Module-II : Economic Planning and Service Sector

Economic Planning in India

The Constitution came into force on 26 January 1950. Subsequently, Planning Commission was set up
on 15 March 1950 and the plan era started from 1 April 1951 with the launching of the First Five Year Plan
(1951-56).

Economic Planning In India – Five Year Plans

The term economic planning is used to describe the long term plans of the government of India to develop and
coordinate the economy with efficient utilization of resources. Economic planning in India started after
independence in the year 1950 when it was deemed necessary for economic growth and development of the
nation.
Long term objectives of Five Year Plans in India are:

 High Growth rate to improve the living standard of the residents of India.
 Economic stability for prosperity.
 Self-reliant economy.
 Social justice and reducing the inequalities.
 Modernization of the economy.
The idea of economic planning for five years was taken from the Soviet Union under the socialist influence of
first Prime Minister Pt. Jawahar Lal Nehru.
The first eight five year plans in India emphasised on growing the public sector with huge investments in
heavy and basic industries, but since the launch of Ninth five year plan in 1997, attention has shifted towards
making government a growth facilitator.

Objectives of Economic Planning in India

The following were the original objectives of economic planning in India:

 Economic Development: This is the main objective of planning in India. Economic Development of
India is measured by the increase in Gross Domestic Product (GDP) and Per Capita Income
 Increased Levels of Employment: An important aim of economic planning in India is to better utilise
the available human resources of the country by increasing the employment levels.
 Self Sufficiency: India aims to be self-sufficient in major commodities and also increase exports
through economic planning. The Indian economy had reached the take-off stage of development during
the third five-year plan in 1961-66.
 Economic Stability: Economic planning in India also aims at stable market conditions in addition to the
economic growth of India. This means keeping inflation low while also making sure that deflation in
prices does not happen. If the wholesale price index rises very high or very low, structural defects in
the economy are created and economic planning aims to avoid this.
 Social Welfare and Provision of Efficient Social Services: The objectives of all the five year plans as
well as plans suggested by the NITI Aayog aim to increase labour welfare, social welfare for all
sections of the society. Development of social services in India, such as education, healthcare and
emergency services have been part of planning in India.
 Regional Development: Economic planning in India aims to reduce regional disparities in
development. For example, some states like Punjab, Haryana, Gujarat, Maharashtra and Tamil Nadu
are relatively well developed economically while states like Uttar Pradesh, Bihar, Orissa, Assam and
Nagaland are economically backward. Others like Karnataka and Andhra Pradesh have uneven
 development with world class economic centres in cities and a relatively less developed hinterland.
Planning in India aims to study these disparities and suggest strategies to reduce them.
 Comprehensive and Sustainable Development: Development of all economic sectors such as
agriculture, industry, and services is one of the major objectives of economic planning.
 Reduction in Economic Inequality: Measures to reduce inequality through progressive taxation,
employment generation and reservation of jobs has been a central objective of Indian economic
planning since independence.
 Social Justice: This objective of planning is related to all the other objectives and has been a central
focus of planning in India. It aims to reduce the population of people living below the poverty line and
provide them access to employment and social services.
 Increased Standard of Living: Increasing the standard of living by increasing the per capita income and
equal distribution of income is one of the main aims of India’s economic planning.

History of Economic Planning In India

Economic planning in India dates back to pre-Independence period when leaders of the freedom movement
and prominent industrialists and academics got together to discuss the future of India after Independence
which was soon to come. Noted civil engineer and administrator M. Visvesvaraya is regarded as a pioneer of
economic planning in India. His book “Planned Economy for India” published in 1934 suggested a ten year
plan, with an outlay of Rs. 1000 crore and a planned increase of 600% in industrial output per annum based on
economic conditions of the time.
The Industrial Policy Statement published just after independence in 1948 recommended setting up of a
Planning Commission and following a mixed economic model. Here are the major milestones related to
economic planning in India:

 Setting up of the Planning Commission: 15 March 1950

 First Five Year Plan: 9 July 1951
 Dissolution of the Planning Commission: 17 August 2014
 Setting up of NITI (National Institution for Transforming India) Aayog: 1 January 2015
Setting up the NITI Aayog was a major step away from the command economy structure adopted by India till
1991. The Planning Commission’s top down model of development had become redundant due to present
economic conditions and NITI Aayog approaches economic planning in a consultative manner with input from
various state governments and think tanks.

The NITI Aayog:

Objectives and Function:

The Planning Commission of India supervised the five-year plan for the economic development of the
country. However, in 2014, the 65-year-old Planning Commission was dissolved and a think tank – NITI
Aayog (National Institution for Transforming India) took its place. The NITI Aayog (National Institution for
Transforming India), is a think tank of the Government of India established on 1 January 2015 as a
Commission to give suggestions to the Governments at the central and state levels with relevant strategic,
directional and technical advice across the spectrum of key elements of policy / development process. The
Prime Minister of India heads the Aayog as the Ex-officio Chairperson. Currently Rajiv Kumar is the vice
chairperson of the NITI Further, it has some full-time as well as part-time members along with four Union
Ministers serving as ex-officio members. It also has a governing council which includes all State Chief
Ministers and Lt. Governers of the Union Territories. The council works towards fostering cooperative
federalism for providing a national agenda to the Center and the individual States. Additionally, there are
specific regional councils and the Prime Minister invites some special invitees who are experts and specialists
in various fields too. Since it serves as a think tank of the government or as a directional and policy dynamo, it
provides advice on strategic policy matters to the governments at the Center and the States. Further, it includes
economic issues of both domestic and international importance. The Aayog provides direction to the
Monitoring and Evaluation (M & E) activities in India. It also pegs importance to the quality standards, ethical
procedures and provides appropriate institutional mechanisms.

