The wireless
technologies currently in use Indian Telecom Industry are Global System for
Mobile Communications (GSM) and Code Division Multiple Access (CDMA).
Telecom Industry in India is regulated by 'Telecom Regulatory Authority of India'
(TRAI). It has earned good reputation for transparency and competence. Three
types of players exist in Telecom Industry in India:
State owned companies like - BSNL and MTNL.
Private Indian owned companies like - Reliance Infocom and Tata
Teleservices.
Foreign invested companies like - Hutchison-Essar, Bharti Tele-Ventures,
Escotel, Idea Cellular, BPL Mobile, Spice Communications etc.

The Indian Telecom Industry services is not confined to basic telephone but it
also extends to internet, broadband (both wireless and fixed), cable TV, SMS,
IPTV, soft switches, etc.

3.3.4 Foreign Trade in Services

The largest service sub sector in India is trade. The share of this sector in GDP
was almost 12 per cent or more throughout the period of planning. Now it has
become more than 14%. This sector registered a growth of about 6% per annum
in 1980s, 7% per annum in 1990s and it is more than 9% per annum in the
current decade. There are number of services which are traded across the
countries. Transport and insurance are traditional components of trade in India.
With the spread of telecommunication and computer technologies, virtually all
types of commercial services have become tradable among countries. The
liberalization policies of nineties and the removal of regulatory obstacles have
fueled the steady growth of foreign investment and trade in services.

The following table shows that there is significant change in the composition of
import of services from abroad. The total amount of imports of services became
$5 2 billion in 2008-09 having CAGR of 20.4% .The share of Import of business Development of Service
Stztor
services has increased significantly to 29.7% having growth rate of 57.9%. The
shares of transport and travel services in the import are 24% and 18% respectively.

Table 7: Import of Services (2000-09)

- - -

1 Commodity group Share of Service Import (%) CAGR(2000-2007)

2000-01 20008-09

pofiware services I
I
4.1
I
5.4
I
25.1
1 Business services I 7.0 1 29.7 1 57.9 I
binancia1 services 13.5 5.7 7.2
CA GR= compound annual growth rate
Sotrrce: Government of India, Economic Survey, 2008-09, 2009

Coiiversely the following table shows that there is significant change in the
cornposition of export of services to abroad. The total amount of exports of
services has increased manifold from $4.6 billion in 1990-91 to $102 billion in
2008-09 having CAGR of 28.7%. It has reduced our balance of payment deficits.
Tht: share of export of business services has increased significantly to 16.2%
ha\ ing growth rate of 87.6%.

Table 8: Export of Services (2000-09)

I Commodity group I Share of Service Export I CAGR (2000-07) I (%)

( Transport

CSoftware services

( Business services 1
39.0 45.5 30.5

/
--
Financial services 1 2.1 1 3.9 1 44.1 I
CAGR= compound annual growth rate
Source: Government of India, Economic Survey, 2008-09, 2009, New Delhi

3.3.5 Hospitality and Tourism Sector

Tourism is the second largest industry of the world and sixth largest industry in
India .Tourism comprises the largest component of the tertiary sector. It constitutes
Role of Public, Private and the major item in the world trade, which is growing at a faster rate than the
Service Sectors in
Development
world trade in tangible goods. It has now become a highly organized industry
representing about 12 percent of world's gross income. World's revenue from
this business has been constantly growing at a faster rate. In developing countries
Tourism is also one of the largest industries with fastest expansion in its range
and dimension. It is an industry with great employment potential. In fact one in
every 16 workers world wide owns his or herjob to tourism sector. It has emerged
as the most lucrative business of the world, having tremendous potentiality for
earning foreign exchange, yielding tax revenue to the state, promoting ancillary
industries, generating income and employment and developing backward regions
through various linkage effects. Indian tourism as a sector of economic
significance received the widest recognition after I1 world war. The two most
important and obvious components are:
i) Accommodation and Hospitality
ii) Travel and Transportation
There are many other ancillary services and informal activities having direct
effects on tourism. Ancillary services having direct connectivity with tourism
are: handicrafts, souvenir industry, horticulture, floriculture, leisure and
entertainment services, and activities of all personals dealing with tourists across
the counter in customs, immigration, airports, airlines, railway stations, ferry
services, museums, bus terminals, taxi stands, banks, medicals, police stations,
post offices, communication, advertising, shopping centers, sports and many
other organizations both in the private and public sector.

