The Role and Impact of the Service Sector in the Indian Economy

Posted on May 13, 2024 in Economy

Composition of the Service Sector

The tertiary sector, also known as the service sector, is a diverse sector comprising trade, hotels, transport, communications, financing, insurance, real estate, business services, community, social, and personal services. Each sub-sector has grown significantly and contributed substantially to India’s recent accelerated growth.

Notable Contributions of Sub-sectors

1. Banking Sector

   The banking sector has undergone a significant transformation in recent decades. Until 1991, public sector banks were dominant. The 1991 economic liberalization opened the field for private and foreign banks. Today, India’s banking sector is comprehensive, consisting of public, private, and foreign banks. With branches nationwide, the banking sector has significantly contributed to the Indian economy through employment generation, balanced regional development, capital formation, and industrial and agricultural development.

2. Telecommunication

   This sector has achieved impressive growth recently and is one of the fastest-growing sectors in the Indian economy. The number of telecom connections increases yearly, with the private sector playing an active role in providing this service. Teledensity, a crucial indicator for telecom penetration, has improved in rural and urban areas. The government has framed policies to introduce new technologies and innovations. This sector’s phenomenal growth has created new employment opportunities and contributed to export promotion.

3. Information Technology

   This sector is primarily responsible for putting India on the international map. It is a force to be reckoned with in terms of its contribution to GDP, export promotion, and employment generation. This sector consists of software and non-software services like business services, financial services, and communication services.

4. Insurance Sector

   Another service sector that has grown significantly in the post-liberalized era is the insurance sector. The number of insurers in 2000 was 7, which has increased to 58 operating in life, non-life, and reinsurance segments. 24 out of the 58 insurers deal with life insurance, and others with non-life insurance. FDI was allowed up to 49% of the paid-up equity capital of the insurance company. This limit increased to 74% in the 2021-22 Union Budget. Due to various government initiatives, insurance penetration is increasing in rural and urban areas. The Insurance Regulatory and Development Authority guides and regulates the insurance sector.

5. Transport and Tourism

   Both sectors offer large direct and indirect employment opportunities. The transport sector includes railways, roadways, air, and water transport. All these sectors have improved their performance recently due to the overall improvement in the economy’s growth and rapid developments in the industrial and service sectors.

6. Real Estate

   This sector deals with buying and selling residential and commercial properties. The demand for real estate has increased due to the ever-growing population and the need for commercial properties like malls, corporate offices, and multiplexes. This sector employs many workers, though from the unorganized sector. The real estate sector is also open for foreign investment.

7. Trade

   Trade is an important part of the service sector. It consists of retail and wholesale trade in the organized and unorganized sectors. The retail sector is booming in India due to the rising income levels, especially among the middle class, and changes in consumption patterns. FDI is permitted in cash and carry wholesale trading but not in multi-brand retailing. Since 2006, FDI up to 51% has been allowed in single-brand retailing. FDI inflows have increased considerably from 2006 to 2010.

Scope, Role, and Importance of the Service Sector

The service sector plays a significant role in India’s economic development. Its role can be elaborated as follows:

Key Contributions

1. Contribution to GDP

   The service sector’s share of GDP has continuously increased. In recent years, the service sector has contributed the most to GDP. The CSO changed the base year from 2004-05 to 2011-12. As per the new national income accounting system, the service sector accounted for 55% of the Gross Value Added in 2019-20. Due to the pandemic, this contribution declined to 53% in 2021-22. The service sector registered a growth rate of 7.5% in 2018-19 (Source: Economic Survey 2018-19). In the post-reform years, the service sector’s good performance contributed to higher national income. During the pandemic, this sector was the worst affected, witnessing a sharp contraction. The various government initiatives brought about a recovery in 2021-22.

2. Employment Generation

   The service sector offers various job opportunities to the labor force. This sector accounted for 22.9% of total employment in 1993-94, which increased to 34% in 2017 (Source: Economic Survey 2018-19). Of the three sectors—primary, secondary, and tertiary—the tertiary sector’s employment growth rate is higher than the secondary and primary sectors. Different categories of people, namely professionals, skilled and semi-skilled women, etc., can find gainful employment in this sector.

3. Contribution to Primary and Secondary Sectors

   Many services provided by the tertiary sector help the primary and secondary sectors to be productive. Services provided by this sector include transport, information technology (IT) and Information Technology Enabled Services (ITES), communication, logistics, banking, etc. They provide substantial support to the two sectors to bring about rapid changes.

4. Export Promotion

   Exports from this sector have grown significantly in recent times. According to WTO data, India’s services accounted for 3.4% of global services, and services exports increased to US$ 153.5 billion in 2018-19 from US$ 16.8 billion in 2001. India is currently among the top ten service exporters globally. The government has taken many initiatives to strengthen this sector further.

