2- Emergence of the Services Economy

Introduction:

For more than a decade, the services sector has been a significant and crucial driver fuelling growth in the Indian economy. Because of the strength of this sector in the domestic economy and its central role in India’s external economic dealings, the economy has effectively traversed the stormy years of the recent global economic crisis. The services industry encompasses various activities, from cutting-edge information technology (IT) to essential services supplied by the unorganised sector, such as barber and plumber services. Trade, hotels, and restaurants; transportation, storage, and communication; financing, insurance, real estate, and business services; and community, social, and personal services are all included in the National Accounts classification of the services sector. Construction is classified by the World Trade Organization (WTO) and the Reserve Bank of India (RBI).

Service Concept:

The American Marketing Association was one of the first to describe services as “activities, benefits, or satisfactions that are offered for sale, or delivered in connection with the sale of goods” as early as 1960. This definition had a very narrow view of services, implying that they are only provided in conjunction with the sale of products.

“Services represent either intangibles providing satisfaction directly (transit, housing), or intangibles offering satisfaction jointly when acquired either with commodities or other services (credit, delivery),” according to another definition provided by Regan in 1963. For the first time, services were viewed as pure intangibles capable of delivering consumer satisfaction and could be marketed as physical goods.

Robert Judd defined service as “a market transaction by an enterprise or entrepreneur where the object of the market transaction is other than the transfer of ownership of a tangible commodity”.

In 1983, Lehtinen defined services as “an activity or a series of activities that take place in interactions with a contact person or a physical machine and which provide consumer satisfaction.”

Kotler and Bloom 1984 defined services as “any activity or benefit that one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product.”

Gummesson, highlighting the intangible nature of services, defined “services as something which can be bought and sold but which you cannot drop on your foot.” This definition also pointed out one basic characteristic: services can be exchanged even though they are not tangible.

According to Gronross, “a service is an activity or series of activities of more or less intangible nature that normally, not necessarily, take place in interactions between the customer and service employees and/or physical resources or goods and/or system of the service provider, which are provided as a solution to customer problems.”

This definition takes into account the following important features of services:

Services are “activities” or series of activities rather than things.
As a result, services are intangible.
They occur in the interaction between the customer and the service provider, meaning that services are produced and consumed simultaneously.
The customer has a role to play in the production process, as the services are provided as solutions to customers’ problems.

Overview of the Indian Economy:

According to United Nations (UN) research, India is expected to develop at a quicker rate of 7.5 per cent this fiscal year, owing to increased savings and investment rates, even though most Asia-Pacific economies are expected to develop at a slower rate. According to Nagesh Kumar, Chief Economist of United Nations Economic and Social Commission for Asia and the Pacific, “we estimate it will expand by roughly 7.5 per cent in 2012-13.” (ESCAP). According to Ms. Pratibha Patil, President of India, “Today, India is among the most attractive places internationally for investments and business, and FDI has surged over the last several years.” Ms. Patil emphasised that the Indian economy has maintained high growth rates and has become a desirable investment location.

Meanwhile, according to a research report produced by The Pew Charitable Trusts, India has maintained its position as a top destination for private sustainable energy investment. Phyllis Cuttino, Director of Pew’s Clean Energy Program, said, “Clean energy investment, excluding research and development, has increased by 600% since 2004.” In 2011, India’s renewable energy sector continued to grow, with private investment increasing by 54% to US$ 10.2 billion, putting the country in sixth place among the G-20 nations. Among the G-20 countries, this was the second-greatest growth rate. In the next twelve months, the World Economic Forum (WEF) wants to open an office in India to establish a permanent physical presence. Mr Sushant Palakurthi Rao, Senior Director, WEF, stated, “Today, India is among the most important G-20 economies, and this reaffirms Forum’s commitment to the country as a partner.”

Current Scenario:

With its robust democracy and strong relationships, India has emerged as the world’s fastest-growing major economy. It is anticipated to be among the top three economic powers in the next 10-15 years.

The size of the market:

According to the second advance estimates (SAE) for 2020-21, India’s real gross domestic product (GDP) at current prices was Rs. 195.86 lakh crore (US$ 2.71 trillion) in FY21.

According to the Hurun Global Unicorn List, India has the world’s fourth-largest unicorn population, with over 21 unicorns worth $73.2 billion. According to the Nasscom-Zinnov report “Indian Tech Start-up,” India will have 100 unicorns by 2025 and generate 1.1 million direct jobs.

According to the McKinsey Global Institute, India must raise its employment growth rate and create 90 million non-farm jobs between 2023 and 2030 to boost productivity and economic growth. To attain 8-8.5 percent GDP growth between 2023 and 2030, the net employment rate must increase by 1.5 percent per year.

According to RBI data, India’s foreign exchange reserves were $582.04 billion on March 12, 2021.

Recent Happenings:

Investments have been made in many sectors of the economy as the economic situation has improved. In 2020, India’s overall deal value was US$ 80 billion, spread across 1,268 transactions. M&A activity accounted for about half of the entire transaction value. In 2020, the Private Equity – Venture Capital (PE-VC) sector saw 921 acquisitions worth US$ 47.6 billion. The following are some of the most significant recent economic developments in India:

India’s total exports were predicted to be US$439.64 billion from April 2020 to February 2021 (a 10.14 percent decrease over the same period last year). Overall imports were predicted to be $447.44 billion from April 2020 to February 2021 (a 20.83 percent decrease over the same period last year).