3.3.6 Hotel Industry

Hotel accommodation is the significant segment of hospitality industry of India.
The 'Incredible India' destination campaign and the recently launched 'Atithi
Devo Bhavah' (ADB) campaign have also helped in the growth of domestic and
internationaltourism and consequently the hotel industry. Hotel Industry in India
has witnessed tremendous boom in recent years. Hotel Industry is inextricably
linked to the tourism industry and the growth in the Indian tourism industry has
fuelled the growth of Indian hotel industry. The thriving economy and increased
business opportunities in India have acted as a boon for Indian hotel industry.
The arrival of low cost airlines and the associated price wars have given domestic
tourists a host of options. Growth story of hotel industry of India seconds only to
China in Asia Pacific. Hotel industry of India has the supply of 110,000 rooms.
According to the tourism ministry, 4.4 million tourists visited India in 2009 and
at current trend; demand will soar to 10 million in 2010 - to accommodate 350
million domestic travelers. With tremendous pull of opportunity, India is a
destination for hotel chains looking for growth. The World Travel and Tourism
Council, India, data says, India ranks 18th in business travel and will be among
the top 5 in this decade. Sources estimate, demand is going to exceed supply by
at least 100% over the next 2 years. Hotel Industry' is adding about 60,000 quality
rooms, currently in different stages of planning and development MNC Hotel
Industry giants are flocking India and forging Joint Ventures to earn their share
of pie in the race. Government has approved 300 hotel projects, nearly half of
which are in the luxury range. Sources said, the manpower requirements of the
hotel industry will increase from 7 million in 2002 to 15 million by 2010.
- Development of B:rvice
3.4 FACTORS CONTRIBUTING TO THE GROWTH Yiector
OF SERVICE SECTOR
Tl~eservice sector has rapidly grown due to many reasons. The following factors
have mainly contributed towards its growth.

i) Liberalization Policy
The globalization process after 1991 has considerably liberalized the industrial
artd trade policies and opened up the banking, insurance, transport and
cc~mmunication sectors to private entrepreneurs. This liberalization has boosted
the growth of service sector in India. Some sectors which are more liberalized,
like banking, IT, communication, insurance services have experienced faster
growth. The share of communication has increased from 1% in 1991 to 5.7% in
2007-08.

ii) Technological Advancement

Growth of service sector is also stimulated by technological advancement. New
activities and new products emerge as a result of technological breakthrough.
Tlie technological advancements that have positive impact on economic growth
in India are the increasing use of internet in case of IT sector, expansion of
cellular phone in case of telecom sector and wider use of ATWcredit cards in
case of banking sector.

iii) Splintering
With maturing of the economy specialization takes place. Industrial units tend
to outsource some of the activities which were previously undertaken by them.
They use and hire the services of the specialist contractors and sub contractors
to provide accounting, R/D, cleaning, legal and security services, etc. This process
of specialization splintering leads to a growth in the share of services in GDP,
even when GDP itself not growing. Jobs outsourced are counted as service sector
contribution to GDP rather than being subsumed in manufacturing value-added.

iv:) Sectoral Interdependence

The growth of industry and other sectors has positive impact on the service
selctor because the interdependence among sector has also increased. There is
direct and reverse interrelationship between industry and service sector. The
irr~pactof manufacturing sector on service sector is significant. But the
contribution of service input to manufacturing in 1980 was only 1% of output
growth, while it has increased substantially upto 25% in 1990s. This implies
thiit increasing use of services in manufacturing in the 1990s favourably affects
tht: TFP (total factor productivity)

v) Demand-side impetus
Demand for different type of services increased by leaps and bounds after
199 1.The share of services in the consumption basket increase d by 3% pointes
each decade; that is from 8% to I 1% during 1 960-6 1,14% during 1970-7 1,17%
during 1980-81 and 20% during 1990-9 1. Thereafter the trend changed
significantly, when private sector consumption of services increased to 31% and
during 2006-07 it increased to 39%. Thus the growth of service sector is due to
the impetus given by domestic consumers as well as foreign buyers. The export
Role of Publie, Private an* of services from India increased from $4.9 billion in 1992 to $101.2 billion in
Service Sectors in
Development
2008-09.

