V2C9: SERVICES SECTOR

SERVICE SECTOR PERFORMANCE: AN OVERVIEW

Gross Value Added in the Services Sector

• As per the First Advance Estimates for Gross Value Added (GVA), Services Sector growth (YoY) continued to moderate and reached 6.9%during 2019-20 from 7.5%in 2018-19.
• Growth in air passenger traffic has begun to show some signs of recovery after having witnessed a slowdown since mid-2018-19.
• Even the growth in rail freight, which was contracting in the past few months, has picked up in November 2019.
• In contrast, bank credit to the services sector has continued to decelerate. The growth in bank credit to the services sector was 4.8% as on November 2019 as compared to 28.1% a year ago.
• RBI’s data on the allocation of bank credit for services sub-sectors shows that the deceleration in credit growth during April-November 2019 has been driven by ‘Professional Services’, ‘Shipping’, ‘Transport Operators’ and ‘Wholesale Trade’.
• Bank credit to ‘Tourism, Hotels & Restaurants’, ‘Commercial Real Estate’ and ‘Non-Banking Financial Corporations (NBFCs)’ remained high as compared to the other sub-sectors during April-November 2019.

SERVICE SECTOR PERFORMANCE AT THE STATE AND UTS LEVEL

• Services sector performance at the State and UT levels show that the services sector now accounts for more than 50% of the Gross State Value Added (GSVA) in 15 out of the 33 states and UTs.
• In 8 states, the services sector accounts for more than 60% of GSVA.
• Chandigarh and Delhi stand out with a particularly high share of services in GSVA of more than 80% while Sikkim’s share remains the lowest at 26.8%.
• Even states with a relatively lower share of services in GSVA, such as Jharkhand, Odisha, Andhra Pradesh, Uttarakhand, Gujarat, Arunachal Pradesh and Goa, have witnessed strong services sector growth in the recent years.

FDI INFLOWS INTO SERVICES SECTOR

FDI data from the Department for Promotion of Industry and Internal Trade shows that gross FDI equity inflows (excluding re-invested earnings) into the services sector witnessed a strong recovery during April – September 2019 following a declinein2018-19.

• Gross FDI equity in flows jumped by 33% YoY during April-September 2019 to reach US$ 17.58 billion, accounting for about two-thirds of the total gross FDI equity inflows into India during this period.
• The jump in FDI equity inflows was driven by strong in flows into sub-sectors such as‘ Information & Broadcasting’, ‘Air Transport’, ‘Telecommunications’, ‘Consultancy Services’ and ‘Hotel & Tourism’.
• Gross FDI Equity Inflows into Services Sector

TRADE IN SERVICES SECTOR

RBI’s Balance of Payments data suggests that services exports during April-September 2019 maintained their momentum from 2018-19,withagrowth(YoY)of6.4%. The jump in export growth of travel, software, business, and financial services offset the contraction in export growth of insurance and other services (including construction, etc.).

• The robust growth in business services exports was driven by higher receipts for R&D services, professional and management consultancy services, and technical and trade-related services.
• Trends in the composition of services exports over the past decade show that the shares of traditional services, such as transport, and value-added services, such as software, financial services, and communications, have witnessed a decline.
• Meanwhile, the share of travel services has increased over the past decade and that of business services has risen slightly. The share of software services has declined by 4 percentage points over the past decade to reach 40% of total services exports in 2018-19. Yet, India’s services exports remain concentrated in software services, accounting for twice the share of the second-largest component, business services.
• This has made the software sector, and therefore over all services exports, susceptible to changes in the exchange rate, global IT spending, stringent USA visa norms, and rising cost pressures due to increased local hiring in export destinations.
• Even though global IT spending, as projected by Gartner in October 2019, is expected to accelerate in 2020, rising production costs and uncertainty related to Brexit and USA’s visa norms pose downward risks to India’s software exports.
• Services import growth (YoY) during April-September 2019 was 7.9%. An increase in import growth for transport, software, communication, and business services offset the contraction in imports of financial and insurance services and the slowdown in imports of travel services. Increased business services payments were primarily driven by professional, management and consultancy services and technical and trade-related services.
• Net exports of services increased from US$ 38.9 billion during April-September 2018 to US$ 40.5 billion during April- September 2019, up 4.1%YoY. The services trade surplus, largely driven by the surplus in software services, financed about 48% of India’s merchandise deficit during April September 2019, partially offsetting the impact on the current account deficit.
• Besides software services, India runs a small trade surplus in travel, insurance, and financial services. However, within travel services, India persistently runs a trade deficit in education services with education imports, i.e., expenditure incurred by Indian students traveling abroad for education purposes on tuition, room and boarding, reaching about US$3billionin2018-19.
• Adding to the other payments for education purposes, such as fees paid for correspondence courses abroad, which constitute payments for receiving education services abroad, there has been a marked increase in India’s education services imports in recent years, amounting to US$ 5.0 billion in 2018-19.