5. Flow of Foreign Capital

   India’s service sector has emerged as an attractive destination for foreign investment. The top ten service sectors, like financial services, telecommunication, software tourism, and consultancy services, account for a major share of FDI equity inflow. By attracting substantial foreign capital, the service sector contributes to rapid economic development.

6. Contribution to Tax Revenue

   The service sector generates huge revenue for the government through the service tax. The government collected more than Rs. 70,000 crores through service tax in 2010-11, and by 2016-17, the service tax collection increased to Rs. 2.54 lakh crores. The government introduced the Goods and Service Tax (GST) on 1st July 2017.

Recent Trends in the Banking Industry

1. Use of ICT

   The use of ICT (Information Communication Technology) has significantly transformed the banking industry. It is widely used by this sector in its various operations. Banks can provide efficient, error-free, and hassle-free services to customers. Using ICT has enabled banks to provide various new services like ATM, Phone banking, and internet banking. Optimum utilization of resources, better customer services, and improving human resources by imparting necessary skills have become possible with the introduction of technology.

2. ICT in Public Sector Banks

   ICT is extensively used not only by private banks but also by public sector banks. Initially, computerization was slow in public sector banks. However, over time, they adapted and now use IT in most of their operations.

3. Core Banking Solution

   Introducing Core Banking Solution (CBS) is a major step in using IT in the banking sector. CBS enables the banking sector to have better connectivity between branches, set up effective Management Information Systems (MIS), and prevent fraudulent practices. CBS helps banks offer diverse services, improve efficiency, and reduce costs. Most major banks in India have implemented CBS in their operations.

4. Technological Innovations

   Technological innovations have enabled banks to enter the retail market. Retail banking involves many challenges and is highly competitive. It requires continuous innovation, micro-planning, product customization, product differentiation, and extensive e-banking availability. Though the challenges are daunting, applying and efficiently using technology will help banks stay competitive. The customer is the major beneficiary of this highly competitive market, which offers various products at a lower cost.

Recent Trends in the Insurance Sector

1. Micro Insurance

   IRDA has issued detailed guidelines for Micro Insurance. This insurance is expected to penetrate all sections of society. Some insurance companies are already providing insurance products per IRDA guidelines.

2. Rural and Social Sector Obligations

   The obligations of insurers towards the rural and social sectors have been amended to link them with their past performance and relax certain rules and regulations.

3. Anti-Money Laundering Rules

   IRDA has given detailed guidelines regarding the Anti-Money Laundering (AML) program. The guidelines include know your customer (KYC) norms, complete customer identity, and sources of funds.

4. Data Warehousing

   This is another IRDA initiative to help insurers develop new products, settle claims smoothly, and provide data access to all stakeholders.

5. Grievance Redressal

   The consumer grievance redressal cell of IRDA deals with policyholders’ complaints. It takes up the issues with the respective insurers and tries to resolve their complaints amicably.

6. Awareness Campaign

   Print and electronic media create awareness among customers about various insurance industry products. This helps customers make rational choices.

7. Cap on Service Charges

   Unit-linked insurance policies have become popular in India. Insurers levy service charges on such policies. IRDA has capped such service charges to ensure they are reasonable.

8. Corporate Governance

   Guidelines regarding corporate governance have also been issued, effective from 1st April 2010.

Recent Trends in the Healthcare Industry

The healthcare industry plays a crucial role in developing the economy. A healthy labor force is a prerequisite for rapid economic growth. Proper and sufficient healthcare facilities enhance the workforce’s health and lead to better productivity. Population control becomes easier when children’s health can be well protected. Resources can be used for other productive purposes rather than fighting diseases.

Key Programs and Initiatives

1. National Vector Borne Disease Control Program

   This program prevents vector-borne diseases like Malaria, Filaria, Dengue, and Chikungunya.

2. National Tuberculosis Control Program

   It controls the spread of TB using the Directly Observed Treatment Short Course (DOTS) strategy. It covers the entire country and has reduced the death rate due to TB to less than 5%.

3. National AIDS Control Program

   The program has two objectives: (a) reducing the spread of HIV infection in India and (b) strengthening India’s capacity to respond to HIV/AIDS on a long-term basis. It focuses on preventive intervention, low-cost care for people living with HIV/AIDS, institutional strengthening, inter-sectoral collaboration, and targeting high-risk populations.

4. Control of Non-Communicable Diseases

   These include cancer, heart diseases, mental disorders, blindness, and cataracts. Under this, measures are taken to create awareness and control the incidence of these diseases.

5. Ayurveda, Yoga, Naturopathy, Unani, Siddha, and Homeopathy (AYUSH)

   Under this program, efforts are underway to improve and upgrade the standard of education, standardize drugs and quality control, and sustain, collect and cultivate medicinal plants.