Therefore, NITI Aayog means:

• A group of people that the Government entrusts for formulating and regulating policies concerning
the transformation of India.

• A Commission assists the Government in both social and economic issues. • An institution with
experts

• A body that actively monitors and evaluates the implementation of the Government’s programs and
initiatives.

Seven Pillars of NITI Aayog:

1. Pro-People: Full fill aspiration of society as well as individual.

2. Pro-Active: In anticipation of and response to citizen needs.

3. Participation: Involvement of all

4. Empowering: Women in all aspects

5. Equity: of opportunity for the youth.

6. Transparency: Making government visible and responsive

7. Inclusion of All: SC, ST, OBC, Minorities, Gareeb, Gaon and Kisan.

Composition/Structure of NITI Aayog:

1. Chairperson - Prime Minister of India

2. Governing Council - comprising the Chief Ministers of all the States and Lt. Governors of Union
Territories.

3. Experts, specialists and practitioners with relevant domain knowledge as special invitees nominated by the
Prime Minister

4. Vice-Chairperson - appointed by the Prime Minister (Dr. Rajiv Kumar)

5. Full-time members (Dr. Bibek Debroy, Shri V.K. Saraswat, Prof. Ramesh Chand, Dr. V. K. Paul)

6. Maximum of 2 part-time members.

7. Ex Officio members -Maximum of 4 members of the Union Council of Ministers to be nominated by the
Prime Minister. v. Chief Executive Officer - appointed by the Prime Minister for a fixed tenure, in the rank of
Secretary to the Government of India.
Aims of the NITI Aayog:

1. Provide a critical directional and strategic input to the development process of India.

2. Serve as a think tank of the Government both at the Center and State-level. Also, provide relevant strategic
and technical advice on key policy matters.

3. Try to replace the center-to-state, one-way flow of policy with an amicably settled policy which a genuine
and continued partnership of state frames.

4. Seek to put an end to the slow and tardy implementation of the policy. This is possible through better Inter-
Ministry and state-to-state coordination.

5. Further, it help to evolve a shared vision of national development priorities and foster cooperative
federalism. Work with the view that strong states = a strong nation.

6. Develop mechanisms to formulate credible plans at the village level. Further, aggregate these plans
progressively at the higher levels of the Government. In other words, ensure that special attention is paid to the
sections of the society which carry the risk of not benefitting from the overall economic progress of the
country.

7. Create a Knowledge, Innovation, and Entrepreneurial system through a collaborative community of national
and international experts and practitioners. Offer a platform for the resolution of inter-sectoral and inter-
departmental issues to accelerate the implementation of the development agenda.

8. Monitor and evaluate the implementation of programs and also focus on upgrading technology and building
capacity.

Objectives:

The NITI Aayog tries to accomplish the following objectives and opportunities:

• Creating an effective administration paradigm in which the Government is an enabler rather than a provider
of the first and last resort.

• To focus on technology upgradation and capacity building for implementation of programmes and initiatives.

• To undertake other activities as may be necessary in order to further the execution of the national
development agenda, and the objectives mentioned above.

• Attaining progress from food security. Focusing on a mix of agricultural production and the actual returns
that farmers get from their produce.

• Ensuring that India is an active participant in global debates and deliberations.

• Ensuring that the economically vibrant middle-class is actively engaged and utilized to its full potential.

• Leveraging India’s pool of entrepreneurial, scientific, and intellectual human capital.

• Incorporating the geo-economic and geopolitical strength of the NRI Community.

• Using urbanization as an opportunity to creating a secure habitat via modern technology.

• Using technology to reduce opacity and potential for misadventures in governance.

• To pay special attention to the sections of our society that may be at risk of not benefitting adequately from
economic progress. The measures were taken by the NITI Aayog to help India face complex challenges

• Leverage India’s demographic dividend and realize the potential of young men and women. This is done
through imparting education, skill development, the elimination of gender bias and providing employment
opportunities.

• Eliminate poverty and offer Indians a better chance to live a life of dignity and respect. • Redress inequalities
based on gender bias, caste, and econmic disparities. • Integrate villages into the development process of the
country.

• Provide policy support to more than 50 million businesses – a major source of employment generation.

• Safeguard our environmental and ecological assets.

Functions of NITI Aayog:

1. Cooperative and Competitive Federalism : Primary platform for operationalizing Cooperative

Federalism by enabling States to have active participation in the formulation of national policy, as well as
achieving time-bound implementation of quantitative and qualitative targets.

2. Shared National Agenda : Evolve a shared vision of national development priorities and strategies, with
the active involvement of States. This will provide the framework ‘national agenda’ for the Prime Minister and
Chief Ministers to implement.

3. State’s Best Friend at the Centre : Support States in addressing their own challenges, building on
strengths and comparative advantages. This will be through coordination with Ministries, championing their
ideas at the centre, providing consultancy support and building capacity.

4. Decentralized Planning : Restructure the planning process into a bottom-up model.

5. Vision & Scenario Planning : Design medium and long-term strategic frameworks across all sectors.

6. Network of Expertise : Main-stream external ideas and expertise into government policies and
programmes through a collaborative community of national and international experts, practitioners and other
partners. This would entail being Government’s link to the outside world.

7. Knowledge and Innovation hub : Be an accumulator as well as disseminator of research and best practices
on good governance, through a Resource Centre which identifies, analyses, shares and facilitates replication of
the same.

8. Harmonization : Facilitate harmonization of actions across different layers of government through

communication, coordination, collaboration and convergence amongst all stakeholders. The emphasis will be
on bringing all together on an integrated and holistic approach to development.