According to IHS Markit, the manufacturing Purchasing Managers’ Index (PMI) was 57.5 in February 2021.

In February 2021, gross tax income was Rs. 113,143 crore (US$15.58 billion), up from Rs. 105,361 crore (US$14.51 billion) in February 2020.
Between April 2000 and December 2020, India received US$ 749.39 billion in FDI equity inflows.
In January 2021, India’s Index of Industrial Production (IIP) was 135.2, compared to 136.6 in December 2020.
In February 2021, the Consumer Food Price Index (CFPI) – total inflation was 3.87 percent, compared to 1.96 percent in January 2021.
In February 2021, the Consumer Price Index (CPI) – total inflation was 5.03 percent, up from 4.06 percent in January 2021.

Initiatives by the government:

Ms. Nirmala Sitharaman, Minister of Finance and Corporate Affairs, presented the first Union Budget of the third decade of the twenty-first century in Parliament on February 1, 2020. The budget included a mix of short-, medium-, and long-term policies to revive the Indian economy. To strengthen the economy, capital expenditure for FY22 is expected to increase by 34.5 percent to Rs. 5.5 lakh crore (US$ 75.81 billion) in the Union Budget 2021-22.

Increased government spending is projected to encourage private investment, with the production-linked incentive programme offering strong prospects. The Indian economy is expected to benefit from consistent proactive, graded, calibrated governmental support.

The Ministry of Electronics and IT (MeitY) announced the second round of large-scale electronics manufacturing applications under the production-linked incentive (PLI) plan in March 2021. The application period for the programme has been extended until March 31, 2021, with the possibility of an extension based on MeitY criteria.

In March 2021, the government indicated that it will examine an essential programme for constructing display fabrication units in India after establishing incentive programmes for mobile and IT hardware manufacture. The Ministry of Electronics and Information Technology (MeitY) has requested expressions of interest from companies interested in setting up LCD/OLED/AMOLED/QLED-based display fabrication operations in India.

The Indian government launched a Rs. 2.65 lakh crore (US$ 36 billion) stimulus programme in November 2020 to create jobs and offer financial support to several industries like tourism, aviation, construction, and housing. In addition, India’s cabinet adopted the production-linked incentives (PLI) programme, which would grant Rs. 2 trillion (US$ 27 billion) over five years to help the country create jobs and enhance productivity.

As a result of government efforts such as Make in India and Digital India, many foreign companies are establishing operations in India. Mr. Narendra Modi, India’s Prime Minister, initiated the Make in India programme to boost the country’s manufacturing sector and increase the purchasing power of the typical Indian consumer, hence driving demand and spurring development, and therefore benefiting investors. Under the Make in India initiative, the Indian government is attempting to increase the manufacturing sector’s contribution to GDP from 17 percent to 25 percent. In addition, the government has launched the Digital India programme, which focuses on three key areas: building digital infrastructure, delivering services digitally, and increasing digital literacy.

The following are some of the government’s most recent projects and developments:

In March 2021, Flipkart announced its intention to expand its grocery services to over 70 cities in the next six months. As a result of this planned growth, customers in seven main cities and more than 40 neighbouring cities will be able to obtain high-quality grocery items, offers, speedy deliveries, and a seamless shopping experience.
Amazon India stated in February 2021 that it would begin manufacturing devices in India. The company intends to start production in 2021 with its contract manufacturer, Cloud Network Technology, a Foxconn subsidiary in Chennai.
India and Kuwait agreed to form a joint ministerial committee in March 2021 to expand relationships in energy, trade, investment, manpower and labour, and information technology. According to a joint statement, the commission will focus on building the best platform to deepen the alliance in sectors such as energy, trade, economy, investment, human resources, manpower and labour, finance, culture, information technology, health, education, defence, and security.
The parliament adopted a bill to enhance foreign direct investments (FDIs) in the insurance sector from 49 percent to 74 percent in March 2021. Ms. Nirmala Sitharaman, the Union Minister for Finance and Corporate Affairs, who is spearheading the Bill, remarked that raising the FDI ceiling in the insurance sector will assist insurers in raising more funds and overcoming financial difficulties.
The ‘National Commission for Allied Healthcare Professions Bill 2021′ was passed by parliament in March 2021. Mr. Harsh Vardhan, Union Minister for Health and Family Welfare, Science and Technology, and Earth Sciences, remarked that the bill aims to satisfy long-standing requests in the field and expand professional employment prospects.
The Union Cabinet approved the revised cost estimate (RCE) of the comprehensive scheme for strengthening transmission and distribution in Arunachal Pradesh and Sikkim in March 2020, at a cost of Rs. 9,129.32 crore (US$1.26 billion), to support economic growth in those states by strengthening intrastate transmission and distribution systems.
The Union Cabinet authorised a memorandum of understanding (MoU) signed by the Ministry of Agriculture and Farmers’ Welfare and the Ministry of Agriculture of the Republic of Fiji in March 2020 to improve bilateral relationships and collaborate in the agricultural and related sectors.
During 2019-23, India is estimated to attract roughly US$ 100 billion in investment to improve its oil and gas infrastructure.
By 2025, the Indian government plans to increase public health spending to 2.5 percent of GDP.
The government has allocated a budget of Rs. 2.068 billion (US$ 29.59 million) for 2019 to implement the Agriculture Export Policy to double farmers’ income by 2022.

