Service Sector

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                                  When
                                  MANUFACTURING is
               service centric                         Madhulekha Nandy




                                         "The CII Snap Poll reveals
                                         robust services growth
                                         expectation during the current
                                         year and supports GDP growth
                                         expectation of eight per cent
                                         plus. Both investment and
                                         employment is expected to
                                         increase in the services sector
                                         despite pressure on profitability
                                         during the current year”.
                                         Director General, CII
                                         – Chandrajit Banerjee,
                                           Director General, CII.



140 PURCHASE   Anniversary 2011
                                                                   Services Sector


B    y all accounts India’s service sector has
     been a source of solace and joy to the
Indian economy and its people. Even during
                                                 4,000 Indian firms from 1993 to 2005 shows
                                                 that a key factor for the success of Indian
                                                 manufacturing may lie outside of
the worst days of the global meltdown this       manufacturing and in the services sector. It is
sector maintained its double-digit growth        happy augury that the service sector in India
while the rest of the economy slipped to a       today accounts for more than half of India's
6.8 per cent growth in 2008-09 from 9.3 per      GDP and this has been the fact for more than
cent in 2007-08. Not only have services          half a decade, indicating a game-changing
throbbed with dynamism with its                  phenomenon vis-à-vis the Indian economy.
employment-oriented, FDI attracting,                 This is largely because Information
export-potential qualities, they have ensured    Technology has been such a dominating
that Indian manufacturing could hold its         segment in this sector, driving the entire
head up even when times are trying.              economy, as it were. This is in sharp contrast
    The multifaceted sector has been in a        to the Chinese experience where economic
state of sustained buoyancy because when         growth has been driven by manufacturing in
one facet is down the other does well. Thus,     the main. Yet this manufacturing has been
as the Reserve Bank’s May 2011                   ably supported by a responsive service
                                                          sector. Across all states, the services
                                                          sector has been dominating the
                                                          country: the share of services in the
                                                          gross state domestic product (GSDP)
                                                          of different states and union
                                                          territories is higher with Delhi,
                                                          Chandigarh, Kerala, Maharashtra,
                                                          Bihar, Tamil Nadu and West Bengal
                                                          better than the national average.
                                                              To go by the latest figures in the
                                                          Economic Survey, the share of
                                                          services in India’s GDP at factor cost
                                                          (at current prices) increased rapidly:
                                                          from 30.5 per cent in 1950-51 to 55.2
                                                          per cent in 2009-10. If construction is
                                                          also included, then the share
                                                          increases to 63.4 per cent in 2009-
                                                          10. However the services basket
                                                          varies in different estimates and
                                                          figures are at variance but the Indian
                                                          growth story is around a services
                                                          revolution as opposed to the China
                                                          story that is manufacture driven.
                                                          There are, however, two significant
Macroeconomic and Monetary                       aspects of this growth in the Indian services
Developments in 2010-11 survey confirms,
the recent moderation in the service sector
                                                   In the Indian context, services cover:
performance has not affected the 11
                                                   Trade
finance, insurance, real estate and business
                                                   Hotels and restaurants
services' that continue to impress and make
                                                   Healthcare
for an overall positive outlook. Lead
indicators of the services sector such as
                                                   Railways
tourist arrivals and cell-phone connections        Other transport, logistics and storage
have recorded a robust growth as per data          Communication (post, telecom)
available so far for 2010-11, the RBI said.        Banking
                                                   Insurance
                                                   Dwellings, real estate
Game-changer                                       Business services
    Say Jens Matthias Arnold, Beata                Public administration; defence
Javorcik, Molly Lipscomb and Aaditya
                                                   Personal services
Mattoo in their article ‘Regulatory reform in
                                                   Community services
services sectors: The missing explanation
                                                   Consultancy
for the revival of Indian manufacturing?’
                                                   Legal services
that while conventional explanations for the
                                                   Auditing
post-1991 growth of India’s manufacturing
                                                   Research & Development
sector focus on trade liberalization and
                                                   Other services
industrial de-licensing, their examination of


                                                                                        Anniversary 2011   PURCHASE 141
                     Services Sector

                sector: the growth has been outstanding but           ? 94 per cent of the CEOs expected
                the rise in employment by this sector has          higher employment in the health care sector
                not. This suggests that the services space is         ? 88 per cent of the CEOs expected
                being supported by growing mechanization           higher employment in retail
                or automation; relatively higher capital-             ? 82 per cent of the CEOs expected
                intensity and, therefore, productivity.            higher employment in tourism
                                                                      The worry is around the fact that 86 per
                The IT factor                                      cent of the CEOs said profits would be under
                     Such sophistication is understandable         pressure because of (i) high interest rates, (ii)
                                                                             stiff domestic competition, (iii)
                                                                             increase in staff costs and (iv) stiff
                                                                             global competition.

