Ramesh Singh : Summary of Services Sector - Indian Economy for UPSC CSE

OVERALL PERFORMANCE

The performance of the services sector during 2019-20 (April-September] has been sluggish in comparison to the corresponding period of the preceding year.

A brief idea about its performance, based on the latest Government data, is given below:

• Growth continued to moderate during 2019-20, reaching 6.9 per cent from 7.5 per cent in 2018-19.
• The sector continues to outperform agriculture and industry sector growth, contributing around 55 per cent to total GVA as well as to total GVA growth.
• By sub-sector, growth in 'financial services, real estate & professional services' decelerated to 6.4 per cent during 2019-20 and that in 'trade, hotels, transport, communication & broadcasting services' remained on a downward trend, reaching 5.9 per cent in 2019-20. However, 'public administration, defence & other services' witnessed an acceleration in activity during 2019-20, with a growth of 9.1 per cent.
• The services Purchasing Managers' Index (PMI) has stabilized in the recent months above the threshold of 50 (above 50 indicates service sector activity is expanding) after having softened during fourth quarter of 2018-19 and first quarter of 2019-20.
• Growth in air passenger traffic has begun to show some signs of recovery after having witnessed a slowdown since mid-2018-19.
• The sector now accounts for more than 50 per cent of the Gross State Value Added (GSVA) in 15 out of the 33 states and UTs. In 8 states, services sector account for more than 60 per cent of GSVA. Chandigarh and Delhi stand out with a particularly high share of services in GSVA of more than 80 per cent while Sikkim's share remains the lowest at 26.8 per cent.

FDI Inflows : As per the latest data, gross FDI equity inflows into the services sector witnessed a strong recovery (April-September 2019) following a decline in 2018-19. Gross FDI equity inflows jumped to reach US$17.58 billion during the period (33 per cent over the last year), which is about two-thirds of the total gross FDI equity inflows into the country.

TRADE IN SERVICES

• As per the RBI's Balance of Payments data (April-September, 2019-20 compared with the same period of the preceding year), the situation of India's trade in services remained as given below :
• Services exports during 2019-20 had an annual growth of 6.4 per cent. The jump in export growth of travel, software, business and financial services offset the contraction in export growth of insurance and other services (including construction, etc). The robust growth in business services exports was driven by higher receipts for R&D services, professional and management consultancy services, and technical and trade related services.
• Services import growth was 7.9 per cent. An increase in import growth for transport, software, communication and business services offset the contraction in imports of financial and insurance services and the slowdown in imports of travel services. Increased business services payments were primarily driven by professional, management and consultancy services, and technical and trade related services.
• Trade balance in services increased to US$40.5 billion showing 4.1 per cent growth rate. The surplus, largely driven by the surplus in software services (which financed about 48 per cent of India's merchandise deficit), partially softening the current account deficit.
• Composition of services exports over the past decade show that the share of traditional services, such as transport, and value-added services, such as software, financial services and communications, have witnessed a decline.

Commercial Services Exports

• Comparing two time periods, 2005-11 and 2012-2018, it is evident that both commercial services exports and goods exports have slowed in India and globally in the recent years.
• As per the latest WTO data, India's share in world's commercial services exports has risen steadily over the past decade to reach 3.5 per cent in 2018 (USA is ranked 1st with a share of 14 per cent, UK ranked 2nd with 6.5 per cent share and Germany at 3rd with a share of 5.6 per cent). India's share in the global merchandise exports is 1.7 per cent (less than half of the services exports).