Role of MNCs

A multinational Corporation (MNC) operates in countries other than its home country. MNCs have their head office in their home country while having offices or factories in other countries. They are also called transnational corporations. Some examples of MNCs are Microsoft, Google, General Electric, Toyota, PepsiCo, Sony Corporation, and Phillips Electronics. MNCs play an important role in developing their home country and the countries where they operate. At the same time, their role in developing countries has often been debated. While many arguments support their role, opposition to them is also very vehement.

Benefits of MNCs

According to MNC supporters, the following benefits can be reaped by encouraging MNCs:

1. They enhance capital formation and help accelerate economic growth.
2. As they are profit-oriented, resources will be utilized optimally.
3. Along with capital, MNCs bring their own advanced technology and better management practices.

Limitations of MNCs

While the above arguments are correct, there are certain apprehensions about MNCs. Some of the major limitations are:

1. MNCs have superior staying power and financial powers. Domestic producers cannot withstand this competition.
2. They generally bring in capital-intensive technology, unsuitable for a labor-abundant country like India.
3. They are mainly interested in maximizing profits and will not be interested in serving national interests.
4. According to critics, MNCs tend to influence people with their own culture and encourage wasteful consumption.

Role and Impact of SAARC

The South Asian Association for Regional Cooperation (SAARC) was established in 1985 to promote trade among South Asian countries. It consists of seven countries: Bangladesh, India, Pakistan, Bhutan, Nepal, Sri Lanka, and the Maldives. In 2007, Afghanistan also joined the Association. The headquarters of SAARC is in Kathmandu, Nepal.

Objectives of SAARC

1. To improve the quality of life of people in South Asia.
2. To accelerate growth in all aspects – economic, social, and cultural – in the South Asian countries.
3. To promote collaborations amongst the countries of South Asia in economic, social, cultural, and technical fields.
4. To pursue their common interests in international forums.
5. To improve their relations with other developing countries.
6. To help each other in solving various social and economic problems.

To achieve the above objectives, SAARC has initiated several programs. The two main ones are poverty eradication and trade and economic cooperation. SAARC has given significant attention to poverty eradication by adopting a plan of action on poverty alleviation. It provides a framework for providing basic needs, educational and health facilities. Expanding trade and economic cooperation is another main agenda of SAARC. A high-level committee on economic cooperation deals with all issues related to trade and economic cooperation. To liberalize trade among the SAARC countries, the member states signed the SAARC Preferential Trading Arrangement (SAPTA) in 1993. Under SAPTA, preferential treatment is extended to member nations, especially less developed countries.

In the last three decades of its existence, SAARC has helped expand trade and strengthen cooperation among the member states. However, the results are far from satisfactory. There is a need for more free trade and greater investment flow between the member nations.

Role and Impact of ASEAN

ASEAN refers to the Association of Southeast Asian Nations. It was established in 1967 and had five member nations: Indonesia, Malaysia, Philippines, Singapore, and Thailand. Later on, five more countries, namely Brunei, Vietnam, Laos, Myanmar, and Cambodia, joined ASEAN. The member nations differ in political systems, religious practices, and cultural features. The diversity did not deter them from forming ASEAN to ensure greater cooperation amongst nations.

The ASEAN member nations are endowed with rich natural resources and supply substantial natural rubber, tin, and palm oil to the rest of the world. Most member nations have registered high growth rates and emerged as middle-income economies. Some, like Thailand, Malaysia, and Singapore, have registered impressive growth rates in recent decades, earning them the term”tiger economies” Apart from promoting trade relations amongst the ASEAN countries, it has successfully dealt with foreign trade and economic cooperation with the Organisation for Economic Cooperation and Development (OECD). It is also strengthening its relations with other Asian countries.

Objectives of ASEAN

The basic objectives of ASEAN are to promote economic growth and development, ensure peace and prosperity, and cooperate to ensure regional stability.

Major Initiatives of ASEAN

1. Member nations signed the Treaty of Amity and Cooperation in Southeast Asia in 1976 at the first summit held in Bali. This Treaty formed the basis for fostering relations among nations.
2. To accelerate trade ties, ASEAN members signed the Preferential Trading Agreement in 1977, extending preferential treatment to member nations.
3. A ‘Free Trade Area’ scheme formulated by ASEAN in 1992 aimed at removing tariff and non-tariff barriers within a timeframe.

Features of the Indian Money Market

The Indian money market is well-developed compared to other developing countries. However, it is not as developed as the London money market. It exhibits the following features:

Key Features

1. Dichotomy in the Money Market

   The Indian money market is divided into organized and unorganized sectors, which are quite independent. There is no coordination between them. The Reserve Bank controls the organized sector, while the unorganized sector is unregulated. Even within the organized sector, the different units lack proper coordination and compete. Due to this dichotomy, there is no national money market but only local money markets. The RBI’s monetary policy becomes ineffective due to a lack of integration.

