Service Sector in India: Pandemic effect, Future prospects, Way forward

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The Service sector which has been the largest and fastest growing sector of India in the past three decades has been worst hit by the pandemic and pandemic induced Lockdown of boundaries. But according to recent Purchasing Manager’s Index (PMI), it is showing signs of recovery due to opening up of the economy and phased unlock program. It had been contracting for seven months in a row after registering a seven year high in January 2020. Though the PMI for services sector is still under 50 which is sign of contraction, it has increased significantly.

Contents

What are the industries that are classified as service sector in India?

According to the National Industrial classification 2008, the service sector in India includes,

Transportation and storage
Wholesale and retail trade
repair of motor vehicles and motorcycles
Accommodation and food service activities
Information and communication
Financial and insurance activities
Real estate activities
Professional, scientific, and technical activities
Administrative and support services
Public administration and defence
compulsory social security
Education
Human health and social work activities
Arts, entertainment, and recreation
Other service activities
Activities of households as employers; undifferentiated goods and services producing activities of households for own use
Activities of extraterritorial organizations and bodies

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What was the status of Services sector in India before the pandemic hit?

The Indian economy after liberalization followed idiosyncratic growth pattern by skipping the phase of industrialization dominated growth to directly services led growth.
India’s growth since 1990s is largely on account of service sector expansion. During the first decade of the 21^st century, India had the second fastest growing service sector (just below China).
This growth has also been accompanied by a significant increase in the exports of services which has brought significant forex reserves and brought Current account deficit under control.
According to the Economic Survey 2019-20, service sector accounted for about 55% of the economy, 2/3^rd of FDI inflows and near 38% of total export.
The sector saw a 33% jump in the gross state value added in 15 states and UTs.
Services sector has outperformed goods exports in the recent years with tourist arrival increased by 5 times since last three years.
The Indian Startup ecosystem has been progressing and is the third largest in the world according to Economic Survey 2019-20.
Besides software services, India runs a small trade surplus in travel, insurance and financial services.
The Space sector has also been growing exponentially since its modest beginning five decades ago. Space sector is set to boom after the current policy initiatives such as to bring more private participation.

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What has been the status of service sector since the pandemic began?

The global and national economic lockdown has hit the service sector very badly as it shown a contraction according to PMI.
The restrictions on production, travel, and businesses impacted many important services such as logistics, entertainment, transport and tourism, Real Estate, etc.
Except the essential services such as Health, Administration and essential transport everything came to a grinding halt.
If we look at the PMI, Service sector PMI was under contraction for the last seven months in a row.
Due to uncertainty of the pandemic spread and recovery, demand contracted during the last seven months.
With the demand plunging, service sector resorted to job cuts on a large scale. At a time when the regular salaries were on hold, the job cuts hit the service sector employees very badly.
The Service firms reported that attempts to take on extra workers to some extent hit were hampered by the lack of labour.
Service sector employment is largely subcontracted to informal sector which saw the greatest impact due to local shops, supermarkets, agencies closed. This forced labour reverse migration to the home states due to lack of jobs in the host states.
Even if the unlocking of the economy began in a phased manner, consumers fear to venture out to crowded public places or avail contact-intensive services. They are holding back a large part of consumption expenditure.

Does the situation seem to be improving now?

The main issue with the service sector is that it is a perception driven industry. It works on the subjective, intangible aspects that drive customer satisfaction.
The pandemic has severely affected this perception component the service sector cannot pickup from the excess inventory as in case of Manufacturing sector.
Even though we are undergoing phased unlock, the pandemic is still a threat as India has crossed 1 lakh in death toll. People still fear to go out.

With recent roadblocks in vaccine development worldwide, there is no predictable period within which vaccine will be available. Under these circumstances, the service sector will take time to pick-up he growth speed as it was before the pandemic.
As the country has been opened to a large extent, there are still lesser trains operating, all the state transports have not been fully operational.
The Companies are still wary of calling employees to work from office. The work from home model though picked up during the lockdown has its limitations. So, the initial pick-up will be tardy.
The spending on festivities, purchase, and holidaying will not pickup just like that as the pandemic threats still loom.
Economists believe that the travel and tourism industry would face a near-to-medium term headwinds as people chose to travel only when necessary.
The Real estate sector as it is already under stress will remain stressed as the people will put on hold their plans to buy property.
The Vaccine nationalism would impact global tourism also as the country where the vaccine will be developed will require companies to fulfil domestic necessities first.
The entertainment industry will open completely when the infection starts reducing after attaining the peak. Hence, the theatres, exhibitions, shooting for films and TV, malls, etc will not be running on full throttle soon.
The Banks and financial institutions are under sever stress for a while. As the economy has contracted to a historic low, the government will be its biggest borrower as the need for public investment is huge. This will likely impact the lending operations to service sector.
Hence, it can be safely said that, even though the economy opens, the service sector will take time to go normal.

