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Introduction

  • The services sector has outperformed other sectors in the Indian economy, playing a crucial role in the country's integration with world trade and capital markets.

  • Liberalization of services faced challenges in various sub-sectors, but those integrating through trade and foreign direct investment (FDI) exhibited rapid growth with positive spillovers.

  • Sustainability concerns exist for a services-led growth process, primarily reliant on exports of skill-based services. There is a need to balance external demand with internal demand for sustained growth.

  • To ensure balanced, equitable, and employment-oriented growth, the services sector should experience more broad-based growth with backward and forward linkages to the rest of the economy.Ramesh Singh Summary: Services Sector- 2 | Indian Economy for UPSC CSE

  • Infrastructural and regulatory reforms and FDI liberalization can diversify growth sources within India’s services sector and provide the required momentum.

  • A debate arose regarding the sector leading the growth process in India, with services contributing over 62% to GDP during 2001-12. The Economic Survey 2014-15 favored the manufacturing sector.

  • Recent empirical studies highlight the interconnectedness between services and manufacturing sectors, emphasizing their role in creating employment and addressing issues related to skilled and unskilled labor force, formality, and informality.

  • The government's "Make in India" initiative is seen as a timely action to support the growth of the manufacturing sector.

  • The Economic Survey emphasizes the significance of expanding the railways and increasing public investment to support economic growth.

  • Findings align with several other recommendations for timely government actions in recent times.


High Frequency Indicators

  • Services sector activity, gauged by Services PMI, recovered swiftly after the waning of the Omicron variant in early 2022. However, setbacks occurred due to the Russia-Ukraine conflict and a domestic demand slump.

  • PMI services rose to 58.5 in December 2022, indicating growth, following an easing of retail inflation (CPI-C).

  • Bank credit to the services sector experienced significant growth since October 2021, with a year-on-year growth of 21.3% in November 2022, the second-highest in 46 months.

  • World services trade volume surpassed its pre-pandemic peak in the second quarter of 2022. However, the WTO's Services Trade Barometer Index fell to 98.3 in October 2022, slightly below its baseline, suggesting a moderation in growth in real commercial services in the third quarter of 2022.

Service SectorService Sector

  • India's major trading partners may face a slowdown, potentially leading to a contraction. Conversely, India's services exports could improve due to high inflation in advanced economies, driving up wages and making local sourcing expensive.

  • India's significant role in services trade is expected to increase, with services exports growing by 27.7% in April-December 2022.

  • India was the 7th largest recipient of FDI among the top 20 host countries in 2021, receiving the highest-ever FDI inflows of US$ 84.8 billion in 2021-22, according to the World Investment Report 2022 by UNCTAD.

  • The Covid-19 pandemic had a crippling impact on the services sector. However, with the easing of movement restrictions, near-total vaccination, and the waning of the pandemic, the sector has shown a speedier recovery.


Tourism and Hotel Industry

  • Global tourism is gradually recovering post-pandemic, reaching 63% of the pre-pandemic level in January-September 2022, as per UNWTO's World Tourism Barometer (November 2022).

  • Hotel occupancy in India, affected by the Covid-19 pandemic, declined to 33-36% in 2020 but recovered to 42-45% in 2021.

  • A study by the Ministry of Tourism in collaboration with NCAER revealed a 32% decline in Tourism Direct Gross Value Added (TDGVA) in 2020-21.

Tourism & Hotel IndustryTourism & Hotel Industry

  • India is ranked 10th in the Medical Tourism Index 2021, with Medical Value Tourism (MVT) expected to grow to USD 13 billion by 2022. Factors include world-class hospitals, skilled medical professionals, lower treatment costs, and global demand for wellness services.

  • Government initiatives to make India an attractive destination for specialized tourism include AYUSH Visa for medical tourists, the National Strategy for Sustainable Tourism & Responsible Traveller Campaign, the Swadesh Darshan 2.0 scheme, and "Heal in India."

  • The G20 presidency provides a unique opportunity to promote India as a major tourism destination.


Real Estate

  • The Covid-19 pandemic disrupted the real estate sector, leading to project delays, deferment of big-ticket purchases, stagnation of property prices, and scarce funding for developers.

  • By early 2023, the real estate sector exhibited the following trends:

    1. Impact on demand for office space due to the work-from-home model adopted by corporates.
    2. Change in individual home buyers’ sentiment in favor of owning a house, leading to increased interest in the residential housing sector.
  • The hybrid work mode allowed for working from anywhere, encouraging first-time home buyers to move away from conventional metros, resulting in a pent-up demand in the residential real estate markets of Tier II and III cities.