From a long-run perspective, India’s focus on boosting services exports during bilateral trade negotiations augurs well for mitigating bilateral trade deficits with trading partners.

INDIA IN WORLD COMMERCIAL SERVICES EXPORTS

World trade volume for goods and services is projected to recover in 2020 following a deceleration in 2019. Global uncertainty, protectionism and stricter migration rules would be key factors in shaping India’s services trade ahead.

The increasing role of services in economic activity is well reflected in the growing importance of services in global trade and in India’s trade.

• Looking at two time periods, 2005-11 and 2012-2018, it is evident that both commercial services exports and  goods exports have slowed in India and globally in recent years.
• However, while merchandise exports were growing faster than commercial services exports during 2005-11, commercial services exports have outperformed goods exports lately. This has led to an increase in the share of commercial services exports in overall exports both in India and globally.
• According to WTO data, India’s share in the world’s commercial services exports has risen steadily over the past decade to reach 3.5% in 2018, twice the share in the world’s merchandise exports at 1.7%.
• India now ranks 8th among the world’s largest commercial services exporters and continues to register strong growth performance relative to the other major services-exporting countries as well as world services export growth.

DEVELOPING THE OFFSHORE FUND MANAGEMENT INDUSTRY TO BOOST FINANCIAL SERVICES EXPORTS

The financial services sector has been identified as one of the Champion Services Sectors by the government to enable on-shoring of the India-related financial services that are currently being rendered from global financial centers.

• This would provide an impetus to financial services exports and high-skilled employment. Despite India’s strong performance in services exports, India’s financial services exports have remained stagnant, averaging about US$ 5 billion in recent years.
• As a result, the share of financial services exports in overall services exports has almost halved from 4.2% in 2011-12 to 2.3% in 2018-19.
• One type of financial service that is currently being rendered from global financial centers and could be potentially brought on-shore is the asset management activity of offshore funds.
• These offshore funds located in tax and regulatory friendly jurisdictions, such as Singapore, Luxembourg, Ireland, Hong Kong and London, pool investments from offshore investors and invest in India via the Foreign Portfolio Investment (FPI), Private Equity (PE) or Foreign Venture Capital Investment (FVCI) route.
• Such funds include the India-focused offshore funds which invest only in India and the Regional/ Global diversified funds with partial investment allocation to India.
• As foreign investment into India continues to increase in the coming years, on-shoring the fund management activity of offshore funds to India would benefit the economy by:

• Contributing to the continued expansion of India’s asset management industry which has been witnessing significant growth in recent years.
• The Asset Managers Roundtable of India (AMRI) estimates that fund management activity of almost 25% of FPI, PE and FVCI funds’ total Assets Under Management (AUM) could be potentially on-shored to India by 2020, and potentially a greater share of AUM in the coming years.
• Generating employment for high-skilled finance professionals, including fund managers and support service providers, such as custodians, fund specialists, fund accountants, fund administrators, risk managers, research analytics professionals and tax advisors.

MAJOR SERVICES: SUB- SECTOR WISE PERFORMANCE AND RECENT POLICIES

Most of the sub-sectors of the services sector witnessed a moderation in growth during 2019-20. The growth in the tourism sector decelerated in 2019-20 with weaker growth in foreign tourist arrivals and consequently in foreign exchange earnings from tourism. In the ports sector, growth in port traffic softened in2019-20 from the previous year. The number of wireless phone subscriptions and wireless internet subscriptions increased in 2019-20.

Developments in some key sub-sectors of the services sector are:

Tourism Sector

The tourism sector is a major engine of growth, contributing to GDP, foreign exchange earnings and employment. In India, the tourism sector witnessed a strong performance from 2015 to 2017, with high growth in foreign tourist arrivals. However, foreign tourist arrivals growth (YoY) has decelerated since then to 5.2% in 2018 and 2.7% in January-October 2019. This trend, however, is not unique to India, as the

growth (YoY) in international tourist arrivals globally also slowed from 7.1% in 2017 to 5.4% in 2018.