9. Conflict Resolution : Provide a platform for mutual resolution of inter-sectoral, inter-departmental,

interstate as well as centre-state issues.

10. Coordinating interface with the World : Be the nodal point for strategically harnessing global expertise
and resources from multilateral platforms , nations etc.
11. Internal Consultancy : Offer an internal consultancy function to central and state governments on policy
and program design , specialised skills such as structuring and executing Public Private Partnerships.

12. Capacity building : Enable capacity building and technology up-gradation across government,
benchmarking with latest global trends and providing managerial and technical knowhow.

13. Monitoring and Evaluation.

Role of Private/Corporate
DEVELOPMENT OF SERVICE SECTOR Sector in Development

Service Sector in India: Meaning and Composition

The tertiary or service sector provides a service, not an actual product. Services or the “tertiary sector” of
the economy covers a wide gamut of activities like trading, banking & finance, infotainment, real estate,
transportation, security, management & technical consultancy among several others.
In the National Income Accounting in India, service sector includes the following:
1. Trade, hotels and restaurants (THR)
Trade
Hotels and restaurants
2. Transport, storage and communication
Railways
Transport by other means
Storage
Communication
3. Finance, insurance, real estate and business services
Banking and insurance
Real estate, ownership of dwellings and business services
4. Community, social and personal services
Public administration and defense (PA&D)
Other services

Growth of Service Sector in India

India is the 4th largest economy and 2nd fastest growing major economy of the world today. India ranks 50
out of 117 economies in terms of competitiveness. Its rank is 15th in service sector of the world. Strong
growth across sectors promises not just to beat back the recession blues but also cement India’s position as
a leading growth center in Asia alongside China. FDI in India are flowing into mainly three service sub
sectors : Telecommunication equipments and services, Financial services (banking and non banking) and
Hospitality industry. More than two decades of opening up has produced new dynamism in India People
force of India is growing fast. India is the largest English speaking country in the world. Therefore India has
experienced hyper growth of its service sector.
ndian economy is classified in three sectors — Agriculture and allied, Industry and Services. Agriculture
sector includes Agriculture (Agriculture proper & Livestock), Forestry & Logging, Fishing and related
activities. Industry includes ‘Mining & quarrying’, Manufacturing (Registered & Unregistered), Electricity,
Gas, Water supply, and Construction. Services sector includes ‘Trade, hotels, transport, communication
and services related to broadcasting’, ‘Financial, real estate & ‘Public Administration, defence and other
services’.
Services sector is the largest sector of India. Gross Value Added (GVA) at current prices for Services sector is
estimated at 73.79 lakh crore INR in 2016-17.
 Services sector accounts for 53.66% of total India’s GVA of 137.51 lakh crore Indian
rupees. With GVA of Rs. 39.90 lakh crore, Industry sector contributes 29.02%. While,
Agriculture and allied sector shares 17.32% and GVA is around of 23.82 lakh crore INR.

At 2011-12 prices, composition of Agriculture & allied, Industry, and Services sector
were 15.11%, 31.12%, and 53.77%, respectively. Accordingly, now the sector wise
Indian GDP composition in 2014 was as follows: Agriculture (17.9%), Industry (24.2%)
and Services (57.9%). Total production of agriculture sector is $366.92 billion. India is 2nd
larger producer of agriculture product. India accounts for 7.68 percent of total global
agricultural output. GDP of Industry sector is $495.62 billion and world rank is 12. In
Services sector, India world rank was 11 and GDP was $1185.79 billion. Contribution of
Agriculture sector in Indian economy is much higher than world’s average (6.1%).
Contribution of Industry and Services sector is lower than world’s average 30.5% for
Industry sector and 63.5% for Services sector.

Service Sector in India today accounts for more than half of India’s GDP. According to
data for the financial year 2014, the share of services, industry, and agriculture in India’s
GDP was 55.1 per cent, 26.4 per cent, and 18.5 per cent respectively. The fact that the
service sector now accounts for more than half the GDP marks a watershed in the evolution
of the Indian economy and takes it closer to the fundamentals of a developed economy.
There was marked acceleration in services sector growth in the eighties and nineties,
especially in the nineties. While the share of services in India’s GDP increased by 21 per
cent points in the 50 years between 1950 and 2000, nearly 40 per cent of that increase
was concentrated in the nineties. While almost all service sectors participated in this boom,
growth was fastest in communications, banking, hotels and restaurants, community
services, trade and business services. One of the reasons for the sudden growth in the services
sector in India in the nineties was the liberalization in the regulatory framework that gave
rise to innovation and higher exports from the services sector.

The boom in the services sector has been relatively “jobless”. The rise in services share in
GDP has not been accompanied by proportionate increase in the sector’s share of national
employment. Some economists have also cautioned that service sector growth must be
supported by proportionate growth of the industrial sector, otherwise the service sector
grown will not be sustainable. In the current economic scenario it looks that the boom in the
services sector is here to stay as India is fast emerging as global services hub.

Table 1: Contribution of Service Sector to Economic Growth

Sectors 1950/ 1960/ 1970/ 1980/ 1990/ 2000/ 2007/ 2008/

51 61 71 81 91 01 08 09
Agriculture 55.3 50.8 44.3 37.9 31.4 23.9 17.8 17.0
Industry 15.1 18.8 22.1 24.1 25.9 25.8 26.5 25.8
Services 29.8 30.4 33.6 38.0 42.7 50.3 55.7 57.3

Source: Reserve Bank of India, Handbook of Statistics of Indian Economy, 2008-09and Government of
India, Economic Survey, 2009-10, New Delhi

Role of Public, Private and Service Sector in Development

 The service sector has unprecedented growth in India over last sixty years. The sectoral
share of service sector has increased from 29% in 1950s to 57% in 2009. But the share of
agriculture in GDP has decreased from 55% to 17% during the same period. It is seen from
the following table 2.