The Journey Continues

According to the NSO’s (National Statistical Office) second advance estimates, India’s real GDP (gross domestic product) increased by 0.4 percent in the third quarter of FY21. This increase reflects a V-shaped recovery that began in the second quarter of FY21.

India’s real GDP growth for FY22 is expected to be 11%, according to the Economic Survey 2020-21. The January 2021 WEO report predicted a gain of 11.5 percent in FY22 and 6.8 percent in FY23. According to the IMF, India is also anticipated to become the fastest-growing economy in the next two years. India relies on renewable sources to generate energy. It aims to get 40% of its energy from non-fossil sources by 2030, up from 30% now, and expects to raise renewable energy capacity to 175 gigawatts (GW) by 2022. According to a Boston Consulting Group (BCG) estimate, India will be the world’s third-largest consumer economy by 2025, with consumption anticipated to triple to US$ 4 trillion due to changes in consumer behaviour and spending patterns. According to a forecast by PricewaterhouseCoopers, it is expected to surpass the United States as the world’s second-largest economy in terms of purchasing power parity (PPP) by 2040.

Importance of Services in the Economy:

The global economy is becoming more and more of a service economy. This is primarily due to the service sector’s growing prominence and role in the economies of both developed and developing countries. Indeed, the service sector’s expansion has long been considered a barometer of a country’s economic progress. According to economic history, all emerging countries have seen a shift from agriculture to industry and, subsequently, to the service sector as the mainstay of the economy. The definition of commodities and services has also changed due to this transformation.

The size of service organisations varies greatly. At one extreme of the scale are large worldwide firms engaged in fields such as aviation, finance, insurance, telecommunications, and hotels. Restaurants, laundries, optometrists, beauty parlours, and various business-to-business services are among the locally owned and operated small companies on the other end of the spectrum.

The service sector is undergoing revolutionary upheaval, which is significantly impacting how we live and work. New services are always being created to address our current demands as well as needs we didn’t even realise we had. Few individuals could have predicted the future demand for online banking, website hosting, or email providers nearly fifty years ago when the first electronic file-sharing system was launched. Many of us today believe we can’t live without them. Business-to-business markets are seeing similar changes.

The service sectors of the Indian economy that have grown faster than the economy are as follows:

Information Technology (the leading service sector in Indian economy)
IT-enabled services (ITeS)
Telecommunications
Financial Services
Community Services
Hotels and Restaurants

Software services and product exports are developing at a breakneck pace in India’s economy, with a staggering 35.5 percent increase to a total of USD 18 billion. The ITeS and BPO sectors expanded by 33.5 percent, bringing in USD 8.4 billion in revenue. The service sector of the Indian economy has historically been the most powerful. It has recently concentrated on a variety of investments. As the Indian economy moves toward further liberalisation, sectors such as banking are poised to grow in importance and play a more significant role in the Indian economy.

International Comparison of the Services Sector:

According to conventional wisdom, the expansion of manufactured goods output precedes growth in the services sector during a country’s early economic period. Manufacturing often takes a back seat as a country develops, giving way to the services sector in terms of output and employment, and manufacturing companies themselves become more service-centric to stay competitive. Some say that the loss in manufacturing and subsequent transition to services is unsustainable in the long run because services rely on manufacturing for demand. Although this reasoning may hold for some services, such as retailing and transportation, it does not apply to all services. Rather than the other way around, information technology has been a driving force behind contemporary industry expansion. While the traditional wisdom of development holds globally, it appears to have been turned on its head in India, with the services sector taking a significant lead over manufacturing. There are beneficial spillovers from the rise of services to manufacturing in India, thanks to income, demand, technology, and organisational learning.

Gross Domestic Product (GDP) of Services: International Comparison

In 2010, services accounted for approximately 68 percent of the US$63 trillion global gross domestic product (GDP), up from almost 67 percent in 2001. In terms of this indicator, India’s performance is superior to that of other emerging developing economies and comparable to that of the top developed countries. India is ranked 8th in overall GDP and 11th in services GDP among the top 12 countries with the most significant overall GDP in 2010. While countries like the United Kingdom, the United States, and France have the most excellent service-to-GDP ratios (over 78%), India’s share of 57 percent is far higher than China’s (41.8 percent). India is the country with the most significant increase in its services proportion of GDP (7 percentage points) in 2010 compared to 2001, followed by Spain and Canada (5.3 percentage points each), the United Kingdom (4.5 percentage points), and Italy (3.2 percentage points). China, with a compound annual growth rate (CAGR) of 11.3 percent, and India, with a CAGR of 9.4 percent, both have very significant services sector growth. Russia (5.5%) and Brazil (4.0%) are in third and fourth place, respectively. While India’s service sector growth rate of 10.1 percent in 2009 was higher than China’s 9.6 percent, it has slowed to 7.7 percent in 2010, while China’s has remained constant. All of this emphasises India’s reliance on the services sector. Despite India’s higher percentage of services in GDP and China’s manufacturing dominance over services, the hard reality remains that China is still ahead of India regarding the absolute value of services GDP and service growth in 2010.