• Correspondingly, growth in foreign exchange earnings from the tourism sector has slowed in 2018 and 2019 after registering strong growth until 2017. Foreign exchange earnings totaled US$ 24 billion in January-October 2019, with a growth (YoY) of 2%.
• India ranked 22nd in the world in terms of international tourist arrivals in 2018, improving from the 26th position in 2017.
• India now accounts for 1.24% of the world’s international tourist arrivals and 5%of Asia &Pacific’s international tourist arrivals. India ranks 13th in the world and 7th in Asia & Pacific in terms of tourism foreign exchange earnings, accounting for close to 2% of the world’s tourism foreign exchange earnings.
• Foreign tourists from the top 10 countries visiting India – Bangladesh, the USA, the UK, Sri Lanka, Canada, Australia, Malaysia, China, Germany, and Russia –accounted for 65% of the total foreign tourist arrivals in India in 2018.
• Among the foreign tourists, 62.4%of tourists visited for leisure, holiday and recreation, 16.3% for business purposes, and 13.5% was Indian diaspora.
• Looking at tourism trends at the state level: The top five states attracting domestic tourists are Tamil Nadu, Uttar Pradesh, Karnataka, Andhra Pradesh and Maharashtra, accounting for nearly 65% of the total domestic tourist visits in the country in2018. The top five states attracting foreign tourists are Tamil Nadu, Maharashtra, Uttar Pradesh, Delhi and Rajasthan, accounting for about 67% of the total foreign tourist visits in the country in 2018.
• To facilitate international tourism, India introduced the e-Tourist Visa regime in September 2014 for 46 countries. Prior to the launch of the scheme, the e-Visa facility was available for only 12 countries.
• The government further liberalized the visaregimein2016,renamingittoan e-Visa scheme with five subcategories, i.e., ‘e-Tourist Visa’, ‘e-Business Visa’, ‘e-Medical Visa’, ‘e-Conference Visa’ and ‘e-Medical Attendant Visa’.
• The e-Visa scheme is now available for 169 countries with valid entry through 28 designated airports and 5 designated seaports. With this, foreign tourist arrivals to India on e-visas have increased from 4.45 lakh in 2015 to 23.69 lakh in 2018 and stood at 21.75 lakh in January-October 2019, recording nearly 21% year-on-year growth from the previous year.

Information Technology and Business Process Management (IT-BPM) Services

The Indian IT-BPM industry has been the flag-bearer of India’s exports for the past two decades, with industry size reaching about US$ 177 billion in March 2019. The sector contributes significantly to the economy via employment growth and value addition.

IT services constituted 51% of the IT-BPM sector in 2018-19, followed by Software & Engineering Services (20.6% share) and BPM Services (19.7% share).

Within the IT-BPM sector, IT services remained the dominant segment with about US$ 91 billion in revenues in 2018-19. Out of the IT services, digital revenues grew (YoY) more than 30% to reach US$ 33 billion.

A significant part (about 83%) of the IT-BPM industry (excluding hardware) continues to be export driven, with export revenues in excess of US$ 135 billion in 2018-19. During 2018-19, the revenue growth (YoY) for the IT-BPM sector (excluding hardware) softened to 6.8% from 8.2% in 2017-18. This was driven by a contraction of 0.3% in domestic revenue growth even as export revenue growth accelerated to 8.3%.

Out of the total US$ 135.5 billion in exports of the IT-BPMsectorin2018-19, IT services accounted for 55 of the exports, and BPM and Software Products & Engineering services accounted for the remaining 45% with each accounting for almost half of the share. All three sub-sectors witnessed a pickup in export revenues in 2018-19, with IT services growing (YoY) by 7.3%, BPM services by 8.3% and Software Products & Engineering Services by 11.2%.

Looking at export revenues by destination, the USA accounts for the bulk of exports, amounting to US$ 84 billion, which is 62% of total IT-BPM exports (excluding hardware) in 2018-19. This is much larger than the share of exports going to the UK, which is the second-largest export market for IT-BPM services, with a share of around 17%. Europe (excluding the UK) and Asia-Pacific accounts for 11.4% and 7.6% of the export earnings, respectively.

Over the past 2-3 years, a number of policy initiatives have been undertaken to drive innovation and technology adoption in the IT-BPM sector, including Start-up India, National Software Product Policy, and removal of issues related to Angel Tax.

The Indian start-up ecosystem has been progressing and is now the third-largest in the world with 24 unicorns, though the gap with the largest (China: 206) and second-largest (USA: 203) markets remains significant. Cities such as Bangalore, Delhi- NCR and Mumbai account for around 55% of the total startups in India (Source: NASSCOM study).