Table 2: Sectoral Share of GDP in India

Sector GVA (Rupees in Crore) at Current Prices

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 %Share
1 Agriculture Sector 1,501,816 1,680,798 1,932,692 2,067,935 2,172,910 2,382,289 17.32
1.1 Agriculture, forestry & fishing 1,501,816 1,680,798 1,932,692 2,067,935 2,172,910 2,382,289 17.32
2 Industry Sector 2,635,052 2,921,262 3,188,270 3,455,221 3,683,358 3,989,791 29.02
2.1 Mining & quarrying 261,035 285,776 295,716 313,844 296,041 309,178 2.25
2.2 Manufacutring 1,409,986 1,572,830 1,713,445 1,883,929 2,065,093 2,278,149 16.57
2.3 Electricity, gas, water supply & other utility services 186,668 215,164 259,840 279,456 321,765 338,396 2.46
2.4 Construction 777,363 847,492 919,269 977,992 1,000,459 1,064,068 7.74
3 Services Sector 3,969,789 4,603,255 5,245,305 5,947,260 6,595,670 7,378,705 53.66
3.1 Trade, hotels, transport, communication and services 1,413,116 1,664,083 1,874,443 2,095,337 2,294,367 2,538,162 18.46
related to broadcasting
3.2 Financial, real estate & prof servs 1,530,691 1,776,023 2,069,386 2,363,328 2,632,432 2,896,300 21.06
3.3 Public Administration, defence and other services 1,025,982 1,163,149 1,301,476 1,488,595 1,668,871 1,944,243 14.14
GVA at basic prices 8,106,656 9,205,315 10,366,266 11,470,415 12,451,938 13,750,786 100.00
Source: Ministry of Statistics and Programme Implementation, Planning Commission, (2017) Govt of India

Major Services’ Sector-wise performance and some recent Government policies till 2017 to
boost the growth of the sector are as follows:

Tourism
India’s Tourism sector has been performing well with Foreign Tourist Arrivals (FTAs)
growing by 9.7% to 8.8 million and Foreign Exchange Earnings (FEEs) at 8.8% to US$
22.9 billion in 2016. FTAs during 2017 were 10.2 million, with a growth of 15.6%, while
FEEs from tourism were US$ 27.7 billion, with a growth of 20.8% over 2016. Domestic
tourist visits grew by 12.7% to 1,614 million in 2016 from 1,432 million in 2015. Tamil
Nadu, Uttar Pradesh, Andhra Pradesh, Madhya Pradesh and Karnataka were the Top 5
Destination States in 2016.

Various initiatives have been taken by the Government to promote tourism include the
introduction of the e-Visa facility under three categories of Tourist, Medical and Business
for the citizens of 163 countries; launch of Global Media Campaign for 2017-18 on various
Channels; launch of ‘The Heritage Trails’ to promote the World Heritage Sites in India;
launch of International Media Campaign on various international TV channels; Celebration
of ‘Paryatan Parv’ having 3 components namely ‘Dekho Apna Desh’ to encourage Indians
to visit their own country, ‘Tourism for All’ with tourism events at sites across all states in
the country, and ‘Tourism & Governance’ with interactive sessions & workshops with
stakeholders on varied themes. FTAs on e-Tourist Visa grew by 143% to 10.8 lakh in 2016,
and further grew by 57.2% to 17.0 lakh during 2017.

IT-BPM
India’s Information Technology – Business Process Management (IT-BPM) industry grew
by 8.1% in 2016-17 to US$ 139.9 billion (excluding e-commerce and hardware) from
US$129.4 billion in 2015-16, as per NASSCOM data. IT- BPM exports grew by 7.6% to
US$116.1bn from US$ 107.8 billion during the same period. E-commerce market is estimated
at US$ 33bn, with a 19.1% growth in 2016-17.

To further promote this sector, many initiatives have been taken, which include the
establishment of BPO Promotion and Common Services Centres to help create digital inclusion
and equitable growth and provide employment to 1.45 lakh persons, mostly in the small towns;
setting up a separate Northeast BPO promotion Scheme with 5000 seats and having
employment potential of 15000 persons; preparing the draft Open Data Protection Policy law;
besides long-term initiatives like Digital India, Make in India, Smart Cities, e-Governance,
push for digital talent through Skill India, drive towards a cashless economy and efforts to
kindle innovation through Start-up India.

Real Estate
The Indian Real Estate sector has begun to show signs of improvement with the total FDI
of US$ 257mn in H1 2017, which is more than double the total FDI in 2016 full year. Some
of the recent reforms and policies taken by the Government of India related to Real Estate
Sector include the Pradhan Mantri Awas Yojana (PMAY) with the government
sanctioning over 3.1 million houses for the affordable housing segment in urban regions till
November 2017. Of this, about
1.6 million houses have been grounded and are at various stages of construction, and about
0.4 million houses have been built under the mission. PPP policy for affordable housing
was also announced on 21st September 2017 for affordable housing segment to provide
further impetus to the ambitious ‘Housing for all by 2022’ mission. Credit Linked Subsidy
Scheme (CLSS) under PMAY was extended to the Middle Income Group (MIG) segment,
which got included in the scheme from 1st January 2017. With the enactment of Real
Estate (Regulation & Development) Act, 2016, it is anticipated that accountability would
lead to higher growth across the real estate value chain, while compulsory disclosures and
registrations would ensure transparency.