SECTORAL SITUATION
During 2019-20, most of the sub-sectors of the services sector witnessed a moderation in growth. The growth in tourism sector decelerated with weaker growth in foreign tourist arrivals and consequently in foreign exchange earnings. In the ports sector, growth in port traffic softened from the previous year.
Tourism Sector

• The tourism sector is a major engine of growth, contributing to GDP, foreign exchange earnings and employment. In India, the tourism sector witnessed a strong performance from 2015 to 2017, with high growth in foreign tourist arrivals.
• Foreign tourist arrivals growth decelerated to 2.7 per cent in 2019 (from 5.2 per cent of 2018). However, this trend was seen across the world as international tourist arrivals globally also slowed from 7.1 per cent in 2017 to 5.4 per cent in 2018.
• Foreign exchange earnings have slowed in 2018 and 2019 after registering strong growth until 2017 which totalled US$ 24 billion in (a 2 per cent growth).
• Today (2018), India is ranked 22nd in the world in terms of international tourist arrivals (up from 26th position in 2017). India now accounts for 1.24 per cent of world's international tourist arrivals and 5 per cent of Asia & Pacific's international tourist arrivals. India ranks 13th in the world and 7th in Asia & Pacific in terms of tourism foreign exchange earnings (close to 2 per cent of the global tourism foreign exchange earnings).

IT-BPM Sector

• India's IT-BPM (Information Technology and Business Process Management) Services has been the flag-bearer of India's exports for the past two decades and contributes significantly to the economy via employment growth and value addition.
• By March 2019 the industry size was of about US$ 177 billion in March 2019.
• IT services constituted 51 per cent of it in 2018-19, followed by Software & Engineering Services (20.6 per cent share) and BPM Services (19.7 per cent share).
• A significant part (about 83 per cent) of the IT-BPM industry (excluding hardware) continues to be export driven, with export revenues in excess of US$ 135 billion in 2018- 19. During 2018-19, the revenue growth for IT-BPM sector (excluding hardware) softened to 6.8 per cent from 8.2 per cent in 2017-18.
• Out of the total US$ 135.5 billion in exports of the IT-BPM sector in 2018-19, IT services accounted for 55 per cent, and BPM and Software Products & Engineering services accounted for the remaining 45 per cent.

Port and Shipping Services

• As on January 2019, India had a 0.9 per cent share in world fleet. With 13 major ports and about 200 non-major ports. 
• He turnaround time of ships (which is a key indicator of efficiency of the ports sector), has declined continuously, almost halving in the period 2010-19 (to 2.48 days).
• The shipping turnaround time has declined across all major ports and is now the lowest at the Cochin (1.47 days), New Mangalore (1.93 days), V.O. Chidambararanar (1.96 days) and Chennai (1.98 days) ports, and the highest at the Kolkata (3.84 days) port.
• As per the latest UNCTAD data, the median ship turnaround time globally is 0.97 days, suggesting that India has room to further improve upon the efficiency at ports.

Space Sector

• The space programme of India has grown exponentially since its modest beginnings five decades ago, moving from providing simple mapping services in the 1960s to many more uses currently. 
• This includes design and development of a series of launch vehicles and related technologies, satellites and related technologies for earth observation, telecom and broadband, navigation, meteorology and space science, R&D in space sciences, and most recently, planetary exploration.

OFFSHORE FUND MANAGEMENT

• India's strong performance in services exports, India's financial services exports have remained stagnant, averaging about US$ 5 billion in the recent years. As a result, the share of financial services exports in overall services exports has almost halved from 4.2 per cent in 2011-12 to 2.3 per cent in 2018-19.
• One type of financial services that is currently being rendered from global financial centres and could be potentially brought on-shore is the asset management activity of offshore funds. These offshore funds located in tax and regulatory friendly jurisdictions (such as Singapore, Luxembourg, Ireland, Hong Kong and London), pool investments from offshore investors and invest in India via the Foreign Portfolio Investment (FPI), Private Equity (PE) Foreign Venture Capital Investment (FVCI) route.
• As foreign investment into India continues to increase in the coming years, on-shoring the fund management activity of offshore funds to India would benefit the economy in the following ways—
  (i) Contributing to the continued expansion of India's asset management industry which has been witnessing significant growth in the recent years. The Asset Managers Roundtable of India (AMRI) estimates that fund management activity of almost 25 per cent of FPI, PE and FVCI funds' total Assets Under Management (AUM) could be potentially on-shored to India by 2020, and potentially a greater share of AUM in the coming years. Assuming total AUM of FPIs at US$ 542 billion and total AUM of PE & FVCIs at US$ 326 billion by 2020, this implies that nearly US$ 136 billion of FPI funds and US$ 82 billion of PE & FVCI funds, i.e., US$ 217 billion in total assets, could be potentially managed on-shore in India by 2020, according to AMRI estimates.
  (ii) Generating employment for high-skilled finance professionals.
  (iii) Gain through the management fee would constitute as financial services exports. Based on a conservative assumption of 1 per cent management fee, the AMRI estimates that on-shore management of US$ 217 billion in assets of offshore funds could yield about US$ 2.2 billion in fund management fees and therefore financial services exports in 2020. At present, the fund management activity of these offshore funds is being undertaken by fund managers, often of Indian origin, located in offshore jurisdictions since their presence in India would create tax implications for the offshore fund's profits.

