OMTEX CLASSES TYBMS - SEM V - SSM

Compiled by Kripa Kalro

CHAPTER 3
GROWTH OF SERVICE SECTOR
CHAPTER CONTENTS

 Introduction – Contribution of service industry to Indian Economy and World

Economy

 Reasons for growth of service sector

 Cause effect of services
 Scope of Service Sector

INTRODUCTION - CONTRIBUTION OF SERVICE INDUSTRY TO INDIAN

ECONOMY AND WORLD ECONOMY

The developed countries in the recent decades have seen a trend that primarily their
economy has come from the service sector. The services account for a major share of
those countries Gross Domestic Product (GDP). The United States is the country with
leading service economy in the world. More than 75% of the U.S. Workforce is
employed in the service sector, and major service sector includes housing and household
operations, medical care, personal services, transportation services and repair services.
Canada, Great Britain, France, Italy, Japan and Germany almost have their 50% of
workforce employed in service sector. Developing and less developed countries are more
dominant in goods production and they focus on agricultural production and developing
natural resources. Their main thrust is on first satisfying the physiological needs like
food, shelter and clothing. Even then in these countries there is a fast swing towards
services and service sector is taking over the manufacturing sector. The fact already
floating in the air of "TERRITORY ECONOMIA" that service sector has revivified the
whole Indian economy by injecting life serum into it, is ample enough to approve it as an
indispensable growth component of the Indian economy. If the present rate of growth
continues unabated it will certainly surpass china by the year 2009, and by 2013 India's
services exports would somewhat dollar 100 billion higher than that of china.

The contribution of the Services Sector in India to GDP

"In every progressive economy there has been a steady shift of employment and
investment from the essential 'primary' activities to secondary activities of all kinds and
to a still greater extent into tertiary production" - A.G.B Fisher

1
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

The quotation and the present configuration of the Indian economy amply suggest that
the day when India will be called upon as the developed economy is not far off as there
has been a structural shift from the agriculture (primary) sector to industrial (secondary)
and service (tertiary) sector. The below table shows the percentage contribution of the
service sector India’s Gross Domestic Product (GDP):

2003- 2004- 2005-

Sector
04 05 06
Agriculture 22.2 20.8 19.9
Industry 19.5 19.5 19.4
Services 58.3 59.7 60.7

Services Sector in India- Some Facts and Figures

WORLD SCENARIO
As economy shifts from developing to developed stage, they will show more and
more shift toward services
Today, the fastest growing segments of the US economy is services
In 1948 54% of the GDP of US was generated by services which is 80% now
Employment in this sector which was 55% in 1950 is now 83%
The US balance of trade in goods has remained in the red for many years, but
there has been a trade surplus in services
Today service sector dominates the economics of many developed nations. As
countries develop the role of agriculture in the economy declines and that of
services increase.(china has 50% GDP from service, 35% from industry, and
15%from agriculture)
During recession it has been seen that service output declines less than industrial
output – the service employment is less sensitive to business cycle fluctuation
Globalization as strategy for service firm is becoming more important

INDIAN SCENARIO
The service sector now accounts for more than half of India's GDP: 51.16 per cent
in 1998-99. This sector has gained at the expense of both the agricultural and
industrial sectors through the 1990s.

2
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

The service sector's share has grown from 43.69 per cent in 1990-91 to 51.16 per
cent in 1998-99.
Some economists caution that if the service sector bypasses the industrial sector,
economic growth can be distorted. They say that service sector growth must be
supported by proportionate growth of the industrial sector; otherwise the service
sector grown will not be sustainable.
The response to liberation has been more in service sector, partly because lower
fixed investment requirements
Technological advances have made it possible for India to compete on global
basis in areas like SOFTWARE, IT, HEALTH, EDUCATION, etc.,
In addition lower wage structure has helped to develop CALL Center’s,
MEDICAL TRANSCRIPTION, etc.,
India ranks fifteenth in the services output
It provides employment to around 23% of the total workforce in the country.
Service Sector contributed only 15% to the Indian GDP in 1950.
Service Sector can generate higher income with lesser capital
During the last ten years, Service Sector has grown ahead of GDP

Services Sector Growth Rate in India GDP registered a significant growth over the past
few years. The Indian government must take steps in order to ensure that Services Sector
Growth Rate in India GDP continues to rise. For this will ensure the growth and
prosperity of the country's economy.