R&D
The professional Scientific & Technical activities which include R&D services grew by
17.5% and 41.1% in 2014-15 and 2015-16 respectively. India-based R&D services
companies, which account for almost 22% of the global market, grew at 12.7%. However,
India’s gross expenditure on R&D has been at around 1% of GDP. India ranks 60th out of
 127 on the Global Innovation Index (GII) 2017, improving from 66th rank in 2016.
Buoyed by the Government’s support which includes important Schemes of different
Ministries/Departments, the R&D sector in India is all set to witness robust growth in the
coming years. According to a study, engineering R&D market in India is estimated to grow
at a CAGR of 14% to reach US$ 42 billion by 2020. India is also expected to witness
strong growth in its agriculture and pharmaceutical sectors as the Government is investing
large sums to set up dedicated research centres for R&D in these sectors.

3.2.4 Contribution of Service Sector to Employment

It is important to point out that, within the services sector employment growth rate is
highest in finance, insurance, and business services, followed by trade, hotels and
restaurants and transport etc. the community social and personal services occupy the last rank
in growth rates of employment. Even though there has been substantial growth of service
sector after the globalization, commensurating to its growth, the employment absorbing
capability of the service sector is slow. It is found that during 1990s although the service
sector growth was from 42 percent to 48 percent of GDP, during the same period, the
employment share of the services actually declined by about one percentage point during the
decode. In other words, it can be concluded that while activity has shifted to services,
employment creation in services has lagged far behind.

Indian Economy is classified in three major sectors;

Agriculture & Allied Sector: This sector includes forestry and fishing also. This sector
is also known as the primary sector of the economy. At the time of Indian independence
this sector had biggest share in the Gross Domestic Product of India. But year by year its
contribution goes on declining and currently it contributes only 17% of Indian GDP at
current prices. It is worth to mention that agriculture sector provides jobs to around 53%
population of India.
Industry Sector: This sector includes ‘Mining & quarrying’, Manufacturing (Registered
& Unregistered), Gas, Electricity, Construction and Water supply. This is also known as
the secondary sectors of the economy. Currently it is contributing around 31% of the
Indian GDP (at current prices).
Services Sector: Services sector includes ‘Financial, real estate & professional services,
Public Administration, defence and other services, trade, hotels, transport,
communication and services related to broadcasting. This sector is also known as tertiary
sector of the economy. Currently this sector is the backbone of the Indian economy and
contributing around 53% of the Indian GDP.
Services sector is the largest sector of India. Gross Value Added (GVA) at current prices for
Services sector is estimated at 73.79 lakh crore INR in 2016-17. Services sector accounts
for 53.66% of total India’s GVA of 137.51 lakh crore Indian rupees.
Industrial sector contributes 29.02% with GVA of Rs. 39.90 lakh crore. While, Primary
Sector of the economy i.e. Agriculture and allied sector contributes 17.32% and its GVA
is around Rs. 23.82 lakh crore at the current prices in the FY 2016-17.
 Table 3: Three sectors of the Indian economy in the FY 2016-17 at the current
price.

Sector GVA (Rupees in Percentage

Crore) at current share
prices (2016-17)
A1g.0riculture Sector 2,382,289 17.32 %
A1g.1riculture,forestry & fishing 2,382,289 17.32 %
I2n.d0ustry Sector 3,989,791 29.02 %
M
2.i1ning & quarrying 309,178 2.25 %
2.2 Manufacturing 2,278,149 16.57 %
2.3 Electricity, gas, water supply & 338,396 2.46 %
other utility services
2.4 Construction 1,064,068 7.74 %

3.0 Services Sector 7,378,705 53.66 %

3.1 Trade, hotels, transport, 2,538,162 18.46 %

communication and services
related to broadcasting
3.2 Financial, real estate & prof 2,896,300 21.06 %
servs
3.3 Public Administration, 1,944,243 14.14 %
defence and other services
GVA at Current Prices 13,750,786 100.00 %

Source: Economic Survey Report 2017-18. Government of India.

The above table shows that the service sector is the backbone of the Indian economy;
contributing the most in Indian GDP followed by the industrial sector. But the declining
percentage of the agriculture and allied sector in the Indian GDP is the cause of concern for
the policy makers because this sector still provides livelihood to around 53% population of
the country but its contribution in the economy is declining year by year.

IMPORTANT SERVICES SECTORS IN INDIA

Financial Sector
Some of the important services sectors in India follow:
Financial sector and financial services sector have grown considerably in recent years,
 catalysed by deregulation in the 1990s. The financial sector consists of two types of
market: Money market and capital market. The privatization process in banking and
insurance sector of India has been very powerful. International acquisitions and internal
growth have swollen the banks’ combined balance sheets
.The foreign commercial banks have subsidiaries and branch offices in India and
elsewhere. Total assets of the commercial banks have significantly increased. Many other
credit institutions and non banking institutions currently operate in every country including
India: Life Insurance Company (LIC) represents the largest portion of total assets of
insurance companies.

There are three types of Insurance in India

1. Life Insurance - guaranteeing a specific sum of money to a designated beneficiary
upon the death of the insured, or to the insured if he or she lives beyond a certain age.
2) Health Insurance - against expenses incurred through illness of the insured.
3) Liability Insurance – for property such as automobiles, property and
professional/business mishaps.
Because of extensive reforms undertaken in the banking sector after 1991, the
performance of banking sector has improved significantly. The operating profits and net
profit of public sector banks has increased by 33% 28.3% during 2008- 09.There were 15
old private sector banks and 7 new private banks (Axis, HDFC, ICICI, Development Credit
Bank Ltd, Indus Ind. Ban ltd, Kotak Mahindra Bank Ltd and Yes Bank Ltd) have started
operating in India. The operating profits of old private banks were 33.2 % while it is 24.6
% in case new private banks during 2008-09. The net profit of old private and new
private banks rose by 21.8% and 12.1% respectively during 2008-09.