Port and Shipping Services

India has a 0.9% share in the world fleet as on January 2019. India has 13 major ports and about 200 non-major ports. The total cargo capacity of Indian ports stood at 1,452.64 Million Tonnes Per Annum (MTPA)at the end of March 2019, more than doubling from 628.03 MTPA at the end of March 2010.

• Ports such as Paradip, Chennai, Vishakhapatnam, Deendayal (Kandla) and JNPT had the highest cargo capacities as of March 2019.
• Growth in overall port traffic witnessed an acceleration between 2013-14 and 2016-17 but has decelerated since 2017-18.Traffic handled at major ports grew(YoY) at close to 1% in April December 2019.
• The turnaround time of ships, which is a key indicator of the efficiency of the ports sector, has been on a continuous decline, almost halving between 2010-11 and 2018-19 to 2.48 days. The shipping turnaround time has declined across all major ports and is now the lowest at the Cochin, New Mangalore, V.O. Chidambararanar and Chennai ports, and the highest at the Kolkata port.
• As per the latest UNCTAD data, the median ship turnaround time globally is 0.97 days, suggesting that India has room to further improve upon the efficiency at ports.

Space Sector

India’s space programme has grown exponentially since its modest beginnings five decades ago, moving from providing simplemappingservicesinthe1960stomany more uses currently. This includes the design and development of a series of launch vehicles and related technologies, satellites and related technologies for earth observation, telecommunication and broadband, navigation, meteorology and space science, R&D in space sciences, and most recently, planetary exploration.

• India spent about US$ 1.5 billion on spaceprogrammesin2018.However,India’s government space expenditure still lags behind that of the major players in the space sector, such as the USA, which spent about 13 times more than India in the space sector in 2018. China, which has become a key player in the space sector in recent years, also spent about seven times more than India in 2018.

Source: ISRO (which sourced from Statista).

India has launched around 5-7 satellites per year in recent years with no failures, barring one in 2017. On the other hand, Russia, the USA and China dominate the satellite launching services with 20, 31 and 39 satellites respectively in 2018.

Among the key areas of focus in the space programme,

• the first area has been satellite communication, with INSAT/GSAT system as the backbone to address the needs for telecommunication, broadcasting and satellite based broadband infrastructure in the country.
• The second area of focus has been earth observation and using space-based information for weather fore casting, disaster management, national resource mapping,  and governance.
• The third focus area has been satellite-aided navigation including GAGAN and NavIC.

Globally, space activity is undergoing tremendous changes in recent years in terms of players and applications. This has been marked by a shift in engagement of space activities – from government agencies pursuing national needs and space exploration activities to non-governmental/private sector agencies aggressively pursuing commercial needs. Space systems are also being actively used for national security purposes by most countries.

The global space economy for 2018 tallied about US$ 360 billion, which includes space systems manufacturing and space-based services.

• ISRO has been pursuing the policy of engaging Indian industries in delivering space-related goods and services, especially in light of the growing number of satellite and launch vehicle missions and application programmes.
• In this direction, the following areas have been identified for attracting private investments in the space sector:
  • Production of Polar Satellite Launch Vehicle (PSLV):
  • Satellite integration and assembly;
  • Production of composite materials;
  • Production of solid, liquid, cryogenic and semi-cryogenic propellants; and
  • Production of electronic packages, Testing & Evaluation for avionics and satellite subsystems.

Questions

1.With reference to the importance of the Service sector in the Indian economy, consider the following statements:
1. It accounts for around 55 per cent of the total size of the economy.
2. Nearly two-thirds of the total FDI inflows into India in the services sector.
Which of the above statements is/are correct?
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

Ans. (C)
The services sector’s significance in the Indian economy has continued to increase, with the sector now accounting for around 55 per cent of the total size of the economy and GVA growth, two-thirds of total FDI inflows into India and about 38 per cent of total exports. The share of services sector now exceeds 50 per cent of Gross State Value Added in 15 out of the 33 states and UTs, with this share more than 80 per cent in Delhi and Chandigarh.

2. The service sector in India accounts for:
1. more than 50 percent of total size of the economy.
2. around two-thirds of total FDI inflows into India.
3. more than 50 percent of total exports.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 2 only
(d) 1, 2 and 3

Solution: C
· The services sector‘s significance in the Indian economy has continued to increase, with the sector now accounting for around 55 per cent of total size of the economy and GVA growth, two-thirds of total FDI inflows into India and about 38 per cent of total exports.

· The share of services sector now exceeds 50 per cent of Gross State Value Added in 15 out of the 33 states and UTs, with this share more than 80 per cent in Delhi and Chandigarh.
· Hence option (c) is the correct answer.