REASONS FOR GROWTH OF SERVICE SECTOR

As the physiological needs of the people got fulfilled, there was a demand for more
satisfaction. The changing lifestyles, changing world, changes economies, technological
advances, modernization, liberalization, privatization and globalization policies,
exponential growth in several economic areas, advent of electronic data interchange
(EDI) and computer explosion are some of the factors for stimulating the dramatic
growth in services. High complexity of products requiring skilled specialists, business
internationalization, de-regulation policies, need for use of expert knowledge to outsmart
competition created a need for specialist services like consultants and professionals.
Urbanization, cost effectiveness drives, optimum use of resources, resulted in security
services, private detective agencies, janitorial services, sub-contracting services, etc.
Multimedia, advertising, data processing, internet, E-business services are consequences
of information technology explosion. Overall affluence, shift toward leisure and pleasure
created recreational and entertainment services, travel related services. Desire to live long
has resulted in special healthcare services like nursing homes, private hospitals, health
and fitness clubs. There is an endless list, but a general categorization of factors

3
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

contributing towards the growth of services and some important reasons are discussed
here:
I. Demographic factors
1) High life Expectancy: The economic growth and increasing standard of living have
also resulted in the greater life expectancy and there by an expanding old age population.
Thus there is an increased need for services like old age homes, nursing homes,
healthcare centres, insurance, etc.

2) Structural shifts in Communities/ development of new towns: have affected where

and how people live. The development of new towns and villages has led to the need for
infrastructural and support facilities.

II. Economic factors

1) Globalization: has increased the demand for courier, forwarding and shipping services
as well as travel and information services. This has been fuelled by the rapid changes
brought about by the new information technology. India today is looked upon as a great
location to setup both outbound and inbound call centers due to globalization.

2) Specialization: within the economy has led to greater reliance on specialist service
providers, for example, advertising and market research have become specialist functions
supporting all sectors of the economy. Other examples include education and specialist
financial planners.

III. Political factors

1) Huge Infrastructure of Government Department: leads to development of most
sectors specially the sectors completely under government control. For example Railways
in India.

2) Internationalization: has made increased and new demands on legal and other
professional services.

3) Privatization/ deregulation: has today increased the demand for sectors such as
telecom, airline, and cellular service providers.

IV. Social changes

1) Increase in number of working women: As more and more women have started
working, the time has become most scarce commodity in family life. This has led to
previously domestic functions performed outside the home. It promoted the growth of

4
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

fast food industry and other personal services such as crèches, baby sitting, household
domestic help, packaged food, etc.

2) Dual income households: and working women has created a demand in retailing, real
estate and personal finance planning. Also the chances of needing divorce lawyers have
gone up!

3) High quality of life: is now prevalent, since smaller families with two incomes now
have more disposable income to spend on leisure, entertainment, education, travel and
hospitality services.

4) More international travel and communication: have produced more sophisticated

consumer tastes and preferences. Consumers compare services both nationally and
internationally and demands quality and variety improvement. The sectors most benefited
are hotel and travel.

5) Greater complexity of life: The greater complexity of life has created demand for a
wide range of services, especially legal and financial advice. The number of specialists in
income tax, labour laws, legal affairs, marriage counseling, employment services etc. has
been increasing.

6) Higher aspiration levels: are developed due to increased income, travel and
communication. As a result of this both children and adults are making new demands on
learning establishments, in order to develop the skills needed to compete in our complex
and fast changing environment.

V. Technological factors
1) Innovations in various fields: have paved avenues for a qualitative transformation in
all areas. Below is a list of innovations in various sectors:
• ATM
• Automated airline check-in
• Automated hotel check-in & check-out
• Electronic blood pressure machine
• Tax preparation software
• Internet banking
• Buying online
• Automated investment transactions

5
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

• Insurance online
• Internet shopping
• Phone banking

Also, with rapid development in technology, the consumer today uses a lot of complex
products in his day to day life. Thus there is a greater demand for specialists who provide
maintenance and upkeep of such products like cars, home computers, household
appliances etc.

2) Computer explosion: has helped solve various problems and enhance service sector.
Earlier a person wanting to transfer money from one bank account to another needed to
travel to the bank branch. Today the same can be done sitting in the luxury of his home or
anywhere else with the help of a computer.