IT and Software Sector

The Indian information technology (IT) industry has played a major role in placing India on
the international map. India is witnessing resurgence in the service sector most dramatically
in IT sector, Bio Technology etc. Some Indian firms in IT business have become world-
beaters. India is meeting almost 70 % of worldwide BPO demand. Multinational firms
come to India for lower cost and ultimately stay here for quality. The Indian IT sector is
growing rapidly and it has already made its presence felt in all parts of the world. The
industry is mainly governed by IT software and facilities for instance System Integration,
Software experiments, Custom Application Development and Maintenance (CADM),
network services and IT Solutions. IT has a major role in strengthening the economic and
technical foundations of India. Indian professionals are setting up examples of their
proficiency in IT, in India as well as abroad. The sector can be classified into 4 broad
categories - IT Services, Engineering Services, ITES-BPO Services, E Business. IT
Services can further be categorized into Information Services (IS) outsourcing, packaged
software support and installation, systems integration, processing services, hardware
support and installation and IT training and education.

The IT/ITES industry provides direct employment to the about 2.23 million and indirect
employment to the 8 million people. Due to the high demand of India’s vaunted IT
outsourcing sector, companies have been forced to raise wages by 10 to 15 per cent. IT sector
is dynamic sector which is continuously evolving. As per NASSCOM, IT exports in business
process outsourcing (BPO) services attained revenues of US $ 48 billion in FY 2008-09 and
accounted for more than 77 percent of the entire software and services income. Over the years
India has been the most favourable outsourcing hub for firm on a lookout of offshore their IT
operations. The factors behind India being a preferred destination are its reasonable priced
labour, favourable business ambiance and availability of expert workforce.

Top Software Companies in India

There are number of software companies in India which have been doing well. However,
some of the top Indian software companies can be listed as:
Tata Consultancy Services MphasiS Wipro
Limited IBM India
Infosys Patni Computer Systems
HCL Technologies L&T Infotech
Tech Mahindra i-flex Solutions

Indian Telecom Industry

Indian Telecom Industry is the fifth largest and fastest growing in the world. It has
provided 110.01 million connections. It is currently expected to contribute nearly one
percent to India’s GDP. The subscriber base has grown by 40% in 2005 and is expected to
reach 250 million in 2007. Over the last 3 years, two out of every three new telephone
connections were wireless. Consequently, wireless now accounts for 54.6% of the total
telephone subscriber base, as compared to only 40% in 2003. Wireless subscriber growth
is expected to grow at 2.5 million new subscribers every month in 2007. The wireless
subscriber base skyrocketed from 33.69 million in 2004 to 62.57 million in FY 2004 -
2005. The wireless technologies currently in use Indian Telecom Industry are Global
System for Mobile Communications (GSM) and Code Division Multiple Access
(CDMA). Telecom Industry in India is regulated by ‘Telecom Regulatory Authority of
India’(TRAI). It has earned good reputation for transparency and competence. Three
types of players exist in Telecom Industry in India:
 State owned companies like - BSNL and MTNL.
 Private Indian owned companies like - Reliance Infocom and Tata Teleservices.
 Foreign invested companies like - Hutchison-Essar, Bharti Tele-Ventures, Escotel,
Idea Cellular, BPL Mobile, Spice Communications etc.
The Indian Telecom Industry services is not confined to basic telephone but it also
extends to internet, broadband (both wireless and fixed), cable TV, SMS, IPTV, soft
switches, etc.

Foreign Trade in Services

The largest service sub sector in India is trade. The share of this sector in GDP was
almost 12 per cent or more throughout the period of planning. Now it has become more
 than 14%. This sector registered a growth of about 6% per annum in 1980s, 7% per annum
in 1990s and it is more than 9% per annum in the current decade. There are number of
services which are traded across the countries. Transport and insurance are traditional
components of trade in India. With the spread of telecommunication and computer
technologies, virtually all types of commercial services have become tradable among
countries. The liberalization policies of nineties and the removal of regulatory obstacles
have fueled the steady growth of foreign investment and trade in services.

Hospitality and Tourism Sector

Tourism is the second largest industry of the world and sixth largest industry in India.
Tourism comprises the largest component of the tertiary sector. It constitutes the major item in
the world trade, which is growing at a faster rate than the world trade in tangible goods. It has
now become a highly organized industry representing about 12 percent of world’s gross
income. World’s revenue from this business has been constantly growing at a faster rate.
In developing countries Tourism is also one of the largest industries with fastest expansion in
its range and dimension. It is an industry with great employment potential. In fact one in
every 16 workers worldwide owns his or her job to tourism sector. It has emerged as the
most lucrative business of the world, having tremendous potentiality for earning foreign
exchange, yielding tax revenue to the state, promoting ancillary industries, generating
income and employment and developing backward regions through various linkage
effects. Indian tourism as a sector of economic significance received the widest
recognition after II world war.

There are many other ancillary services and informal activities having direct effects on
tourism. Ancillary services having direct connectivity with tourism are: handicrafts,
souvenir industry, horticulture, floriculture, leisure and entertainment services, and
activities of all personals dealing with tourists across the counter in customs, immigration,
airports, airlines, railway stations, ferry services, museums, bus terminals, taxi stands,
banks, medicals , police stations, post offices, communication, advertising, shopping centers,
sports and many other organizations both in the private and public sector.