MANUFACTURING VS. SERVICES

• The manufacturing exports in India has distracted attention from what might be a no less noteworthy development.
• India's share of world exports of services, after surging in the mid2000s, has flattened out. 
• The composition of Indian exports of services is more favourable than that of Indian exports of manufactured goods.
• These developments have longer-term implications. Realising India's medium- term growth potential of 8-10 per cent will require rapid growth of exports.
• To achieve a similar trajectory, India's competitiveness will have to improve so that its services exports, currently about 3 per cent of world exports, capture nearly 15 per cent of world market share. That is a sizeable challenge, and recent trends suggest that a major effort at improving competitiveness will be necessary to meet it.

GLOBAL NEGOTIATIONS

(i) WTO Negotiations

• He 11th Ministerial Conference (MC) of the WTO ended without a Ministerial Declaration or any substantive outcome, India saw certain favourable outcome from the 10th MC of the multi-lateral trade body (Economic Survey 2017-18): 
• Implementation of preferential treatment in favour of services and service suppliers of least developed countries (LDC) and increasing LDC participation in services trade.
• To maintain the current practice of not imposing customs duties on electronic transmissions (e- Commerce) until the next Ministerial Conference to be held in 2017 trade.
• Before the 11th MC of the WTO India made a presentation a proposal to the WTO for a global pact to boost services trade. The proposal—Trade Facilitation in Services (TFS)—is mainly aimed at 'ensuring'—easier norms for movement of foreign skilled workers/professionals across borders for short-term work. India, together with 20 other members have notified preferential treatment to LDCs in services

(ii) Bilateral Agreements

• Comprehensive bilateral trade agreements signed, including trade in services, with the governments of Singapore, South Korea, Japan and Malaysia. An FTA in services and investment was signed with the Association of South East Asian Nations (ASEAN) effective since mid-2015. 
• India has joined the RCEP (Regional Comprehensive Economic Partnership) plurilateral negotiations. The proposed FTA includes the 10 ASEAN countries and its six FTA partners, viz. Australia, China, India, Japan, South Korea and New Zealand. The RCEP is the only mega-regional FTA of which India is a part.
• India is also engaged in bilateral FTA negotiations including trade in services with Canada, Israel, Thailand, the EU, the EFTA (European Free Trade Association), Australia and New Zealand. Dialogue is under way with the US under the India-US Trade Policy Forum (TPF), with Australia under the India-Australia JMC (Joint Ministerial Commission), with China under the India-China Working-Group on Services, and with Brazil under the India-Brazil Trade Monitoring Mechanism (TMM).

RESTRICTIONS AND REGULATIONS

(i) Trade and Transport Services

• Some constraints in these sectors include restrictions on inter-state movement of goods which could ease with the adoption of the model Agriculture Produce and Marketing Committee (APMC) Act by many states.
• The Multimodal Transportation of Goods Act 1993 which needs revision to ease the existing restrictions on transportation and documentation through different modes of transport, particularly restrictions in the Customs Act, which do not allow seamless movement of goods.
• Restrictions on free movement of cargo between Inland Container Depots (ICDs), Container Freight Stations (CFSs) and Ports.

