Services account for more than 60 per cent of world GDP and trade in services has grown.

As an economy
grows, the proportion of income spent on services increases more than proportionately when compared to
income spent on manufactured items, which, in turn, accounts for a higher proportion of income spent on
them as compared to agricultural items. The demand for services increases as income increases. On the
supply side, the share of services in output also goes up. As the economy grows, firms restructure to use a
supply intensive mode of production. This "splintering" refers to the activity where firms start focusing on
core functions and sub-contract non-core functions to the services sector.

Services are categorized into four different Modes. Mode 1 refers to services supplied from one country to
another, such as international telephone calls and business process outsourcing. Mode 2 relates to
consumption abroad where consumers or firms of one country make use of services in another country.
Examples in this category include medical care, education, and tourism. Mode 3 refers to commercial
presence, where foreign companies set up subsidiaries or branches to provide services in another country.
Examples include banking, financial and telecommunication services. Lastly, Mode 4 refers to movement of
natural persons. Examples include IT professionals, scientists and other professionals, traveling from their
own country to provide services in another country.

The Modes of service delivery and respective share in world trade in services

International trade in services has recorded rapid growth in the recent past. Global exports in commercial
services grew by 10 % and amounted to USD 2145 billion in 2005. It is expected that by 2050 world trade in
services will exceed world trade in manufactured items. Trade in services within Asia went up 14 % for the
same year. Technological developments, demographics, growing globalisation of production processes, and
economic liberalization are the driving forces behind the increasing trade in services. While developed
countries still dominate trade in services, developing countries are catching up fast. Among the top twenty
exporters of commercial services in 2005, five are developing countries with India in the 11th position. In
addition, in terms of the share of services export in total exports, India ranks 1st for the year 2005. India's
share in world exports of services has grown from 0.6 % in 1995 to 2.3 % in 2005.
India's negotiating position on services has changed since the Uruguay Round (UR). During the UR, India
had defensive stance on services. The country was one of the prime opponents of the inclusion of services
in the ambit of the multilateral trade negotiations. It was apprehended that any concessions gained in
traditional sectors like agriculture or textiles would be offset by the opening up of the government dominated
services such as, banking, insurance, and telecommunications. However, since the beginning of the GATS
2000 Negotiations and particularly after the Doha Ministerial in 2001, India has emerged as a leading
proponent of the services trade liberalisations at the multilateral arena.

The change in India's approach towards trade and investment liberalisation in services is clearly due to the
growing importance of the services sector in India's economy and its trade and investment flows in the
recent years. India's services sector recorded an average annual growth rate of 9 per cent in the 1990s,
while India's GDP grew at an average annual rate of 7.5 per cent during the same period. According to the
latest RBI Annual Report, in 2005-06, the services sector has recorded a growth rate of 10.3 per cent,
contributing almost three-fourths of the overall real GDP growth of India. From a mere 28 per cent in 1950-
51, the share of services (excluding construction) in the overall GDP of the economy went up to 53 per cent
in 2004-05.

The impressive growth in the Information technology sector has been feasible because of low cost of
operations, high quality of product and services and readily available skilled manpower. The ITES-BPO
industry has witnessed significant growth in 2005-06, driven by increased offshoring by firms in America and
Europe. Within ITES service lines, customer care and finance have been the two fastest growing segments.
Apart from these two, some other important segments in the outsourcing industry include human resources,
payment services administration and content development. While presently customer care remains the
largest service line, finance and administration services are expected to grow significantly over the next few
years.

The global ITES and BPO market is growing at around 9 per cent. With the industry structure undergoing
change, established software service companies have entered into ITES-BPO arena driven by factors such
as cross selling opportunities, critical mass and strong balance sheets, end-to-end service offerings. Even
as Indian service providers continue to strengthen their position as providers of Information Technology
Outsourcing (ITO) and Business Process Outsourcing (BPO) services to companies around the world, the
possibility now exists for India to add new stream of services export growth i.e., Engineering Services
Outsourcing (ESO).