Hotel Industry
Hotel accommodation is the significant segment of hospitality industry of India. The
‘Incredible India’ destination campaign and the recently launched ‘Atithi Devo Bhavah’
(ADB) campaign have also helped in the growth of domestic and international tourism and
consequently the hotel industry. Hotel Industry in India has witnessed tremendous boom in
recent years. Hotel Industry is inextricably linked to the tourism industry and the growth
in the Indian tourism industry has fuelled the growth of Indian hotel industry. The thriving
economy and increased business opportunities in India have acted as a boon for Indian
hotel industry. The arrival of low cost airlines and the associated price wars have given
domestic tourists a host of options. Growth story of hotel industry of India seconds only to
China in Asia Pacific. Hotel industry of India has the supply of 110,000 rooms. According
to the tourism ministry, 4.4 million tourists visited India in 2009 and at current trend;
demand will soar to 10 million in 2010 - to accommodate 350 million domestic travelers.
With tremendous pull of opportunity, India is a destination for hotel chains looking for
 growth. The World Travel and Tourism Council, India, data says, India ranks 18th in
business travel and will be among the top 5 in this decade. Sources estimate, demand is
going to exceed supply by at least 100% over the next 2 years. Hotel Industry’ is adding
about 60,000 quality rooms, currently in different stages of planning and development
MNC Hotel Industry giants are flocking India and forging Joint Ventures to earn their share
of pie in the race. Government has approved 300 hotel projects, nearly half of which are in
the luxury range. Sources said, the manpower requirements of the hotel industry will
increase from 7 million in 2002 to 15 million by 2010.

FACTORS CONTRIBUTING TO THE GROWTH OF SERVICE SECTOR

The service sector has rapidly grown due to many reasons. The following factors have
mainly contributed towards its growth.

Liberalization Policy
The globalization process after 1991 has considerably liberalized the industrial and trade
policies and opened up the banking, insurance, transport and communication sectors
to private entrepreneurs. This liberalization has boosted the growth of service sector in
India. Some sectors which are more liberalized, like banking, IT, communication,
insurance services have experienced faster growth.

Technological Advancement
Growth of service sector is also stimulated by technological advancement. New activities
and new products emerge as a result of technological breakthrough. The technological
advancements that have positive impact on economic growth in India are the increasing
use of internet in case of IT sector, expansion of cellular phone in case of telecom sector
and wider use of ATM/credit cards in case of banking sector.

Splintering
With maturing of the economy specialization takes place. Industrial units tend to outsource
some of the activities which were previously undertaken by them. They use and hire the
services of the specialist contractors and sub contractors to provide accounting, R/D,
cleaning, legal and security services, etc. This process of specialization splintering leads to a
growth in the share of services in GDP, even when GDP itself not growing. Jobs outsourced
are counted as service sector contribution to GDP rather than being subsumed in manufacturing
value-added.

Sectoral Interdependence
The growth of industry and other sectors has positive impact on the service sector because the
interdependence among sector has also increased. There is direct and reverse interrelationship
between industry and service sector. The impact of manufacturing sector on service sector is
significant. But the contribution of service input to manufacturing in 1980 was only 1% of
output growth, while it has increased substantially upto 25% in 1990s. This implies that
increasing use of services in manufacturing favourably affects the TFP (total factor
productivity)

Demand-side impetus
Demand for different type of services increased by leaps and bounds after 1991.The share of
services in the consumption basket increase d by 3% pointes each decade; that is from 8% to
11% during 1960-61, 14% during 1970-71, 17% during 1980-81 and 20% during 1990-91.
Thereafter the trend changed significantly, when private sector consumption of services
increased to 31% and during 2016-17 it increased even higher. Thus the growth of service sector
is due to the impetus given by domestic consumers as well as foreign buyers.

CHALLENGES OF SERVICE SECTOR

Some of the challenges of service sector are narrated below:
i) Indian money market is not integrated with debt and foreign exchange market.
According to Y.V Reddy, Governor of RBI, while the base has been created with the
variety of products in the money market, the market has not acquired the required
depth in terms of both volume and liquidity. Though the banks have expanded their
branches in an unprecedented scale, the banking facilities in the country are still
inadequate. One branch serves about 160000 population in India while it is only 1200
persons in US. There more competition than cooperation and coordination between
various players of money market.

ii) There is no integration between the organized sector and unorganized sector of
Indian money market. The indigenous bankers do operate as individuals and private
firms, whose volume of operates are unknown. They do not constitute a
homogeneous group. They are engaged in many banking and non- banking business,
which remain largely unregulated. The credit o f money lender has remained as the
necessary evil.

iii) There is absence of organized bill market. There is lack of rational interest rates
structure. There is shortage of funds in money market. The market for short-term
asset has not yet developed. In terms of organization, resources, stability and
elasticity financial institutions are hardly comparable to the money market of
London or New York. The emergence of parallel economy and vast amount of black
money in India has also caused shortage of financial resources in the money
market.With western imitation through free market policy, rapidity in tourism sector
may result in creation of new tourism facilities. These developments in many cases
lead to competition and conflict .In turn they have generated a wide range of
deleterious environmental impacts. It has many negative social and cultural impacts.
The local people of the tourist centers stand to lose in the current process of
tourism development. It has become another element of the destructive process,
which exploits the local population, damages the environment, promotes
consumerism, widens the gap between rich and poor and reinforces the global status
quo.

iv) Educational system has an unintended consequence of producing an

 “educational vacuum” for the society at large. Because all good students now are
running after lucrative jobs as per the imperative of commodity- centric society and
as per the new trend of higher education. Maximization of the short run individual
objectives is being done at the cost of long run social objectives. The society
ultimately remains neglected and bypassed.