3.5 CHALLENGES OF SERVICE SECTOR

Some of the challenges of service sector are narrated below:

i) Indian money market is not integrated with debt and foreign exchange market.
According to Y.V Reddy, Governor of RBI, while the base has been created
with the variety of products in the money market, the market has not acquired
the required depth in terms of both volume and liquidity. Though the banks -?

have expanded their branches in an unprecedented scale, the banking facilities

in the country are still inadequate. One branch serves about 160000 population 4

in India while it is only 1200 persons in US. There more competition than i-

cooperation and coordination between various players of money market.

ii) There is no integration between the organized sector and unorganized sector
of Indian money market. The indigenous bankers do operate as individuals
and private firms, whose volume of operates are unknown. They do not
constitute a homogeneous group. They are engaged in many banking and
non-banking business, which remain largely unregulated. The credit o f
money lender has remained as the necessary evil.

iii) There is absence of organized bill market. There is lack of rational interest
rates structure. There is shortage of funds in money market. The market for
short-term asset has not yet developed. In terms of organization, resources,
stability and elasticity financial institutions are hardly comparable to the
money market of London or New York. The emergence of parallel economy
and vast amount of black money in India has also caused shortage of financial
resources in the money market.

iv) With western imitation through free market policy, rapidity in tourism sector
may result in creation of new tourism facilities. These developments in many
cases lead to competition and conflict .In turn they have generated a wide
range of deleterious environmental impacts. It has many negative social and
cultural impacts. The local people of the tourist centers stand to lose in the
current process of tourism development. It has become another element of
the destructive process, which exploits the local population, damages the
environment, promotes consumerism, widens the gap between rich and poor
and reinforces the global status quo.
,
v) Educational system has an unintended consequence of producing an
"educational vacuum" for the society at large. Because all good students I
now are running after lucrative jobs as per the imperative of comrnodity-
centric society and as per the new trend of higher education. Maximization
of the short run individual objectives is being done at the cost of long run
social objectives. The society ultimately remains neglected and bypassed.

vi) The year 2011 is likely to be a boom for skilled worker in IT & ITES,
biotechnology as against the 15 per cent hike in their salaries in 2010. The
employers are trying to catch up the highly skilled manpower and the salaries
are going through the roof. The youth force of India is contributing to the
54
 growth in IT sector. However, the huge numbers of Indian youth are not Development of Service
Sector
only unemployed but unemployable on the contrary a large numbers of white
collar jobs are waiting for suitable candidates. IT and ITES industry and
biotech industry are facing skill manpower shortages. Companies are not
only facing the problem of retention difficult and job hoping extensive, but
there is a clear shortage of skill. Mainly IT/ITES, academics, engineering,
HR, hospitality, insurance and biotechnology sectors, which are driven by
the highly skilled manpower but the supply of capable labor is not up to the
demand at the point.

vii) The employment generation in service sector has been increasing at a slower
rate than the growth of output in the eservice sector over the years. Thus
India is witnessed a jobless service sector growth during 1990s. It is very
different experience compared to other countries. Service sector accounts
for more than 55% of GDP, but its share in employment continues to be very
low; less than one-fourth of the total. It means the growth in value addition
in service sector is higher than the employment growth in the service sector.
It implies that the growth of average productivity of labour is higher than
the growth of employment in service sector. For example finance, insurance
and real estate business account for 13 % of GDP in 2000, but employed
only 1.2 % of the labour force. So service sector alone cannot sustain the
present trend of economic growth in the long run.

3.6 MEASURES FOR PROMOTION OF SERVICE

SECTOR
Some of the measures required to be taken for the promotion of service sector in
Indi,nare as follows:

i) tnstitutional reforms should be made to integrate money market with debt

and foreign exchange market. It should facilitate RBI (Reserve Bank of India)
to use indirect tools of monetary regulations. There should be integration
hetween the organized sector and unorganized sector of Indian money market.
'There should be cooperation and coordination between various players of
money market. The RBI should regulate the lending operations of the money
I enders and indigenousbankers which is weakening the credit control system.
It should stop the exploitation of money lenders and protect the small
I~orrowersby developing institutional sources of credit.
ii) 'The stringent policy is necessary to curb parallel economy and vast amount
of black money in India in order to overcome the shortage of financial
resources in the money market. The RBI should mop up the excess liquidity
generated on account of the accretion to the foreign exchange assets of the
hanks to neutralise the monetary impact of capital flows.
iii) Given the synergistic relationship between education, health, nutrition, energy,
a.dequate allocation of public investment should be made on the social
overheads and efficient measures should be adopted to magnify its trickle-
d.owneffect on rural people. The new approach requires human development
goals to be an integral part of the economic development. It should be more
and more inclusive process. Community involvement is necessary in order
to reduce the urban bias in the emerging health care system. Health for all
I
Role of Public, Private and should entail the removal of various obstacles to these services such as
Semce Sectors in
Development elimination of ignorance, malnutrition, unhygienic housing, contaminated
water supply etc. Thus concerted efforts should be made in all directions.
iv) India should adopt a new set of values in tourism development. In order to
have a distinguished niche in the international tourism market India should
develop its tourism in its own way and vision. In pursuing the efficient and
profitable path of tourism development should not result in high
environmental distortions. Healthy tourism should not result in unhealthy
environment. Unrnanaged tourism can be disastrous but organized tourism
can only contribute to the genuine prosperity of the region. Suitable policy
of the state should be designed to ensure 'green tourism' and 'rural tourism'.
In this pursuit more resources should be invested to reinforce the ecosystem
rather than making it vulnerable to risks from unplanned activities.
v) The education should be perceived as an integral part of both social
development and economic development. Educational reform should aim at
promoting: 'neo-professionalism' and 'value-based education.' The
knowledge-based society emerges from a progressive educational system.
Thus our educational system should promote quality in order to have a
knowledge-based society for India. The education should integrate
materialism with morality and liberation of mind. The higher education
system should help in building a society which automatically rejects any
type of malhctioning and mal-development.
vi) The IT industry should depend more on exports of software products to
advanced countries of the world. It should enhance its credibility as a business
destination by creating a new model of global delivery, gorging the
relationship with MNCs, generating saving for the customers and promoting
a focus on quality. There should be diversification in order to neutralize the
effects of fluctuation in the global demand .There should strong agenda and
high priority for R & D activities in service sector
The growth of Indian economy in the post liberalization period has been service-
led growth. Thus the future of Indian economy depends on the growth potential
of service sector. The dynamism in the service sector plays the crucial role in
maintaining the growth momentum of the economy. Service sector now accounts
for 70 % of the global output. The characteristicsof the service have been altered
by the revolution in the services sector. Services can now be produced and exported
at lower cost. The old idea of services being non-transportable, non-tradable, and
non-scalable no longer holds for a host of modem impersonal services. Therefore
India can sustain a service-led growth as there is huge room for catch-up and
convergence. Thus industrializationis not the only route to economic development.
Thus service sector is highly growth-stimulating with positive externalities for
other sectors and remains as the catalytic agent for economic growth. The growth
in the service sector has not been uniform. In order to arrive at some policy direction
it is imperative to examine the performance of different services and assess the
economy's potentials and constraints in these services. We should examine the
performance of aggregate as well as disaggregated services in terms of their growth
rates; share in GDP, employment, trade and FDI.
In this section, we discussed the factors contributing to the growth of service
sector, challenges of service sector and various measures for promotion of service
sectors. Now, answer the questions in check your progress 3.
Check Your Progress 3 Developmentof Service
Sector
Note: a) Write your answer in about 50 words.
b) Check your answer with possible answers given at the end bf the unit
1) What are the factors responsible for rapid growth of service sector of India?

.......................................................................................................................
2) What are the major bottlenecks of Indian telecom industry?

.......................................................................................................................
3) What are the services available in foreign trade?
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3.7 LET US SUM UP

In this unit we dealt with the definition and significance of Tertiary sector in the
proc:ess of economic growth. We examined the role of service sector in economic
growth of India. We analyzed the significance of service sector in IT sector,
Banking, Insurance, Trade, infrastmctural development, tourism development,
education and health care. We analyzed the problems and challenges of service
sect'orof India. We have given the suggestive measure for the improvement of
the service sector.
-
- REFERENCES AND SUGGESTED READINGS
3.8
Bha tia, A K (1 982), Tourism Development: principles and practices, Sterling
Publication, Delhi
Das. Kumar (1994), "Profile of Global Tourism in India", Indian Journal of
Marketing, Vol.XXI(11)
Role of Public, Private and Das, Kumar (2002), "Economic Development and Human Capital Formation in
Service Sectors in
Development India", Paper presented in World Economic History Congress held at Buenos
Aires, Argentina, 22-26, July
Das, Kumar (2009),Sustainable development, Reference Publication, New Delhi
Dasgupta, P (1993), An Enquiry into Well being and Destitution, Oxford
Clarendon Press
Dutta, R.C. and Sundaram K. (201 O), Indian Economy, S Chand and sons, New
Delhi
T