International Services Trade:

Global service trade has primarily followed the trend in merchandise commerce and, as a result, international demand. Except for 2001 and 2009—periods of global slowdown and economic crisis—world service exports have exhibited a constant rise in the 2000s decade, with a robust average annual growth of roughly 9.5 percent. After increasing by 13% in 2008 (according to WTO data), global service exports declined drastically in 2009, with negative growth of 12%, only to rebound in 2010.

The economy grew by 9% in 2010. The value of services exports in 2010 was $3,695 billion, somewhat lower than the pre-crisis peak of $3,842 billion in 2008. While developed countries dominate global service trade, emerging economies such as China and India increasingly play a role. India is the world’s most dynamic service exporter, ranking eighth in both exports and imports of services in 2010.

In the Services Sector, Foreign Direct Investment (FDI):

Overall, FDI flows were slowed by the global economic and financial crisis. FDI in services, which accounted for most of the drop in FDI flows due to the recession, continued to fall in 2010. However, foreign direct investment (FDI) declined in all major service industries (business services, finance, transportation and communications, and utilities) at varying rates. Overall, FDI projects in the services sector decreased from US$ 392 billion in 2009 to US$ 338 billion in 2010, decreasing their share of sectoral FDI from 33% to 30%. As a result of the economic recession, multinational firms that outsource a more significant part of their business support functions to external providers shrunk their operations by 8% compared to pre-crisis levels. In 2010, transportation and telecommunications services suffered similarly, as the industry’s restructuring was nearly complete following a cycle of big mergers and acquisitions before to the crisis, notably in developed countries. The financial sector saw the steepest drop in FDI, projected to continue in the medium term. Over the last decade, its expansion has been critical in integrating emerging economies into the global financial system, resulting in significant efficiency and stability gains for host nations’ financial systems. Utilities were also severely impacted by the crisis, as decreasing demand and compounded losses caused some investors to reduce their investments or even divest.

India’s Services Sector and Performances of Some Major Services:

Different indicators like share in national and state GDP, FDI, employment, and exports indicate the importance of the services sector for the Indian economy.

According to Advance Estimates, the share of services in India’s GDP at factor cost (at current prices) climbed from 33.5 percent in 1950-1 to 55.1 percent in 2010-11 and 56.3 percent in 2011-12. (AE). The service sector’s share rises to 63.3 percent in 2010-11 and 64.4 percent in 2011-12 when construction is included. Among the numerous subsectors of services, trade, hotels, and restaurants contribute the most to GDP (16.9%), followed by financing, insurance, real estate, and business services (16.4%). Community, social, and personal services are in third place with a 14.3 percent share.

Different Service Sectors in India:

India’s Information Technology Sector:

In its most basic form, information technology refers to the digital processing, storage, and exchange of all data types. As a result, IT has the potential to be utilised in any industry. Even in the United States, which has been the leader and largest adoption of IT, the genuine impact of IT on growth and productivity remains a point of contention. There is no doubt that the IT sector has been dynamic in many established countries, and India has stood out as a developing country where IT has risen substantially in software exports, despite the country’s low level of income and development. The situation of so-called IT-enabled services, a broad category encompassing various types of data processing and voice interactions that employ specific IT infrastructure as inputs but do not always include the generation of IT outputs, illustrates IT’s larger impact. Such services are often included in India’s IT sector statistics.

Despite the sector’s double-digit growth before 2008, the share of banking and insurance services in India’s GDP has remained at 5.5 and 6.5 percent during the last few years. Even the impact of the economic slump was mitigated thanks to the industry’s strong and conservative adherence to prudential standards under Basel II, which allowed it to meet its social sector commitments. The parts that follow outline the regulatory framework for India’s financial sector.

Since the early 1990s, India’s financial sector reforms have resulted in a stable banking system, with existing financial institutions operating with operational freedom and functional autonomy as the financial system was aligned with the globalisation of financial services. India’s excellent regulatory system for its financial industry has tremendously aided its ability to weather the current financial crisis.

The Government of India and the Reserve Bank of India announced the ‘Roadmap for Foreign Bank Presence in India’ in February 2005, laying out a two-track and gradualist approach to strengthen the efficiency and stability of India’s banking industry. The domestic financial system, both private and public, was consolidated on one track, and the presence of international banks was gradually increased and synchronised on the other. The roadmap was divided into two phases, the first from March 2005 to March 2009, and the second began in April 2009 after assessing the first phase’s experience.

Foreign banks were allowed to hold a total of 74 percent foreign stock in Indian private banks under Phase I of the road map, with an aggregate cap of 20 percent for Indian public sector banks. On the other hand, individual foreign banks are limited to retaining less than 5% of a bank’s shares until the bank is recognised for restructuring. Permission for eligible foreign banks to acquire shareholdings in Indian private sector banks will be limited during this phase to banks recognised by the RBI for restructuring. If the RBI is convinced that the foreign bank’s investment will be in the long-term best interests of all stakeholders in the investee bank, it may approve the acquisition. If a foreign bank acquires with a presence in India, the ‘one form of presence’ idea shall be applied for a maximum of six months.