VI. Others
1) Manufacturing became expensive: Among the sectors, agriculture was already being
utilized to the brim and industry did not grow too much due to manufacturing being very
expensive. Services required very less or sometimes no initial investment, due to which
they were preferred over manufacturing.

2) Increase in competition: Manufacturing had large investments and large names in

business. Therefore the best option was for newer companies to come up with services
since due to fewer players in services, the competition levels too were low.

3) Availability of trained manpower: More and more people were getting trained in
services so as to be hired by service sectors.

4) Outsourcing of functions: Specialized functions were being extensively outsourced.

More and more companies found outsourcing of smaller functions more profitable than
actually undertaking the same by themselves. Hence more companies got into functions
like janitorial or cleaning, repairing, etc.

5) New Inventions: Services were attracting more and more people worldwide due to the
new inventions and innovations in the service sector. Each company wanted to
outperform the other in terms of newer features in services.

While the role of agriculture gas been reducing in the economies of industrial societies,
that of service sector ahs been increasing at a fast pace. Thus, as the economies shift from
developing to developed economies the, they show more and more shift towards services.

6
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

GROWTH OF SERVICE INDUSTRIES: CAUSE AND EFFECT

The below mentioned table reflects the causes that have enabled the growth of services
and alongside also reflects the effects on certain sectors.

CAUSE EFFECT ILLUSTRATIONS

1) Technological Higher complexity of products Design service- engineering
advances requiring skilled specialists consultancy
Maintenance service-
computers
Auto service- cars
2) Globalization More business internationalization Multinational courier
companies
International forwarding and
shipping companies
3) Deregulation Privatization of regulated sectors Telecom services
policies Internet services
Private airline- Sahara, Jet
Kingfisher
4) Competition and Specialization/ expert knowledge Market research
need for higher Business process
productivity engineering
5) Cost effectiveness Optimum man power use and Security service
drives subcontracting less critical Janitorial services (hospital/
functions office cleaning)
Electronic data processing
(pay roll processing)
6) Computer Speed of work performance and Multimedia
explosion availability of sound, motion and Advertising
picture at an affordable cost
Data processing
7) Overall increase Increased spending power and Carpet cleaning
in affluence wish for comforts resulting in Laundry
demand for those services which
consumer himself does not want to Ticketing, travel agents
perform anymore

7
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

8) Increasing Work performed earlier when at Crèches

percentage of home now being done by Baby-sitting
working women somebody else
9) More leisure time Shift towards pleasure/ Travel resorts
entertainment Recreation
Entertainment
10) Greater life Desire to live long has resulted in Nursing homes
expectancy special care facilities Private hospitals
Apollo health clubs
11) Increased Need for services of specialist Recruitment services
complexity of life because of complex issues Labour law consultants
required to be handled
Income tax consultants
12) Scarcity of Need for services which can Car rentals
resources and supplement and meet resource Time sharing at internet
concern about crunch cafes
ecology
13) Demographic Dual career families where parents Senior citizen homes
changes have less time to prepare meals
and do house keeping
14) Urbanization Fast mechanical and self centered Security services
life and deterioration in law and Private detective services
order

SCOPE OF SERVICE SECTOR

1) Profit Seeking Organizations
Industry classification Examples
Housing Rentals, real-estate agents
Household Repair and maintenance, electricity,
plumbing, domestic help
Personal care Beauty care, hair dressing, image
services
Recreation and entertainment Parks, discos, D J services
Medical and healthcare Diagnostic, dental, nursing,
hospitalization

8
OMTEX CLASSES TYBMS - SEM V - SSM
Compiled by Kripa Kalro

Business and professional Detective, legal, accounting,

management consultancy
Private education Schools , colleges
Financial Insurance, banking, stock brokers
Communication Telephone, telex, fax, e-mail, internet,
website, PR agencies, ad agencies
Transportation BEST, rail , airways, parcel delivery
services

2) Non- Profit Seeking Organizations

Service sector Examples

Education Universities, schools
Religious Temples, gurudwaras, churches, mosques

Cultural Cultural events, theatres, zoos, museums

Charitable Welfare groups and research foundations

(red cross)
Social cause Family planning, cancer eradication,
environmental concerns

Social Clubs
Healthcare Hospitals, health research institutes( Indian
cancer society)
Political Individual politicians, parties