                                                                             FDI in services
                                                                                 Whatever is the worry,
                                                                             optimism is induced by the
                                                                             continuing inflow of foreign direct
                                                                             investment into the services space
                                                                             and they have had an entirely
                                                                             salubrious impact on the entire
                                                                             manufacturing scene. There is no
                                                                             other sector where quality is more
                because the leader in the services space in        dependent on the state of such service
                India, IT, is spread across four key sectors: IT   inputs as finance, transport and
                services, IT enabled services (ITES),              telecommunications, the three areas that
                software, and e-business. The important            have benefited significantly in the post-
                thing is that there is a great deal of             reforms era; not the least because of the FDI
                confidence in the sector.                          factor. There is technology in services,
                    A CII snap poll shows sector-wise              world-class management over a broad-
                employment outlook for the current year            based ownership of services that are
                based on CEO response:                             competing for custom both at home and
                    ? 64 per cent of the CEOs expected             globally. Government owned phone
                higher employment in financial services            companies no longer dictate telephony
                    ? 66 per cent of the CEOs expected             quality; government owned hospitals no
                higher employment in IT, ITES and telecom          longer dictate quality of healthcare, at least
                                                                                                 for the top
                                                                                                 echelons and
  Performance in services growth in top 12 countries                                             even at the
                                                                                                 grassroots level
                                                                                                 consumers have
                                                                                                 choices; even
                                                                                                 with postal
                                                                                                 services.
                                                                                                 “Available
                                                                                                 evidence
                                                                                                 suggests that
                                                                                                 firms today have
                                                                                                 access to better,
                                                                                                 newer, more
                                                                                                 reliable, and
                                                                                                 more diverse
                                                                                                 business
                                                                                                 services. These
                                                                                                 improvements
                                                                                                 have enhanced
                                                                                                 firms’ ability to
                                                                                                 invest in new
                                                                                                 business
                                                                                                 opportunities
                                                                                                 and better
                                                                                                 production
                                                                                                 technology, to
                                                                                                 exploit


142 PURCHASE   Anniversary 2011
                                                                    Services Sector

economies of scale by concentrating                09, though it dipped to 46.1 per cent in 2009-
production in fewer locations, to efficiently      10 due to the global crisis. The dip was more
manage inventories, and to make                    due to fall in share of merchandize trade to
coordinated decisions with their the four          GDP to 35 per cent in 2009-10 compared to
sectors combined (services – financial and         41 per cent in 2008-09. The fall in the share
non-financial – suppliers and consumers”,          of services trade to GDP was less than two
says the VOX article .                             percentage points from 12.9 per cent to 11.2
    The services of the four sectors: financial    per cent.
and non financial software,
telecommunications, housing and real estate        The services impact
and construction are all attractive                    It would be important to understand the
propositions for the international investor        spheres of services growth to appreciate its
who have accounted for around 51 per cent          impact on manufacturing. The two fast-
of FDI in equity in this space between April       growing broad services categories are:
2000–December 2010. The financial and non-         financing, insurance, real estate and
financial services sector, which falls purely in   business services; and transport, storage
the services category, is the largest recipient    and communication. These are particularly
of FDI equity inflows with a 21 per cent           important for manufacturing for self-evident
share, according to the government. On the         reasons: no manufacturing can function
reverse side of this international interest is     without finance, insurance or business
the increasing export orientation of Indian        space. “Pro-competitive reforms in banking,
services. Balance of payments data between         telecommunications, insurance and
2004-05 and 2008-09 show that merchandise          transportation boosted the productivity of
and services exports grew by 22.2 and 25.3         manufacturing firms. The reforms benefited
per cent respectively. “Services growth            both foreign and locally-owned
slowed in 2009-10 as a result of the global        manufacturing firms but the effects on
recession but the decline was less                 foreign firms tended to be even stronger. A
pronounced than the slowdown in                    one-standard-deviation increase in the
merchandise export growth, and has                 aggregate index of services liberalization
recovered rapidly in the first half of 2010-11     resulted in a productivity increase of 11.7 per
with a growth of 27.4 per cent”, according to      cent for domestic firms and 13.2 per cent for
the Economic Survey (2010-11).                     foreign enterprises” .
    The survey also holds that the overall             Government figures, however, show that
‘openness of the economy reflected by total        the second category overtook the first in
trade including services as a percentage of        2009-10 with a 15 per cent growth: logistics,
GDP shows a remarkable increase from 29.2          warehousing and communications are the
per cent in 2000-01 to 53.9 per cent in 2008-      vitals on which modern manufacturing