Service sector and Atmanirbhar Bharat

When the Centre declared its 20 Lakh crore Atmanirbhar package, even though there was optimism, the service sector did not get anything substantial.
Even though the sector is the most contributing to the GDP, it finds little mention or attention in the government’s Atmanirbhar package.
The big picture would suggest that the relief measures that are focused on the primary and secondary sector will nullify if the tertiary sector is neglected.
Even though most of the service sector is affected by the pandemic, the relief package does not give any specific fiscal and monetary stimulus to it.
The little that package contained was credit linked subsidies for housing sector and credit guarantee cove for MSMEs will depend upon banking sectors ability and will to lend further when the NPAs have been in the range of 10%.
The lack of incentives showed its impacts as the sector contracted for seven months in a row.
The government’s moves of scrapping or rationalizing most of the export-incentive schemes affecting both goods and services export such as Merchandize Export from India Scheme (MEIS), Services Exports from India Scheme (SEIS), etc will further hurt the sector.
Unless the government focuses on the sector in the forthcoming Foreign Trade Policy by announcing schemes-based export incentives and provides interim relief by continuing with the existing schemes in the short run, the sector will take long time to revive.

What are the future prospects/way forward for services sector growth?

As the Commerce and Industry Minister said, the Service sector needs to see the pandemic as an opportunity. It needs to focus on the new norms that are being set in terms of work, education, entertainment, and health.
But for that to happen, Industry must develop competitive advantage, focus on quality and explore new destinations and services.
But for immediate future, it is the government that has to push the demand through economic incentives.
The service sector has been a tax heavy sector with multiple direct and indirect taxes, import duties, luxury taxes. The government must give possible tax-relief to the sector so that the demand picks up.
The urban centers are the main demand clusters. The policy framework that wants to up the immediate demand must focus on the urban sector. Reduced GST on value items, entertainment etc may enthuse spending.
The tourism sector must be incentivized through schemes like Swadesh Darshan, exciting travel packages by IRCTC, Air India, state transports etc.
The Real estate demand must be pushed through foregoing of stamp duty, registration fees
The Education sector has seen a boom in digital format. The digital capacity building may help the Edu-tech startup ecosystem to grow capitalizing on the current boom.
The Healthcare sector has been overworked during this pandemic. The post-pandemic push in healthcare sector through basic infrastructure development, building health facilities and upgrading them with state-of-the-art facilities will help in the health service sector.
Above average monsoon this year has created hopes for a bumper crop in agriculture. This will have a dampening effect on inflation. Government must capitalize through good supply chain
Along with short-term demand creation, India must also look to upgrade its capacities to fully realize its service sector potential through long-term policy measures.
The upcoming Logistics policy is a welcome step to reduce the logistics cost and improve capacity. This will give required thrust to transport sector.
The Digital India Mission is one of the most ambitious programmes of the government which requires telecom infrastructure building. The National Optical Fiber program i.e. BharatNet must be steadfastly completed.
The infrastructure projects like BharatMala and SagarMala will have a spillover effects on service economy through faster transport and deeper reach.
The Bullet train programme, Manufacturing of Rafale jets in India, etc will bring newer areas under service sector making it even more diverse.
The foreign investment recently done by Facebook and digitization fund created by the Google will make Indian service sector robust. The need is to attract further investment in diverse areas.
The need is to make service sector absorb more workforce into it as though it accounts for 55% of GDP, it does not employ proportionate workforce.
The recently passed Farm bills can invigorate agriculture-based service sector through building of cold storage, food processing sectors, etc. It will create more jobs for rural workforce in supply chain.
The Make in India programme will provide huge boost to service sector through requirement of skilled workforce and ancillary service. The recent labour reforms may attract investment and boost Make in India.
Reforms in Aviation sector must bring efficiency in operation of schemes like UDAN through price optimization of Aviation Turbine Fuel.

Conclusion

As India’s growth is led by the service sector, we must contain the pandemic led contraction and focus on more demand creation. As the perception about the safety changes, service sector must be ready to cater to the huge demand the unlock will create. Proper policy support led actions to contain the pandemic and improve the demand is necessary for the service sector to go back to normal and capitalize on pandemic induced opportunities.