Government of India (1992),NationalPolicy on Education -Programme ofAction

1992, New Delhi
Hansda, S. K. (2002), Sewices Sector in Indian Economy: A Status Report, RBI
staff studies, Department of Economic Analysis and Policy, RBI
Misra, S. K. and V.K. Puri (2010),Indian Economy, Himalaya Publication House,
Delhi
Nayak, Pulin (1996)," The State and the Market", Economic and Political Weekly,
Jan 27
Parikh, K.S. (1999), India Development Report, Oxford University Press, New
Delhi
Prasad, Eswar S and Raghuram G R (2008), "Financial Reforms for India",
Finance and Development, Sep.24-27
Ramachandran, Virnala (2002), Hierarchies of Access: Gender and Social Equity
in Primary Education,(ed) European Commission, February
RBI (2009), Report on the trend andprogress of Banking in India, 2008-09
Seth, R. (1996), "Tourism in India: an overview", Yojana, Vol. 40(8)
Shaha, A. ( 1999),"Institutional chacge in India capital Market", Economic and
Political Weekly, Jan .16-23
Shariff, A (1999), India: Human Development Report, National Council of
Applied Economic Research, New Delhi
UNDP (2007), Human Derjelopment Report, Oxford University Press, New York

3.9 CHECK YOUR PROGRESS - POSSIBLE

ANSWERS -

Check Your Progress 1

.. Answerl: Mainly FDI in India are flowing into mainly three service sub sectors:
Telecommunication equipments and services, Financial services (banking and
non banking) and Hospitality industry.
Answer2:The highest growth is registered by financing, insurance and real estate,
followed by trade, hotel, transport and communicition, After global financial
crisis construction and trade, hotel and transport sector had quicker recovery
than financing and insurance sector of India
Answer3: In the National Income Accounting in India, service sector includes Development of Service
Sector
the following:
1) Trade, hotels and restaurants (THR)
2) Transport, storage and communication
3) Finance, insurance, real estate and business services
4) Community, social and personal services
Answer4: The contribution of service sector has been consistently rising h r n
29% to 68 % in 2007, after which it declines due to world fmancial crisis. But
the contribution of agriculture has fallen to only 7% over the years while the
contribution of industry is stagnating in India.

(CheckYour Progress 2
.4nswerl: There were 15 old private sector banks and 7 new private banks are:
.4xix, HDFC, ICICI, Development Credit Bank Ltd, Indus lnd Ban ltd, Kotak
Mahindra Bank Ltd and Yes Bank Ltd.
.4nswer2: There are three types of Insurance in India: a) Life Insurance -
jyaranteeing a specific amount in case of death (b) Health Insurance - against
expenses incurred through illness of the insured. (c) Liability Insurance - for
property such as automobiles, property and professional/business mishaps.
.4nswer3: The capital market has two constituents: (1) The financial institutions
imd (2) the securities Market. The financial institutions e.g IFCI, LDBI, Exim
:Bank, SIDBI, IDFC, SFCs, LIC etc provide long term and medium term loan
Facilities. The securities market is divided into (i) the Government (gilt edged)
securities market and (ii) the corporate securities market.
,4nswer4: There are mainly 5 types of business in the IT sectors: Infrastructure
Software like OS, middleware and databases. Enterprise Software needed in
]finance, sales and marketing, production and logistics. Security Software,
Ihdustry-specific Software and Contract Programming
Answer5 There are four major factors which have contributed for the success
of IT of India. They are: (i) skilled professionals in 1T. (ii) demographic factor
like 60% of the population belong to age group of 15-65. (iii) vast academic
infiastructure.(iv) India has the second largest English-speaking workforce in
I he world.

Check Your Progress 3

,4nswerl: The rapid growth of service sector has been possible for following
five factors: (i) Liberalization Policy. (ii) Technological Advancement (iii)
!Splintering (iv) Sectoral lnterdependence and (v) Demand-side impetus.
Answer2: Indian Telecom Industry has the following bottlenecks: (i) Slow reform
1)rocess.(ii) Low penetration- achieving break-even is difficult. (iii) Huge initial
investments (iv) Limited spectrum availability and interconnection charges
between the private and state operators.
Answer3: After liberalization variety of services are exported and imported.
Now it constitutes about 14% of India's GDP. These services are mainly relating
to Travel, Transport, Insurance, Software services, Business services ,Financial
services etc. 59