Service sector as an engine for inclusive growth in India



  • Services are being more urbanized than manufacturing sector raises immense possibilities of their being a growth driver that can promote inclusive growth in India.


  • Service sector is the single largest and fastest growing sector in India contributing more to output and employment.
  • In India, the service sector has developed manifolds since 1991 when compared to primary and secondary sectors which are downcast in the economy.

Service sector in India:

  • India’s service sector is accounting for more than 55% to gross domestic product (GDP) which is gradually increasing 10 % growth per annum and contributing around 25% to total employment and having major allocation in FDI inflows and 33% of exports total with an expected growth of 27.4 % in 2010-2011.
  • The services sector growth was significantly faster than the 6.6 per cent for the combined agriculture and industry sectors annual output growth during the same period.
  • India with a services sector share of 52 per cent in national GDP in 2009 and 55.2 per cent in 2009-10 compares well even with the developed countries in the top 12 countries with the highest overall GDP.
  • The findings reveals that the performance of service sector such as communication, transportation and storage was high with an growth of 15 % in 2009-10 when compared to other sectors and hotels and restaurants where found to be negative growth rate in the economy.
  • The findings of World Trade Organisation (WTO) reveals that India has maximum share in net exporter of services over a period of 2006-07 to 2008-09 with an increase per cent of GDP from 29.5 to 54 Billion Dollar when compared to other sectors in the economy
  • The reasons behind the development of the services sector are increasing urbanisation, privatisation, more demand for intermediate and final consumer services, availability of quality services, etc.
  • Especially in the post-liberalisation period, this sector accounts for around 60 per cent share in the GDP, growing by 10 per cent annually, contributing to 28 per cent of total employment, a high share in FDI inflows and over one-third of total exports in recent years.

Classification of service sector:

The classification of the services sector consists of four major categories given by Central Statistical Organization (CSO):

  1. Among 4 sectors, in first group, over the years hotels and restaurants were positive in the year 2005-2006 and gradually they decline showing negative growth with an -3.1 % and however, for trade it was positive growth.
  2. Social, Community and personnel services

Jurisdiction of service sector:

  1. Union List : Telecommunications, postal, broadcasting, financial services (including insurance and banking), national highways, mining services
  2. State List :Healthcare and related services, real estate services, retail, services incidental to agriculture, hunting, and forestry
  3. Concurrent List : Professional services, education, printing and publishing, electricity

Service sector components and their contributions:

  • Within services, two industries, hotels and restaurants and land transport, contribute about half of the plant count.
  • A few other services such as education and health services, financial intermediation, and other business services also feature prominently.
  • Within services, it is not surprising that computers and related activities record the highest usage of computers and internet, with the usage of new technologies in organized services always being considerably higher than that in unorganized services.
  • Other organized services with high use of technology include financial intermediation, post and telecommunications, other business activities and supporting/auxiliary transport activities, and travel agencies.
  • Education and health services also record a high usage of computers, but show lower internet usage.
  • Services establishments in richer states adopt technology somewhat more than those in poor ones, while those in urban areas have greater usage ratios than their rural counterparts.

Service sector: International comparison:

  • India with a services sector share of 52 per cent in national GDP in 2009 and 55.2 per cent in 2009-10 compares well even with the developed countries in the top 12 countries with the highest overall GDP.
  • China’s contribution towards national GDP at 39.2 per cent is relatively low, though it is ahead of India in absolute terms (as its overall GDP is more than three times that of India).

State wise performance in service sector:

  • Six states- West Bengal, Uttar Pradesh, Tamil Nadu, Andhra Pradesh, Gujarat, and Maharashtra account for 60% of all enterprise plant counts, in both manufacturing and services.
  • While Union territories such as Delhi, Chandigarh, and Puducherry are the most urbanized.
  • States such as Gujarat, Haryana and Tamil Nadu are experiencing increased urbanization in both manufacturing and services, whereas large states such as Madhya Pradesh have experienced above-average urbanization in services but below-average urbanization in manufacturing.
  • With the exception of Gujarat, urbanization rates are much higher in services vis-à-vis manufacturing.

Service sector Vs manufacturing sector:

  • Relative to manufacturing, economic activity in services tends to be spread around larger distance bands.
  • Distance from the top 3 cities versus top 7 cities has a different relationship for the two sectors. Activity for organized manufacturing tends to decline faster and in a more regular pattern from the three largest cities compared to services, where activity is relatively more spread out.
  • Both sectors have moved into closer proximity to the big three cities. The pattern, however, is especially prominent for services compared to manufacturing. Thus, even though improvements in transport infrastructure are helping activate intermediate sized cities, the importance of the largest cities is undeniable and important.