Most economies are getting increasingly skill-scarce in a relative cost-effective sense, and professionals in
India could meet this gap effectively. Each year, India's universities, technical colleges and other tertiary
institutes produce nearly 100,000 engineering and science graduates. India presently accounts for 28 per
cent of IT and BPO talent among 28 low-cost countries in the world. India has emerged as a major software
exporting country with a level of US $ 23.6 billion in 2005-06, growing at a steady rate of over 30 % in the
recent past. While this cost advantage due to cheap skilled labor and the fluency in English is a major
strength for India, the pool is not big enough. Currently only about 25 per cent of technical graduates and 10
to 15 per cent of general college graduates are suitable for employment in the offshore IT and BPO
industries, respectively. There is a shortfall of nearly 0.5 million qualified employees in the IT and BPO
sector. The potential shortage of skilled labors has already led to an increase in wage. Wage costs are rising
by around 17 - 20 per cent per year. India will need a 2.3 million IT and BPO workforce by 2010 to maintain
its current market share.

*2*

he services sector has been at the forefront of the rapid growth of the Indian economy.

As per the Central Statistical Organisation (CSO), Ministry of Statistics and Programme Implementation:

• Trade, hotels, transport and communication are collectively estimated to grow by 11 per cent in
2010-11 owing to major progress pertaining to passengers handled in civil aviation (14.9 per cent),
air cargo (21.3 per cent) and stock of telephone connections (40.9 per cent) during April-November
2010-11.
• Similarly, financing, insurance, real estate and business services is expected to show a growth rate
of 10.6 per cent during 2010-11, on account of 14.0 per cent growth in aggregate deposits and 22.6
per cent growth in bank credit during April- November 2010 (against the respective growth rates of
18.6 per cent and 10.1 per cent in the corresponding period of previous year)
• Community, social & personal services is estimated to grow by 5.7 per cent in 2010-11.

Indicators

Lead indicators suggest that the pace of expansion in the services sector activity is likely to be sustained.

• Foreign tourist arrivals (FTAs) during Month of January 2011 were 5.38 lakh as compared to FTAs
of 4.91 lakh during the month of January 2010 and 4.22 lakh in January 2009, as per the Ministry of
Tourism data.
• According to the Telecom Regulatory Authority of India (TRAI), the number of telephone
subscribers in the country reached 787.28 million in December 2010 from 764.76 Million in
November-2010, thereby registering a growth rate of 2.95 per cent. With this the overall tele-
density (telephones per 100 people), touched 66.16.
• According to the Indian Ports Association data major ports in India handled 468.27 million tonnes
(MT) traffic during April 2010- January 2011, as compared to 463.25 MT handled during the same
period last year, registering a growth of 1.1 per cent.
• The total approximate earnings of Indian Railways on originating basis during April 2010 – January
2011 were US$ 16.68 billion (INR 76187.27 crore) compared to US$ 15.48 billion (INR 70696.03
crore) during the same period last financial year, registering an increase of 7.77 per cent.

The total goods earnings have gone up by 6.57 per cent and total passenger revenue earnings
expanded by 10.05 per cent during April 2010-January 2011.
• Sales of commercial vehicles have registered a growth rate of 34.1 per cent whereas cargo
handled by civil aviation has grown by 21.3 per cent and passengers handled by civil aviation has
grown by 14.9 per cent during April-November 2010.
Exports

According to World Trade Organisation's (WTO) "International Trade Statistics 2010" released recently,
India ranks twelfth in commercial service exports.

The HSBC Markit Business Activity Index, based on a survey of around 400 firms, rose to 58.1 in January
2011 from 57.7 in December.

The Indian IT-BPO sector is estimated to have grown by 19 per cent in 2010-11 to US$ 76 billion in
revenues, according to software industry body National Association of Software and Service Companies
(NASSCOM). Exports continued to be the mainstay of the industry with revenues of US$ 59 billion, growing
at 18.7 per cent.

Investments

According to data released by the Department of Industrial Policy and Promotion, the services sector
(financial and non-financial) attracted foreign direct investments (FDI) worth US$ 2,596 million between April
and November 2010 while the cumulative FDI between April 2000 and November 2010 has been US$
26,197 million, accounting for 21 per cent of the total FDI inflow.

Some of the investments in the service sector include:

• Denmark-based ISS, a facility services provider, has acquired a 49 per cent stake in Chennai-
based security firm SDB CISCO.
• Travel, transport and logistics major IBS Software has entered into a five-year deal with TUI Group
Airlines to provide support services.
• Kolkata-based Keventer Group will form a joint venture with French analytical service major Groupe
Carso for setting up a state-of-the-art food tasting laboratory in the state.

GROWTH OF SERVICE
SECTOR UNDER FIVE
YEAR PLANS