Real Estate SectorReal Estate Sector

  • During 2022-23 (April-September), the housing sector surpassed the pre-pandemic level, and the inventory overhang decreased from 44 months in the previous year to 33 months.

  • Volatility in international markets and a rise in prices of construction materials forced developers to halt ongoing construction works. The Wholesale Price Index (WPI) for 'cement, lime, and plaster' increased from 127.1 in December 2021 to 137.6 by December 2022.

  • Recent government measures, including the reduction in import duties on steel products, iron ore, and steel intermediaries, aim to cool off price pressures in the coming times.

  • According to the Global Real Estate Transparency Index-2022, India's real estate market transparency is among the top ten most improved globally. The composite transparency score improved from 2.82 in 2020 to 2.73 in 2022, credited to increased institutional investment, a growing number of Real Estate Investment Trusts (REITs), regulatory initiatives like RERA and the Model Tenancy Act, and digitization of land registries and market data through platforms like Dharani and Maha RERA.


IT-BPM Services

  • The IT-BPM (Information Technology and Business Process Management) sector has been the primary driver of India’s exports for the past two decades.

  • The period between 1999 and 2009 is acknowledged as a decade of growth, while the subsequent decade focused on consolidation, successfully decoupling revenue and employee growth.

  • The pandemic presented an opportunity for the sector, accelerating digital transformation across various end-user industries.

  • This acceleration was witnessed through increased investment, adoption of more complex technology, and a strategic shift towards cloud adoption.

Ramesh Singh Summary: Services Sector- 2 | Indian Economy for UPSC CSE

  • Key Developments in the IT-BPM Sector:

    1. The sector experienced a significant revenue growth of 15.5% during 2021-22, a substantial increase compared to the 2.1% growth in 2020-21.
    2. Exports, including hardware, exhibited substantial growth, reaching 17.2% in 2021-22 compared to a modest 1.9% growth in 2020-21.
    3. The sector recorded a noteworthy 10% growth in the direct employee pool during 2021-22, marking the highest-ever net addition to its employee base.
  • As per NASSCOM's Annual Report-2022:

    1. The sector demonstrated exceptional resilience during the pandemic.
    2. This resilience was driven by increased technology spending, accelerated technology adoption, and robust digital transformation.
    3. The sector swiftly adopted remote working on a wide scale, showcasing the adaptability of one of the world’s largest IT workforces.
    4. Beyond addressing immediate challenges, the industry enhanced its capabilities, positioning itself as future-ready.

Ports & Waterways

  • The sea and seashores have historically been crucial sources of opportunity and gateways to prosperity for India.

  • Ports play a vital role in the economy, handling around 90% of international trade by volume and 79.9% by value.

  • Recent Developments in the Ports Sector:

    1. The capacity of major ports increased from 871.5 MTPA in March 2014 to 1534.9 MTPA by March 2022.
    2. The government focus on improving port governance, addressing low-capacity utilization, modernizing berths with technologically efficient loading/unloading equipment, and creating new channels for port connectivity.
    3. Measures taken for digitization of key EXIM processes, including:
      • Electronic Invoice (e-Invoice)
      • Electronic Payment (e-Payment)
      • Electronic Delivery Order (e-DO)
      • Generation of electronic Bill of Lading (e-BL)
      • Letter of Credit (L.C)
      • Implementation of Radio Frequency Identification Device (RFID) solution for seamless movement across port gates.
      • Development of Portal-Marine as a Unified Digital Platform for all maritime stakeholders.

Ports & WaterwaysPorts & Waterways

  • Inland Waterways:

    1. Inland water transport holds untapped potential for goods and passenger transportation.
    2. India has a large endowment of rivers, canals, and waterways with a total navigable length of around 14,850 kilometers.
    3. The government declared 106 new waterways as National Waterways (NWs), bringing the total to 111.
    4. To promote inland waterways, waterway usage charges have been waived until July 2023.
    5. Cargo movement on NWs reached an all-time high of 108.8 million tons during 2021-22, recording a 30.1% growth compared to the previous year.
  • The Government enforced the new Inland Vessels Act 2021 to make inland waterways user-friendly, quicker, cost-effective, seamless, with a uniform application of rules and regulations.


E-Commerce

  • The E-Commerce sector experienced rapid growth, particularly following the pandemic, with a significant increase in penetration due to disruptions in consumer behavior caused by lockdowns and mobility restrictions.