Foreign banks will be allowed to establish a presence in the first phase by establishing a wholly-owned banking subsidiary (WOS) or converting existing branches into a WOS. RBI has also published specific guidelines to help with this. The rules address, among other things, the applicant’s foreign banks’ qualifying criteria, such as ownership structure, financial soundness, supervisory rating, and international ranking.

Notably, FDI up to 100% in non-banking financing firms (NBFCs) is automatically permitted, subject to minimum capitalization requirements. Portfolio management services, stock broking, credit rating agencies, home finance, and rural credit, among other industries, have been opened for FDI in NBFCs in India. In India’s insurance sector, foreign equity of up to 26% is permitted.

India has agreed to give foreign banks 12 new bank branch licences per year, subject to a minimum beginning capital requirement, as part of a WTO commitment. The award of a licence to operate an ATM is not included in the WTO commitment of 12 foreign bank branches. The Branch authorisation policy of September 2005 governs the grant of ATM. There are more than 280 international bank branches in India and more than 800 foreign bank ATMs. The WOS will be treated equally to existing foreign bank branches in branch expansion, with the ability to go beyond the current WTO requirements of 12 branches per year and a preference for branch expansion in underbanked areas.

The roadmap’s second phase was supposed to start in April 2009. There are concerns about the financial strength of banks worldwide in light of the current global financial market turbulence. In addition, national and international regulatory and supervisory regulations are being reviewed. As a result, it is thought prudent to maintain the current policies and processes governing the presence of foreign banks in India for the time being. Once there is greater clarity regarding stability, recovery of the global financial system, and a shared understanding of the regulatory and supervisory architecture worldwide, the proposed review will be undertaken following due engagement with stakeholders.

Reforms have resulted in a significant improvement in the performance of public sector banks. Adopting best international practises and norms, refinements in supervisory practises, tightening of risk weights/provisioning norms in sectors with high credit growth, market discipline brought about by stock exchange listing, and interest rate deregulation all contribute to this improved performance. Simultaneously, the entrance of new-generation private sector banks has increased competitiveness. Despite the progress made since the early 1990s, the Reserve Bank of India has said publicly that domestic financial markets must continue to develop, particularly to support India’s fast economic growth.

While India has liberalised numerous financial services, it has always taken a cautious approach because its capital account is not entirely open. India is a signatory to the Annex on Financial Services but not the Financial Services Understanding.

Telecom Sector in India:

Telecom services have long been considered crucial for a country’s socioeconomic development. It is one of the most critical support services for the quick growth and modernization of numerous economic sectors. The Indian telecommunications sector has undergone a considerable transformation due to significant policy reforms, which began with the introduction of NTP 1994 and was then re-emphasized and carried on under NTP 1999. The Indian telecom business has seen a dramatic transition in the previous decade owing to different regulatory measures. It has grown amazing recently and is positioned to do so again soon.

With 621 million connections (as of March 2010), India’s telecommunications network is the world’s third largest. In recent years, the sector has grown at a rate of 45 percent. This quick growth is achievable because to the government’s proactive and constructive policies, as well as contributions from the public and private sectors. The telecom sector’s rapid growth has been aided by the government’s liberal policies, which give open market access for telecom equipment and a fair regulatory framework for providing telecom services to Indian consumers at reasonable pricing. Currently, all telecommunications services are available to private involvement. For the growth of the telecom sector, the government has made the following major efforts.

Foreign Direct Investment (FDI) in the Telecom Industry:

Composite FDI permissible in Basic, Cellular Mobile, Paging and Value Added Services, and Global Mobile Personal Communications via Satellite is 74 percent (49 percent under automated route) subject to the Department of Telecommunications issue of the licence subject to security and licence restrictions. (paragraphs 5.38.1 to 5.38.4 of the DIPP’s consolidated FDI Policy Circular 1/2010)

The following items are also eligible for up to 74 percent FDI (49 percent under the automatic route): –

Service of Radio Paging
ISPs (Internet Service Providers)

Foreign direct investment (FDI) of up to 100 percent is permitted in the following telecom services: –

Providers of dark fibre (IP Category I) infrastructure;
Email, as well as
Message on Hold

If these corporations were listed in other areas of the world, they would have to divest 26% of their shares in favour of the Indian people in 5 years if they were listed in India. Under the automated approach, 100 percent FDI is allowed in the telecom manufacturing sector.

The government has changed the mechanism of calculating direct and indirect foreign investment in sectors with caps (para 4.1 of the DIPP’s revised FDI Policy Circular 1/2010) and released rules on downstream investment by Indian companies. (paragraph 4.6 of DIPP’s consolidated FDI Policy Circular 1/2010) The transfer of ownership or control of Indian enterprises in sectors with caps from resident Indian nationals to non-resident entities has been outlined in the guidelines.

Insurance and Banking:

The Government of India and the Reserve Bank of India announced the ‘Roadmap for Foreign Bank Presence in India’ in February 2005, laying out a two-track and gradualist approach to strengthen the efficiency and stability of India’s banking industry. The domestic financial system, both private and public, was consolidated on one track, and the presence of international banks was gradually increased and synchronised on the other. The roadmap was divided into two phases, the first of which lasted from March 2005 to March 2009, and the second began in April 2009 after assessing the first phase’s experience.

