On the Service Sector: Regaining The Momentum

3 months ago 11

In the past few decades, the contribution of India's services sector to its GDP has grown significantly, from between 25 and 30 per cent in 1950-51 to around 55 per cent today. According to projections from the International Labour Organization, the services sector became India's largest employer in 2019. This also shows the skew of the economy-India missed out on manufacturing-led growth, with services emerging as the main job creator.

This sector encompasses healthcare, IT (information technology), tourism, hospitality and retail, among others. The pandemic was a body blow to several of these sub sectors, such as travel and tourism and on-ground retail, but for others like healthcare and IT, it proved a moment for business models to pivot. From medical consultations going online to consultants quickly switching to work-from-home models while continuing to do business with international clients, companies in these areas quickly steered themselves out of the crisis. However, industry players say that this success has come despite the government, not because of it. The IT boom in the late '90s and early 2000s, which put India on the map as a global outsourcing destination, happened when the government was still devising regulations for the sector. Similarly, e-commerce, fin-tech and digital education technology have boomed before regulations could catch up.

There has also been very little in terms of a policy push to develop the services sector as a whole. While government programmes like Startup India-focused on giving start-ups easier access to funding-exist, their impact has been tepid. The Aatmanirbhar Bharat package announced during the pandemic also largely ignored the sector, leaving hotels and travel agencies struggling to stay afloat. As a consequence, the sector contracted for most of 2020. And while the Economic Survey of 2019-20 devotes an entire chapter to this sector, with its survey expressing optimism, it offered no solutions to strengthen it or policy changes that could improve matters.

Graphic & Illustration by Tanmoy Chakraborty

Going forward, the expectation is that India's healthcare industry will continue to shift online-the telemedicine market is expected to grow at a compounded annual growth rate of 31 per cent from 2020 to 2025. Other developments that could play a positive role are digital skill development programmes-for instance, NASSCOM FutureSkills and Microsoft have collaborated to launch a nationwide AI skilling initiative to train one million students in AI technologies by 2021. The services sector has also emerged as the largest recipient of FDI in the country, with an inflow of $83.14 billion in the April-June 2020 period.

In the next five years, the government is hoping to increase the digital economy's economic share to 20 per cent of GDP. It says it is working on building cloud-based infrastructure that can be used by start-ups, and a national broadband mission has been announced to provide broadband internet access to all villages by 2022.

The growth of the services sector will be governed by both domestic and global factors. Estimates suggest that the healthcare industry could reach $132 billion by 2023, with India's digital economy estimated to reach $1 trillion by 2025. By the end of 2023, the Indian IT and business services sectors are expected to reach $14.3 billion, with 8 per cent growth. Moving forward, improved ease of doing business, more transparency in tax assessments and legislation that does not stifle innovation will be key ways the government can fuel the services story in India.