(ii) Construction Development

• In this sector, bottlenecks result from continuation of restrictions under the Urban Land Ceiling and Regulation Act (ULCRA) in some states namely Andhra Pradesh, Assam, Bihar, and West Bengal, which have not yet repealed it and the confusion in the process required for clearance of buildings even after the repeal of ULCRA by passing of the Urban Land(Ceiling and Regulations) Repeal Act 1999 by the other states.
• There is also lack of clarity on the role of states as facilitators in the land acquisition policy resulting in increasing number of court litigations adding to risk profile of builders/projects thereby restricting lenders from extending finance to such builders/ projects.
• There are also restrictions on floor area ratio (FAR) in many states.

(iii) Accountancy Services

While the accountancy professionals were hitherto allowed to operate either as a partnership firm or as a sole proprietorship firm or in their own name since the Indian regulations do not permit exceeding 20 professionals under one firm, the emergence of Limited Liability Partnership (LLP) structure is likely to address this impediment. However, the number of statutory audits of companies per partner is restricted to 20.

(iv) Legal Services
In this sector, FDI is not permitted and international law firms are not authorised to advertise and open offices in India. Foreign service providers can neither be appointed as partners nor sign legal documents and represent clients. The Bar Council is opposed to entry of foreign lawyers / law firms in any manner. Indian advocates are not permitted to enter into profit-sharing arrangements with person sother than Indian advocates.

(v) Education Services
These come under the Concurrent List with multiple controls and regulations by central and state governments and statutory bodies. Regulations of minimum of 25 acres of land to establish a medical college restricts the setting up of medical colleges in cities like Delhi.

THE NEED FOR REFORMS
(i) Nodal agency and marketing : Despite having strong growth potential in various services sub-sectors, there is no single nodal department or agency for services. An inter-ministerial committee for services has been set up to look in to this. But services activities cover issues beyond trade and a more proactive approach and proper institutional mechanism is needed to weed out unwanted regulations and tap the opportunities in the services sector in a coordinated way
(ii) Disinvestment : There is plenty of scope for disinvestment in services PSUs under both central and state governments. Speeding up disinvestment in some services- sector PSUs could not only provide revenue for the government but also speed up the growth of these services.
(iii) Credit related : The issues here include ' collateral free ' soft loans to support the sector 's cash needs and possibility of considering even export or business orders as collateral for credit-worthy service firms.
(iv) Tax and Trade Policy related : These include use of 'net' instead of 'gross' foreign exchange criteria for export benefit schemes the issue of retrospective amendments of tax laws like,
(a) Amendment to the definition of royalty to include payment of any rights via any medium for use of computer software,
(b) Tax administrative measures to tacklede lay in refunds,
(c) Introducing VAT (value added tax) refund for foreign tourists.
(d) Addressing the issue of bank guarantees based on past performance to avail of export promotion benefits in services.

OUTLINING FUTURE

• India's services sector, which showed resilient growth after the recovery of the global economy following the global financial crisis, has been showing subdued performance in recent times. Despite the slowdown, the prospects continue to be bright for many segments of the sector.
• In future, government 's focus on the following are expected to provide impetus to logistics services—
  (i) Infrastructure development,
  (ii) Favourable regulatory policies like liberalisation of FDI norms,
  (iii) Increasing number of multimodal logistics service providers,
  (iv) Growing trend of outsourcing logistics to third party service providers,
  (v) Entry of global players.
• Though shipping services are at a low key at present, with increased imports of POL (petroleum, oil and lubricants) for stocks build up to take advantage of low crude oil prices, containerisation of export and import cargo and modernisation of ports with private sector participation, recovery of the shipping and port services sector can be expected.
• Government's focus on the tourism sector including easing visas by eTV and building tourism infrastructure could help in the recovery of the tourism sector.
• Despite challenges in the global market, the Indian IT industry is expected to maintain double or near-double- digit growth as India offers depth and breadth across different segments of this industry, such as, IT services, BPM, ER&D, internet and mobility and software products.