        Selected indicators: Performance of India’s service sector




                                                                                       Anniversary 2011   PURCHASE 143
                      Services Sector

                 functions. The other important category,          and high-tech development zones in China,
                 trade, hotels and restaurants suffered            the majority of which are heavily subsidized
                 because of the global slump in 2008-09 to         by the government. In addition, the
                 recover somewhat in 2009-10. However,             government has established 15 national
                 community, social, and personal services,         software industrial parks to encourage more
                 saw a sudden jump in 2008-09 to overtake          R&D that will contribute to the growth of this
                 the growth of all other categories, reflecting    sector. These development zones provide
                 the high growth in public administration and      infrastructure and facilities for new
                 defence. This category has continued to           companies and hence reduce the overhead
                 grow rapidly in 2009-10, despite a slowdown       costs of these start- ups. The majority of the
                 in growth in public administration and            companies that develop in these zones
                 defence (with the commitments for pay             belong to the service industry. More than
                 arrears under the new revised scale for           half of the approximately 1,000 foreign start-
                 Government), according to the Economic            ups in Shanghai in 2002 were in the service
                 Survey.                                           sector. Perhaps the government’s most
                     “The two broad services categories,           important role comes through its support of
                 namely trade, hotels, transport and               national R&D centers in the several dozen
                 communication; and financing, insurance,          research institutes of the Chinese Academy
                 real estate and business services,                of Sciences. Many of the leading software
                 comprising many dynamic services have             industries have arisen as spin offs from CAS.
                 performed well with growth of 11 per cent         This is vastly different from India, where the
                 and 10.6 per cent, respectively in 2010-11        service sector has succeeded despite the
                 (AE). Only community, social and personal         limited interaction (‘intervention’ might be a
                 services have registered a low growth of 5.7      better word) of the government. In fact, this
                 per cent due to base effect of fiscal stimulus    can be taken as an important lesson drawn
                 in the previous two years, thus contributing      from the growth of the service sector in
                 to the slight deceleration in the growth of the   India; that government role of minimal
                 services sector. Construction sector grew at      intervention and/or reducing the complexity
                 a moderate eight per cent”. The                   of new business formation is especially
                                                                   important in knowledge industries”.

        “Since there are diverse sectors within services, the      Services in the future
        issues and policies cannot be separated into watertight         The Government of India’s Economic
        compartments. Addressing these challenges and issues       Survey believes that “given the myriad
        could further strengthen the services sector, which is     activities in services, supporting its growth
        the driving force for India to realize double-digit        will require careful and differentiated
        growth potential, both overall and at state level, while   strategies” because the country has to break
        providing more and better jobs to help achieve more        new ground while retaining the competitive
        inclusive and balanced growth” – Economic Survey           edge that it has in the IT, ITeS and the
        2010-11.                                                   telecommunications space. There is clearly
                                                                   far greater potential in such areas as
                 performance and outlook for the services          financial services, health care, education,
                 sector based on the limited firm-level data,      accountancy and other business services
                 though sketchy and based on estimates and         “where India has a large domestic market
                 forecasts also indicates a robust                 and has also shown recent signs of making a
                 performance in services activities in 2010- 11    dent in the international market”. More
                 and 2011-12, it says.                             importantly, the government admits that
                                                                   there is the bigger challenge around
                                                                   collecting better data and developing a
                 The China example                                 better co-ordinated strategy to pull together
                     More than anything else, China has            all the dispersed information. It is only when
                 realized that manufacturing growth is             the information base is reliable that the
                 predicated to service support and has taken       regulatory regime, based on the data that it
                 comprehensive steps to ensure that the            shows can actually address the issues of
                 service support to manufacture remains            concern.
                 strong and dependable on a sustainable                 The Vox analysis says that the services
                 basis. Says Vibhuti Rathore, quoting studies      reforms in India remain “incomplete and
                 by Kongsamut (2001): “Similar to its support      barriers to domestic and foreign competition
                 of the manufacturing sector, the Chinese          continue to exist, both in India and in many
                 government has provided enormous support          other countries”. Indeed, any obstacles that
                 to the software industry through tax breaks       hold back the development of the services
                 and high tech development zones. There are        sectors actually hold back manufacturing
                 currently approximately 53 State-level, new       firms and “services reform may be a missing


144 PURCHASE    Anniversary 2011
                                                                         Services Sector


   CSO’s classification of the services sector falls under four broad categories: (a)
   trade, hotels, and restaurants; (b) transport, storage, and communication; (c)
   financing, insurance, real estate, and business services; and (d) community,
   social, and personal services. Among these, financing, insurance, real estate and
   business services; and trade, hotels and restaurants are the largest groups
   accounting for 16.7 per cent and 16.3 per cent respectively of the national GDP
   in 2009-10. The community, social, and personal services category accounts for a
   14.4 per cent share, while transport, storage, and communication accounts for a
   7.8 per cent share. Construction, which is a borderline services inclusion, has a
   share of 8.2 per cent.


element in the commonly cited explanations           continue to focus on goods – agriculture and
for the recent success of Indian                     manufacturing – and only notionally address
manufacturing”. It is in a wider appreciation        impediments to services trade and
of this connect between services sectors             investment”, it says. The Economic Survey
and manufacturing industries that will               concedes that such improvements will also
broaden political support for a “pro-                be important as many domestic regulations
competitive regulatory reform in services. It        and market access barriers could come in
may also provide greater perspective for             the way of fully tapping this growth-
international trade negotiations, which              accelerating sector.




                                                                                        Anniversary 2011   PURCHASE 145

				
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