2. Irrational Interest Rate Structure

   There is no coordination between the various banking institutions, resulting in widely differing interest rates. Different types of interest prevail due to the lack of mobility of funds from one section to another. Due to the RBI’s efforts, some rationality has been introduced. Even then, different interest rates exist in the money market. Subsidized bank loans have encouraged industries to use capital rather than labor, resulting in underutilization of resources.

3. Absence of Organized Bill Market

   The bill market is not well-developed. The Reserve Bank of India introduced two schemes in 1952 and 1970, providing several incentives to boost trading in bills. However, these efforts have met with limited success. The popularity of cash credit, the presence of the inter-bank call money market, and the lack of uniformity in commercial bills have affected the bill market’s development.

4. Shortage of Funds

   In the money market, demand always exceeds supply. Supply is low due to low income, low saving, the absence of banking facilities, and a lack of investment opportunities.

5. Seasonal Stringency of Funds and Interest Rate Fluctuations

   Agriculture is the major occupation in India. The demand for funds from this sector influences the money market. Farmers demand more funds from October to June. Generally, the demand for funds far exceeds the supply, pushing up interest rates. During the slack season, the demand is less, and the interest rate tends to decline. These fluctuations affect the development process.

6. Inadequate Banking Facilities

   Banking facilities have improved after the nationalization of banks in 1969 and 1980. Yet, they are not adequate. In the USA, there is a commercial bank branch for every 1,200 persons. In India, there is a branch for every 15,000 persons. In rural areas, many people do not have access to banking facilities. To accelerate the growth rate, savings have to be mobilized, and for this, banking facilities have to be improved.

7. Inadequate Credit Instruments and Lack of Dealers

   The money market does not have enough short-term credit instruments. Similarly, the number of dealers is also inadequate.

The above features are also termed deficiencies of the money market. They must be removed to make the money market well-developed.

Functions of the Reserve Bank of India (RBI)

The Reserve Bank of India was established in 1935 as a private shareholder’s bank and was nationalized in 1949. It is the apex bank in the banking structure and the leader of the money market. Along with traditional functions, it also performs certain promotional and developmental functions. The functions of RBI have not only expanded over time but have also been diversified. The functions of RBI can be analyzed as follows:

Key Functions

1. Monopoly of Note Issue

   The RBI has the sole right of note issue. All currency notes except one rupee note and coins are issued by the Issue Department of the Central Bank. The RBI follows the minimum reserve system, under which the bank has to maintain a minimum reserve of Rs. 200 crores, of which a minimum of Rs. 115 crores is in gold and bullion, and the rest in foreign securities. This function helps the Central Bank control the money supply in the economy.

2. Banker to the Government

   The RBI is the banker, agent, and advisor to the Government. It accepts deposits and makes payments on behalf of the Government. The bank undertakes the issue of loans, management of public debt, and sale of treasury bills. It helps the Government ensure better coordination of monetary and fiscal policies. The bank provides short-term loans, namely”Ways and Means Advances” to the Central and State Governments. These loans have to be repaid within three months. RBI represents the government in various international organizations like the IMF and World Bank. It sends its officials as government representatives for international seminars and conferences. All important policy decisions are taken by the government in consultation with the RBI. It advises the government on important matters like agricultural credit, devaluation of the rupee, and credit policy for the industrial and export sectors.

3. Banker’s Bank

   RBI acts as a banker for all commercial banks. All scheduled banks come under the direct control of RBI. A scheduled bank has a paid-up capital of Rs. 5 Lakhs or more and is included in the second schedule of the RBI. All scheduled banks have to keep a minimum reserve with the RBI, enabling RBI to influence their credit-creating capacity. Their expansion, management, and reconstruction are regulated by RBI. They have to submit weekly reports to RBI about their transactions. By performing three functions, RBI significantly helps the member banks:
   1. It acts as the lender of last resort, i.e., commercial banks can approach the Central Bank for financial accommodation when other sources are exhausted. RBI sanctions credit based on eligible securities and by rediscounting bills of exchange.
   2. It is the custodian of commercial banks’ cash reserves. All banks have to keep a minimum percentage of their deposits with RBI. This helps commercial banks carry out their business smoothly.
   3. All banks have an account with RBI. All interbank transactions are settled through RBI. Cash transactions are minimal. The Central Bank acts as the clearing house. The claims of each bank are settled through a transfer of accounts. In short, the Central Bank is the friend, philosopher, and guide to commercial banks.

4. Management of Foreign Exchange Reserves

   : RBI is the custodian of the foreign exchange reserves of the country. It is the responsibility of RBI to stabilize external value of rupee and carry out transactions in foreign currencies.