  • Key Facts about the E-Commerce Sector:

    1. According to the Retail and E-commerce Trends Report 2022 by Unicommerce and Wazir Advisors, overall e-commerce order volume grew by 69.4% in 2021-22. This growth was primarily driven by consumers from tier-II and tier-III cities in the last two years.
    2. A recent study (September 2022) by the Indian Institute of Foreign Trade (IIFT) found that MSMEs opting for e-commerce and e-procurement experienced a 100% increase in revenues and margins.
    3. The Government e-Marketplace (GeM) witnessed substantial growth, achieving an annual procurement of ₹1 lakh crore within 2021-22, marking a 160% growth over the previous year. The government took steps to onboard products from Self-Help Groups (SHGs), tribal communities, artisans, weavers, and MSMEs, with 57% of the total business on GeM coming from MSMEs during 2021-22.
    4. The launch of ONDC (Open Network for Digital Commerce) played a significant role in democratizing digital payments, enabling interoperability, and reducing transaction costs. ONDC provides better market access to sellers, bringing the country’s remotest corners into the e-commerce framework through digitization.

Ramesh Singh Summary: Services Sector- 2 | Indian Economy for UPSC CSE

  • Insights from Reports:

    1. According to Bain & Company's report "How India Shops Online 2022," emerging categories such as fashion, grocery, and general merchandise are expected to support e-commerce growth in India, capturing nearly two-thirds of the Indian e-commerce market by 2027.
    2. As per the Global Payments Report by Worldpay FIS, India’s e-commerce market is projected to grow impressively at 18% annually through 2025. The government's initiatives to boost the digital economy, growing internet penetration, increased smartphone adoption, innovation in mobile technologies, and the rise in digital payment adoption further accelerated the growth of e-commerce.

Digital Financial Services

  • Enabled by emerging technologies, digital financial services are accelerating financial inclusion, democratizing access, and personalizing products.
  • The Jan Dhan-Aadhaar-Mobile (JAM) trinity, UPI, and regulatory frameworks provide a strong foundation for digital financial services.
  • The pandemic has accelerated digital adoption, giving a boost to digital financial services by banks, NBFCs, insurers, and FinTechs globally, with India leading with a fintech adoption rate of 87%, significantly higher than the global average of 64%.
  • Neobanks have expanded rapidly in recent years, driven by the demand for on-demand and easier-to-access financial solutions, especially among young and digitally savvy customers.
  • The government's initiative of Digital Banking Units, proposed in the Union Budget 2022-23, aims to take banking solutions to every nook and corner of the country.

Ramesh Singh Summary: Services Sector- 2 | Indian Economy for UPSC CSE

  • The introduction of CBDC (Central Bank Digital Currency) is expected to significantly boost digital financial services, with the currency being piloted by RBI in wholesale and retail spaces by late 2022.
  • The dematerialization of documents, facilitated by the Digital Document Execution (DDE) platform launched in 2020-21, plays a pivotal role in furthering the digital transformation of financial services.
  • Core principles of the DDE platform include digital submission of information, flexibility to accommodate document formats, consent-based processes, digital payment of stamp duty, electronic identity verification, electronic signatures, and secure storage, transmission, and retrieval of documents.
  • The DDE platform eliminates the need for the physical presence of executants and manual processes, offering benefits such as a secure system, authorized access, lower execution time and cost, easy accessibility, bulk processing, fraud prevention, legal robustness, and evidentiary value.
  • While initially used for financial documents, the DDE platform is expected to enable the digital execution of other documents in the future, fostering secure, paperless, hassle-free contracting with a significant positive impact on the ease of doing business in the country.

COVID-19 and Services Sector

  • Government initiative: Launched Atmanirbharta Bharat Abhiyan with a focus on converting the challenges posed by the coronavirus into opportunities.

  • Economic package: An ambitious relief and financial stimulus package of 20 lakh crores announced under the campaign, addressing diverse sectors of the economy.

  • Emphasis on MSMEs: Significant focus on Micro, Small, and Medium Enterprises (MSMEs), including many startups in the country, with measures aimed at fostering growth and contributing to economic revival.

COVID-19COVID-19

  • Revised MSME criteria: The government revised the definition criteria for MSMEs, providing them an opportunity to expand in size and potentially get listed on stock exchange platforms.

  • Elimination of distinction: Abolished the distinction between manufacturing and services MSMEs, providing a substantial boost to the services sector.

