Why the service sector is key to India’s recovery

6 min read
Utkarsh Singh

The natural economic development of any country begins with a farming/agrarian economy and then moves to an industrial economy to a service economy. However, India has leapfrogged from an agrarian economy directly to a service economy.

The services sector is now a key driver of India’s economic growth and contributes nearly 54% of India's GVA of 179.15 lakh crore Indian rupees.

The growth of the service sector in India is fueled by factors like:

  • Opening of the Indian economy to global markets
  • Increase in purchasing power of middle class
  • Improvement in the status of women
  • Growth of information technology (IT) sector
  • Demand for health care
  • Internet penetration

The service sector not only contributes significantly towards India’s GDP (gross domestic product) but has also attracted Foreign Direct Investment (FDI) into the country.

Classification of services industry

Below are the key sub-sectors of India’s services sector:

  1. Information technology
  2. Aviation
  3. Communication and broadcasting
  4. Tourism
  5. Shipping
  6. Ports
  7. Hotels and restaurants
  8. Healthcare
  9. Financial services
  10. Real estate and other professional services

Even as these sub-sectors are driving the Indian economy, they have been hardest-hit by the COVID-19 pandemic.

Impact of COVID-19 on service sector

Person cutting up carrots in a kitchen

The services industry by its nature involves personal contact. As a result, it was severely impacted by COVID-19 related lockdowns and social distancing measures imposed in the country since Mar’20.

During the first half of the financial year 2020-21, the services sector in India contracted by almost 16 percent.

Air passenger traffic, rail freight traffic, port traffic, foreign tourist arrivals, and foreign exchange earnings declined sharply following the first lockdown announced in Mar’20.

Hospitality and travel were one of the first and worst-hit sectors due to the pandemic, and the second wave has only made the situation worse.

Nearly three-fourth companies in the hospitality sector have faced credit downgrades for their loan facilities.

Service businesses are the key to India’s economic recovery

Since the service sector is the major contributor to India’s GDP, its timely rebound is essential for India's economic recovery post-COVID-19. As the economy gradually entered the unlock phase, most of these economic indicators have shown signs of recovery.

Services purchasing managers’ index, rail freight traffic, and port traffic are rising steadily now, hinting at recovery. Although travel hasn’t risen to Pre-COVID levels, in-country passenger air traffic is also increasing gradually.

Because the service sector provides large-scale employment, millions of people lost their jobs since the start of the pandemic. Only the revival of the service sector has the potential to put these people back to work.

Airplan cabin showing empty seats

Related: 7 ways to protect your small business from an economic slowdown

Top sectors that are most likely to shine in the coming years

As lockdowns become less frequent, all service-based businesses will benefit. These are four of the most-likely to recover quickly from the trials of the last two years.

1. Healthcare

Medical professionals look at an xray

Healthcare has been at the center of attention since the pandemic hit the world. There are expectations that the sector will continue to remain in focus in 2021-2022 as there is an ever-increasing demand for:

  • Hospitals
  • Vaccination centers
  • Pharmacies
  • Nursing homes
  • Testing centers
  • Pathology labs
  • Healthcare services
  • Healthcare products

In a nutshell, the healthcare sector as a whole will continue to grow at a fast pace until we see a drastic decrease in the number of COVID-19 cases.

2. Information technology

The number of Indian internet users is expected to increase by 45% in the next five years to 900 million in 2025 from around 622 million last year.

Increased internet penetration has changed consumer behavior, and it has led to the advancement of technologies.

Enterprises in India are developing cloud-based applications for the entire world in different areas like:

  • AI
  • Data analytics
  • Robotics
  • IOT (internet of things)
  • ERP (enterprise resource planning)
  • Blockchain
  • Finance
  • Digital Payments

The sector is bound to grow with skilled labor, global demand, and open-source technologies.

3. Telecom

Telecom has been one of the most important and in-demand services during the global pandemic. It has been a key enabler in helping government and healthcare authorities in timely communication.

Telecom made work from home possible and kept the economic engine running.

Demand for bandwidth/internet is expected to go up in the future from existing and new customers.

4. Finance

India has emerged as one of the fastest-growing fintech hubs. India’s FinTech ecosystem is driven by:

  • Strong customer demand
  • Skilled workers
  • The Government’s push for digitization

Fintech in India has huge growth potential. The sector will witness existing technologies becoming more accessible to many people, while new financial tools will provide new ways to invest, trade, lend and save money.

Government initiatives supporting the service sector

The Government of India (GoI) has adopted few initiatives in the recent past to help the service sector rebound. Some of these are as follows:

  • Under the Emergency Credit Line Guarantee Scheme (ECLGS 3.0), hard-hit hospitality businesses can get the benefits, subject to maximum assistance of 40% of the loan outstanding or ₹200 crore, whichever is lower.
  • The year 2020-21 witnessed many significant structural reforms. The space sector was opened up, telecom-related regulations were removed from the IT-BPO sector, and consumer protection regulations were introduced for e-commerce.
  • The Government of India has launched the National Broadband Mission, intending to provide broadband access to all villages by 2022.
  • Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Central Government increased incentives provided under the Services Exports from India Scheme (SEIS) by two percent.
  • The implementation of the Goods and Services Tax (GST) has created a common national market and reduced the overall tax burden on service businesses.

Related: Top 7 government business loan schemes for small ventures

The road ahead

The service sector is one of the key sectors in India and contributes significantly to the country’s GDP. Being a contact-sensitive sector, India’s Services industry witnessed a significant setback during the pandemic-mandated lockdowns.

The Government of India recognizes the potential of the sector in generating employment and its importance in India’s economic recovery. India’s growth story relies heavily on the service sector, and therefore this sector offers tremendous growth and business opportunities.

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