v) The year 2011 is likely to be a boom for skilled worker in IT & ITES, biotechnology as
against the 15 per cent hike in their salaries in 2010. The employers are trying to
catch up the highly skilled manpower and the salaries are going through the roof. The
youth force of India is contributing to the growth in IT sector. However, the huge
numbers of Indian youth are not only unemployed but unemployable on the contrary a
large numbers of white collar jobs are waiting for suitable candidates. IT and ITES
industry and biotech industry are facing skill manpower shortages. Companies are not
only facing the problem of retention difficult and job hoping extensive, but there is
a clear shortage of skill. Mainly IT/ITES, academics, engineering, HR, hospitality,
insurance and biotechnology sectors, which are driven by the highly skilled
manpower but the supply of capable labor is not up to the demand at the point.

vi) The employment generation in service sector has been increasing at a slower rate
than the growth of output in the eservice sector over the years. Thus India is
witnessed a jobless service sector growth during 1990s. It is very different
experience compared to other countries. Service sector accounts for more than 55%
of GDP, but its share in employment continues to be very low; less than one-fourth of
the total. It means the growth in value addition in service sector is higher than the
employment growth in the service sector. It implies that the growth of average
productivity of labour is higher than the growth of employment in service sector.
For example finance, insurance and real estate business account for 13 % of GDP in
2000, but employed only 1.2 % of the labour force. So service sector alone cannot
sustain the present trend of economic growth in the long run.

MEASURES FOR PROMOTION OF SERVICE SECTOR

Some of the measures required to be taken for the promotion of service sector in India are as
follows:

i) Institutional reforms should be made to integrate money market with debt and
foreign exchange market. It should facilitate RBI (Reserve Bank of India) to use indirect
tools of monetary regulations. There should be integration between the organized sector and
unorganized sector of Indian money market. There should be cooperation and coordination
between various players of money market. The RBI should regulate the lending operations of
the money lenders and indigenous bankers which is weakening the credit control system. It
should stop the exploitation of money lenders and protect the small borrowers by developing
institutional sources of credit.

ii) The stringent policy is necessary to curb parallel economy and vast amount of black
money in India in order to overcome the shortage of financial resources in the
money market. The RBI should mop up the excess liquidity generated on account of
 the accretion to the foreign exchange assets of the banks to neutralise the monetary
impact of capital flows.

iii) Given the synergistic relationship between education, health, nutrition, energy, adequate
allocation of public investment should be made on the social overheads and
efficient measures should be adopted to magnify its trickle- down effect on rural
people. The new approach requires human development goals to be an integral part
of the economic development. It should be more and more inclusive process.
Community involvement is necessary in order to reduce the urban bias in the
emerging health care system. Health for all should entail the removal of various
obstacles to these services such as elimination of ignorance, malnutrition, unhygienic
housing, contaminated water supply etc. Thus concerted efforts should be made in all
directions.

iv) India should adopt a new set of values in tourism development. In order to have a
distinguished niche in the international tourism market India should develop its
tourism in its own way and vision. In pursuing the efficient and profitable path of
tourism development should not result in high environmental distortions. Healthy
tourism should not result in unhealthy environment. Unmanaged tourism can be
disastrous but organized tourism can only contribute to the genuine prosperity of the
region. Suitable policy of the state should be designed to ensure ‘green tourism’ and
‘rural tourism’. In this pursuit more resources should be invested to reinforce the
ecosystem rather than making it vulnerable to risks from unplanned activities.

v) The education should be perceived as an integral part of both social development

and economic development. Educational reform should aim at promoting: ‘neo-
professionalism’ and ‘value-based education.’ The knowledge-based society
emerges from a progressive educational system. Thus our educational system
should promote quality in order to have a knowledge-based society for India. The
education should integrate materialism with morality and liberation of mind. The
higher education system should help in building a society which automatically rejects
any type of malfunctioning and mal-development.

vi) The IT industry should depend more on exports of software products to advanced
countries of the world. It should enhance its credibility as a business destination by
creating a new model of global delivery, forging the relationship with MNCs, generating
saving for the customers and promoting a focus on quality. There should be
diversification in order to neutralize the effects of fluctuation in the global demand
.There should strong agenda and high priority for R & D activities in service sector
The growth of Indian economy in the post liberalization period has been service- led
growth. Thus the future of Indian economy depends on the growth potential of service
sector. The dynamism in the service sector plays the crucial role in maintaining the growth
momentum of the economy. Service sector now accounts for 70 % of the global output. The
characteristics of the service have been altered by the revolution in the services sector. Services
can now be produced and exported at lower cost. The old idea of services being non-
transportable, non-tradable, and non-scalable no longer holds for a host of modern
 impersonal services. Therefore India can sustain a service-led growth as there is huge room
for catch- up and convergence. Thus industrialization is not the only route to economic
development. Thus service sector is highly growth-stimulating with positive externalities for
other sectors and remains as the catalytic agent for economic growth. The growth in the
service sector has not been uniform. In order to arrive at some policy direction it is imperative
to examine the performance of different services and assess the economy’s potentials and
constraints in these services. We should examine the performance of aggregate as well as
disaggregated services in terms of their growth rates; share in GDP, employment, trade and
FDI.

LET US SUM UP
In this unit we dealt with the definition and significance of Tertiary sector in the process of
economic growth. We examined the role of service sector in economic growth of India. We
analyzed the significance of service sector in IT sector, Banking, Insurance, Trade,
infrastructural development, tourism development, education and health care. We
analyzed the problems and challenges of service sector of India. We have given the
suggestive measure for the improvement of the service sector.

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