Foreign banks were allowed to hold a total of 74 percent foreign stock in Indian private banks under Phase I of the road map, with an aggregate cap of 20 percent for Indian public sector banks. On the other hand, individual foreign banks are limited to retaining less than 5% of a bank’s shares until the bank is recognised for restructuring. Permission for eligible foreign banks to acquire shareholdings in Indian private sector banks will be limited during this phase to banks recognised by the RBI for restructuring. If the RBI is convinced that the foreign bank’s investment will be in the long-term best interests of all stakeholders in the investee bank, it may approve the acquisition. If a foreign bank acquires a presence in India, the ‘one form of presence’ idea shall be applied for six months.

Foreign banks will be allowed to establish presence in the first phase by establishing a wholly owned banking subsidiary (WOS) or converting existing branches into a WOS. RBI has also published specific guidelines to help with this. The rules address, among other things, the applicant’s foreign banks’ qualifying criteria, such as ownership structure, financial soundness, supervisory rating, and international ranking.

Education Sector:

The quality of education in a country has a direct impact on its competitiveness and economic growth. In economic globalisation, internationalising education services is critical to developing human capital.

Both the State and the Central Governments have jurisdiction over education in India, according to the Indian Constitution. The All India Council for Technical Education (AICTE) Act and the University Grants Commission (UGC) Act, on the other hand, govern the technical and higher education sectors. Even though there is currently no legislative framework in place in India that allows foreign tertiary education providers to provide courses in India (apart from technical education), new legislation on foreign higher and technical education institutions is being considered. Education is classified as non-commercial under current legal interpretations of existing constitutional provisions. Foreign investment in higher education and technical training is permitted only on a franchisee and affiliate basis. The UGC and the AICTE aim to control international educational institutions’ entry and operation in India. AICTE certification is required for technical institutions.

On a franchisee and affiliate basis, professional and vocational courses have attracted numerous foreign education service providers, particularly in speciality fields such as business and hotel management, engineering, medical, fashion design, and so on.

The Ministry of Human Resources Development of the Indian government has actively promoted international students to come to India to pursue higher education.

Because school curricula emphasize nation-building, the primary and secondary education sectors do not have such open regimes. Even if approved, international schools can automatically receive 100% foreign direct investment as long as specific domestic regulations and norms are obeyed.

A potential bilateral FTA would be able to:

facilitating access for academics working on collaborative projects for a short or long period;
Look on measures to make it easier for both countries’ concerned organisations to recognise qualifications;
make it easier for education service providers to operate in each other’s markets, especially in vocational education; and
facilitating greater transparency in education service provider clearance and certification processes

Services of a Professional Nature:

Individual and firm-based professional services are included in this category. Legal, accounting, engineering, architecture, and medical services are among them. All four GATS-recognized modalities of provision are compatible with this collection of services.

Expanding trade in professional services creates the largest forward and backward linkages in deepening commercial links between countries. It’s also one of the quickest ways to spread knowledge, skills, and technology across national lines.

The professional services trade necessitates objective measurement of the professional’s ability to deliver the necessary service. Mutual recognition of qualifications is used to accomplish this. Professionals may also be required to register with local professional groups or guilds to be permitted to perform the relevant service in the jurisdiction.

Even though laws regulate the profession, these guilds or organisations are primarily self-governed, with the government playing only a minor role. Governments, on the other hand, can decide what conditions, if any, foreign experts must meet to enter the host country and how much service they can provide.

Engineering Services:

India has the most significant pool of technically qualified and trained professionals who can operate in the world market for engineering and integrated engineering services. With the expansion of the manufacturing and service sectors and the ageing demographic profile of most industrialised countries, demand for Indian engineers is expected to skyrocket in the coming years.

Furthermore, given the extensive expansion of the telecommunications sector and the increasing digitization of many businesses, exporting engineering services via mode 1 has great promise. According to NASSCOM, India’s portion of the USD 10-15 billion in off-shored engineering services is projected to be 12%.

To make it easier for Indian engineers to practise their professions and pursue careers in other countries, the All India Council for Technical Education (AICTE) has become a provisional member of the Washington Accord. This ten-nation apex global organisation sets standards for engineering education. This assures that Indian undergraduate engineering degrees are treated equally in all member nations and are acknowledged as high-quality international engineering degrees.

Construction Sector:

India has the single greatest pool of technically qualified and trained individuals with the capability to engage in the worldwide market for engineering and integrated engineering services. With the expansion of the manufacturing and service sectors and the ageing demographic profile of most industrialised countries, demand for Indian engineers is expected to skyrocket in the coming years.

To make it easier for Indian engineers to practise their professions and pursue careers in other countries, the All India Council for Technical Education has become a provisional member of the Washington Accord. This ten-nation apex worldwide organisation sets criteria for engineering education. This assures that Indian undergraduate engineering degrees are treated equally in all member nations and are acknowledged as high-quality international engineering degrees.

Health Services:

Because of the quality of its services and the global brand equity of Indian healthcare experts, India can tap the high end of the USD 3 trillion global healthcare industry. The Indian government prioritises the healthcare industry, focusing on indigenous research and development and human capital development.

Global pharmaceutical and biotechnology businesses are expected to collaborate with Indian counterparts due to Indian regulations and procedures relating to intellectual property recognition and foreign investments.