  • Financial support measures:

    1. Collateral-free loans: Introduced arrangements for collateral-free loans for MSMEs.
    2. Subordinate debt: Implemented measures for subordinate debt to support MSMEs.
    3. Creation of Funds: Establishment of funds, such as the Fund of Funds, to act as a game-changer for MSMEs, particularly benefiting the services sector.
  • Expected impact: Anticipated positive outcomes for MSMEs, facilitating faster growth and enabling them to play a crucial role in economic revival, contributing to the goal of making the country self-reliant.


Way Forward

  • India serves as an export hub for software services, with the IT outsourcing service market expected to grow by 6-8% between 2021 and 2025.

  • The services sector, according to the Government, has untapped potential and should view the COVID-19 crisis as an opportunity rather than a challenge.

  • Post-COVID, new norms are emerging in work, education, entertainment, health, etc., presenting opportunities for the services sector.

  • Governmental steps needed for sector expansion and growth include:

    1. Developing competitive advantage through the adoption of newer technologies and required skill sets.
    2. Focusing on quality, exploring new destinations, and expanding services.
    3. Harnessing the large pool of skilled manpower, particularly in IT and ITeS, available at a relatively low cost.
    4. Leveraging the rapidly increasing population of youth transitioning from agriculture to other sectors.

Software ServicesSoftware Services

  • Addressing the sector's dependency on imports by utilizing the abundant and diverse skilled workforce in India.

  • Indian missions abroad should effectively promote Indian exports, with a particular emphasis on the IT and allied services segment.

  • While the IT and allied services segment has flourished independently, the government's focused policy interventions, especially at the startup level, can aid growth and address unfair practices.

  • The resilience shown by the services sector in 2022-23, but downside risks include external factors and a weak economic outlook in advanced economies affecting growth prospects through trade and other linkages.

The document Ramesh Singh Summary: Services Sector- 2 | Indian Economy for UPSC CSE is a part of the UPSC Course Indian Economy for UPSC CSE.
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FAQs on Ramesh Singh Summary: Services Sector- 2 - Indian Economy for UPSC CSE

1. How has the COVID-19 pandemic impacted the services sector?
Ans. The COVID-19 pandemic has had a significant impact on the services sector. Many businesses in the sector, such as tourism and hotels, have been severely affected due to travel restrictions and lockdown measures. This has led to a decline in revenue and the closure of many establishments. Additionally, the services sector has also faced challenges in terms of reduced consumer demand, disrupted supply chains, and workforce issues. Overall, the pandemic has caused a downturn in the services sector.
2. What are high-frequency indicators in the services sector?
Ans. High-frequency indicators in the services sector are economic indicators that provide real-time or near real-time data on the performance of the sector. These indicators include data on consumer spending, employment levels, business activity, and sentiment surveys. They are often used to gauge the overall health of the services sector and provide insights into short-term trends and fluctuations. High-frequency indicators are particularly useful during times of economic uncertainty or rapid changes, such as during the COVID-19 pandemic.
3. How has the services sector been impacted by digital transformation?
Ans. The services sector has been greatly impacted by digital transformation. The rise of technology and the internet has led to the emergence of new digital services, such as e-commerce, digital financial services, and IT-BPM services. These digital services have transformed the way businesses operate and the way consumers access and consume services. They have also opened up new opportunities for businesses to expand their reach and improve efficiency. However, digital transformation has also posed challenges for traditional service providers who have had to adapt to the changing landscape.
4. What role does the real estate sector play in the services sector?
Ans. The real estate sector plays a crucial role in the services sector. It encompasses various activities related to the development, sale, purchase, and management of properties, including residential, commercial, and industrial properties. The real estate sector contributes to economic growth by providing employment opportunities, attracting investments, and generating revenue through property transactions. It also supports other sectors, such as construction, finance, and hospitality, by creating demand for their services. The performance of the real estate sector is often seen as an indicator of the overall health of the services sector.
5. How has the services sector adapted to the growth of e-commerce?
Ans. The services sector has adapted to the growth of e-commerce by embracing digital technologies and transforming their business models. Many traditional retailers and service providers have established online platforms or partnered with e-commerce platforms to reach a wider customer base. They have also invested in logistics and delivery systems to meet the demands of online shopping. Additionally, new businesses have emerged in the services sector specifically to cater to the e-commerce industry, such as last-mile delivery services and online payment gateways. Overall, the services sector has recognized the importance of e-commerce and has made efforts to integrate it into their operations.
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