Advantages of services sector:

Services offer several advantages over manufacturing.

  • They create many more jobs, and contribute more to output and productivity growth.
  • They also employ more women, and are less likely to despoil the environment.
  • Services are also less vulnerable to global trade protectionism.
  • Although services are more urbanized than manufacturing, they are not tied to big cities. This raises the possibility that services could be the new growth driver that can promote inclusive spatial development, and create more jobs in secondary cities.
  • Services have the potential to better spread spatial gains, if complemented by policies such as investment in digital literacy and better regulation.
  • Recent information and communication technology innovations have upturned services.
  • Services account for many more of the larger establishments in India compared to manufacturing.
  • While large manufacturing firms are moving away from the urban core to the rural periphery, the same trend is not evident for organised services.

Service sector and inclusive growth:

Service sectors act as an engine for inclusive growth in India due to the following reasons:

  • The service sector will be able to contribute to inclusive growth by enhancing investment, creating employment and human capital, and developing infrastructure.
  • It is important for a developing country like India with a large, young population to generate quality employment and to move up the value chain.
  • The service sector is the engine of growth of the Indian economy.
  • The services sector in India is one of the major contributors to both national income and employment.
  • India needs private investments in key infrastructure services such as transport, energy, and telecommunications. It can attract FDI and private investment only with a stable, transparent, non-discriminatory, competitive policy environment.
  • This sector will enhance the productivity and efficiency and will lead to inclusive growth.

Challenges in the Service sectors:

The opportunities in this fast-growing, employment-oriented, FDI attracting sector, with vast export-potential are striking.  However, the challenges are also many:

  • The major challenge in service sector was to retain the competitiveness and preserve the traditional service sectors such as shipping and tourism.
  • Given the myriad activities in services, supporting its growth will require careful and differentiated strategies.
  • One of the challenges in this area is to retain India’s competitiveness in those sectors where it has already made a mark such as IT & ITeS and Telecommunications.
  • The challenge lies in making inroads into some traditional areas such as tourism and shipping where other countries have already established them, but where the potential for India is nevertheless very high.
  • Spreading of domestic trade sectors such as education, banking and communication which also help in converting unemployment to employment ratios of population.
  • Regulatory improvements will also be important as many domestic regulations and market access barriers could come in the way of fully tapping this growth accelerating sector.
  • There are diverse sectors within services, the issues and policies cannot be separated into watertight compartments.
  • It is one of the challenges before India’s services sector to broad base exports of services.

Problems related to service sector in India:

  • The output of many service sectors is hard to measure (public education, for example).
  • Growth pattern in the service sector has not been uniform across all services in India.
  • Some services have grown fast in terms of their share in GDP and also in terms of their share in trade and FDI (e.g., software and telecommunications services). But there are some services, which have grown fast but have not been able to improve their share in international transactions (e.g., health and education) while there are some services that have in fact witnessed a negative growth and also a low share in international transactions (e.g., legal services).
  • Though there exists an overall industrial policy and agricultural policy in India, there is no integrated service policy.


  • Creating more competitive services markets by removing a wide range of internal and external policy distortions is vital for improving service sector productivity.
  • complementary investments in physical infrastructure and human capital will also be necessary to achieve a strong service sector

Government initiatives:

  • In the last two years, the Ministry of Tourism has undertaken several initiatives to provide a further boost to the sector such as launch of new schemes like Swadesh Darshan and PRASAD(The National Mission for Pilgrimage Rejuvenation and Spiritual Augmentation Drive ) scheme,
  • The International Tourism Mart is organized every year in North-Eastern States with the objective to highlight the tourism potential in the region
  • The Make in India programme has identified twenty-five thrust areas from both services sectors and manufacturing sectors to provide major push to both the sectors.
  • The policy initiatives like Start Up India, Stand Up India, Digital India ,Skill India, and fillips to manufacturing and infrastructure through fiscal incentives and concrete measures for transport, power, electricity, smart cities and efforts like improving the ease of doing business through a number of facilitatory  initiatives are also likely to boost service sector in India.


  • The government should adopt appropriate strategies for consolidating, strengthening and further growth of the service sector. Service sector specific policies are necessary to achieve the goals of poverty reduction, employment generation, inclusive growth and balanced growth of the economy
  • India can make forays into globally traded services such as accountancy, legal services, healthcare and education services. Regulatory improvements will also be important as many domestic regulations and market access barriers could come in the way of fully tapping this growth accelerating sector. Resolving the issues in service sector will be advantageous at both overall and at state level, while providing more and better jobs to help achieve more inclusive and balanced growth.
Print Friendly and PDF