Healthcare in India is a $35 billion sector predicted to grow to $75 billion by 2012 and $150 billion by 2017. India has established a reputation for providing high-quality healthcare at lower costs than the United States, the United Kingdom, and the rest of Europe. Medical tourism is growing at a rapid pace, thanks to a large pool of highly qualified doctors, nurses, paramedics, and technicians, as well as growing innovations, expansions, low treatment costs, world-class technology, and five-star services not only in the western system of medicine but also in indigenous systems such as Ayurveda, Yoga & Naturopathy, Unani, Siddha, and Homoeopathy, which provide holistic health care. India has a comparative advantage in exporting health services via mode 4 because it has a big pool of well-trained and highly skilled English-speaking healthcare workers accessible at highly competitive costs. With the rapid advancement of information, communications, and technology, it is also worth noting that a considerable portion of healthcare services is traded worldwide via mode 1.

Turkey and India could collaborate on collaborative training programmes for human resource development and knowledge and experience sharing in the health business. Both countries may study the possibility of allowing mutual recognition agreements for degrees in the fields of doctors, nurses, and skilled health technicians to facilitate the migration of healthcare students. The FTA would also open up possibilities for collaboration in the healthcare sector.

In the past, public institutions played a significant role in the Indian healthcare industry in urban and rural areas. However, public healthcare has significantly declined for the past two or three decades due to a lack of medical and paramedical staff, diagnostic services, and medicines. As a result, despite increased expenditures in the private sector, there has been a significant decrease in the percentage of inpatient treatment in government hospitals and a comparable increase in the percentage of cases treated in private hospitals.

The Group believes that the public’s health and safety must impose minimum standards on clinical establishments in both the private and public sectors by establishing and strictly enforcing them. After the Clinical Establishments (Registration and Regulation) Bill, 2007, was submitted to Parliament, it is critical to guarantee that it becomes law as soon as possible and applies to all states. The proposed National Committee would define acceptable standards for all clinical institutions in the following stage.

Tourism Sector:

Tourism is predicted to produce 5.83 percent of GDP and 8.27 percent of employment in the country; 51.1 million jobs were generated by tourism in 2006-07. According to the Ministry of Tourism, foreign tourist arrivals (business, leisure, and Indians with foreign passports) climbed to 4.42 million in 2006, while domestic tourists grew to 462 million. On the other hand, India’s Revealed Comparative Advantage (RCA) in travel services has been declining.

By 2010, the country’s tourist accommodation shortage is expected to exceed 1,50,000 rooms, with more than 100,000 in the budget category. The main cause of the hotel shortage is a scarcity of land appropriate for developing hotels, particularly low-cost hotels. Land prices have also risen to absurdly high levels in numerous places.

Inbound tourism to India is currently booming in various countries, including Turkey. The Incredible India campaign has been running for four years and is now yielding results. Several international events in India, notably the Commonwealth Games in October 2010, are expected to increase tourist inflow.

Private participation and foreign investment in numerous non-core fields and activities, including hospitality (tourism and catering), are permitted under India’s GATS agreements. At the same time, restrictions on travel agencies, hotels, and tourist guide services persist.

Air Services:

Despite high fuel prices, India’s domestic aviation sector has quickly increased. India has about 300 airports, with at least ten serving frequent international flights. Airport development and pilot training are two possible areas for future bilateral collaboration.

For greenfield airports, FDI with 100 percent foreign equity participation is permitted with automatic approval. The government must first grant authorisation for FDI above 74% in existing airports. The liberalisation policy known as “open skies” focuses on tourism. New private investors can handle ground operations at airports supervised by the Airports Authority of India (AAI). Limited competition has been made necessary at private airports.

Airport management, CNS (Communication, Navigation, and Surveillance) maintenance, air traffic control, and fire services protocols are taught at AAI’s well-established training colleges in Delhi, Allahabad, and Kolkata. The training provided by AAI colleges would benefit both countries’ aviation personnel.

Challenges and Outlook:

India’s services sector was resilient even during the tumultuous years of the global economic crisis, maintaining a steady growth of around 10 percent. This happened even when overall GDP growth dipped sharply to 6.7 percent in 2008-09.

Although it includes some of the most important sectors of the Indian economy, the Indian Service Sector Enterprise is a little-spoken category. Travel and hospitality, beauty and wellness, healthcare, finance, business, real estate, transportation and logistics, and technology and communication service providers are among them, with the majority falling into the SME/MSME and Start-up category. The cheap availability of current technological enablers has further boosted the expansion of service-oriented firms.

The services industry attracts a significant amount of FDI. It employs 31.45% of India’s employed population (as of 2018), is expected to contribute 55.39 percent of India’s Gross Value Added (GVA) in FY20 at current prices. However, the recent pandemic and ensuing lockdown have seriously affected SME/ MSME and start-up businesses, particularly service-oriented organisations. While FM Nirmala Sitharaman’s new “Atmanirbhar Bharat Abhiyaan” has promised a lucrative package of INR 20 lakh crore, the initiative has also re-defined MSME segment parameters and merged the manufacturing and service sectors into terms based on turnover, namely “Micro Units” for less than INR 5 crore in turnover, “Small Units” for less than INR 50 crore in turnover, and “Medium Units

This merging of businesses and re-assignment of businesses based on turnovers has made it even more difficult for service sector businesses to benefit from the economic bailout package, as the sector’s unique challenges and needs continue to go unnoticed, if not lost, as they compete for attention on an unequal playing field. They were integrated into and lost within the pool of Medium, Small, and Micro Units re-assessment of business, based on turnover, at a time when the sector desperately needed special attention and specific solutions from the government. This must alter, particularly in light of the following significant differentiators of service sector businesses:

It’s a Perception-Based Business: Unlike manufacturing and trade, where concrete ‘products’ are at the heart of the business, service sector businesses generally focus on the subjective, intangible factors that generate client happiness. As a result, it is a very perception- and image-driven company, where good client involvement is critical to existence. The COVID-19 epidemic and lockdown have rendered the customer experience interface ineffective, forcing it into the digital realm. While the industrial and trade industries can now continue to operate with surplus inventories, the impact on service sector businesses is immediate! Furthermore, with the COVID worry, it is a sector that may take longer than projected to recover, given that many services do not necessarily fit within the basics list!

People-Centric and More Susceptible to a Crisis: As a people-centric industry, service businesses are far more vulnerable to a crisis, with the lockout preventing employee movement. Furthermore, the health problem directly impacts service standards, consumer traffic, and thus financial input. This impacts the business’s long-term viability and strength, as this industry, which normally has a stable workforce, tends to lose a lot of good human resources during a crisis.

The aforementioned issues are unique hurdles that place service sector businesses on a different survival level. The necessity of the hour is for a well-thought-out strategy that pays special attention to financial support and perks specifically targeted at this group! These are some of them:

Faster loan approval: It is a common fallacy that service sector businesses do not offer the same investment incentives as manufacturing and trade businesses. This is an incorrect notion, especially in today’s industry, when staying relevant requires a substantial reliance on technology, upskilling employees, regular training, and upgrading systems and processes. Furthermore, unlike the industrial industry, which requires huge investments in property, machinery, and set-up, the service sector lacks physical assets, which makes it difficult for many companies to obtain loans. Creditors, namely banks and financial organisations, are unwilling to grant loans due to the lack of a clear return on investment (ROI) that manufacturing or trading may deliver fast. Even recently, the service sector has been overlooked and given insufficient attention in the government’s initiatives and packages. As a result, while industrial and trade sector businesses tend to benefit from faster and easier loans, service sector businesses also need access to platforms and financial institutions that can expedite loan approvals.

Tax Heavens: The service industry has long been one of the most taxed, with several direct and indirect taxes, import levies, and luxury taxes, among other things. As a result, it is one of India’s most significant contributors to GDP. While the re-alignment of SME/MSME enterprises based on turnovers has theoretically made the service sector a member of the bigger pool, there is no mention of tax breaks for them. Currently, service sector businesses are subject to the highest GST bracket, which ranges from 18 percent to 20 percent. On the other hand, the manufacturing sector benefits from GST rates ranging from 1% to 15%, as well as tax holidays in specific sectors such as agro-tech and specialised, necessary manufacturing. The service sector has received no such considerations, even though it is equally if not more, afflicted by the crisis than the manufacturing industry.

Because the Service Sector Enterprises contribute so much to India’s GDP, are a significant source of FDI, and are one of the country’s most important job creators, they demand not just a separate mention and definition but also a different set of relief measures to help them survive.

The service sector in India faces several hurdles, as mentioned below:

There is a need for adequate infrastructure not only in rural areas but also in urban areas. Our megacities face constraints in power cuts, bumpy roads, traffic congestion and pollution. This has a telling effect on the quality of services provided.
While the share of the service sector was 56.9% in 2012, the share in employment was only 28%.
Tourism is a lucrative service given India’s natural beauty and other pleasing factors, but bureaucratic delays and harassment /cheating by touts and agents are impeding factors.
Good mannerisms and etiquette are the hallmarks of service providers, but many of our banks, hotels, restaurants, and hospitals are seriously lagging on this front. The problem is even more adverse for public-sector institutions.
Too many administrative procedures are involved, resulting in various visible and invisible barriers, such as visa and sector-specific restrictions.
For the service sector to grow and impact the growth process, it has to be accompanied by simultaneous developments of both the primary and secondary sectors.
Indian service providers face stiff competition, particularly Business Process Outsourcing and IT providers. They must improve their quality to compete with the best in the world.

Conclusion:

As we have discussed, the service sector is the fastest-growing sector in India, contributing significantly to the GDP and is projected to rise even further. However, the increase in employment is not in keeping with the sector’s share in the GDP and even among those employed, the big question is how many of these work in the organized service sector? India has several problems that are socioeconomic. Poverty and accelerated population growth are significant constraints, thereby depriving several people of access to essential health and education. Several obstacles hamper the progress of this sector and its contribution to inclusive growth. Bureaucratic inertia, multiple government bodies having their own rules and regulations, rampant corruption and the absence of a uniform concrete policy hurt the system. The slow reform process, restrictions on foreign direct investment, poor infrastructural facilities, absence of uniformity in the quality and standard of education, despite having renowned Brain Power, and the existence of unemployable educated youth are all limiting factors. However, India has vast potential to promote the service economy. This is attributed to factors such as the emergence of a new middle class with increasing aspirations, the opening of the economy leading to the availability of a wide range of goods and services, growing retail and improving domestic and international markets for Information Technology.

Curriculum

Service Marketing and Management