The service sector has been a key driver of both the global and Indian economy over the last three decades. The economic reforms since the early Nineties unleashed the potential of the services sector by utilising available skilled manpower due to state-supported higher education. India is probably the only big economy that didn’t follow linear growth theories by jumping from a predominantly agricultural economy to a services-led growth economy without much improvement in manufacturing. The share of manufacturing in India’s GDP has remained stagnant around 16 per cent for nearly three decades and we are nowhere near the 2022 target of 25 per cent. As a result, India’s growth story has been driven by services, which has a 55 per cent share in the economy. Services exports have outperformed goods exports in the recent years, due to which India’s share in the world’s commercial services exports has risen steadily over the past decade to reach 3.5 per cent in 2018 — twice the sector’s share in the world’s merchandise exports,1.7 per cent.
India is fast becoming a major quality service provider. Even before the COVID pandemic set in and just before the nationwide lockdown was announced at the end of March, the sector was booming. The widely-tracked Nikkei India PMI Index stood at 57.5 in February, up from 55.5 in January. However, IHS Markit India Services Index reports that the services sector has been contracting for five consecutive months since March, with an index of 34.2. In PMI jargon, the 50-mark level separates expansion from contraction. Given the uncertainty in the world market and the projected slowdown of developed economies by 8 per cent this year, India’s services-led growth has to depend mostly on the domestic economy. Have we done enough to revive the services sector?
The Centre rolled out a whopping Rs 20.9 lakh crore stimulus package to pull the economy out from the ravages of the pandemic. The package had a strong focus on the MSME sector, employee provident fund, power distribution companies and taxation, among other affected areas. Most of the stimulus package is in the form of funding and loan opportunities and, injecting liquidity to the market.
While the package is a beam of hope for some, it has overlooked the plight of the services sector. The sector finds little mention or attention in the government’s Atmanirbhar Reform Package. The sector’s significance in the economy continues to grow with its share amounting to two-thirds of total FDI inflows into India and about 38 per cent of total exports.
As the post-pandemic world is taking shape, the sector is struggling hard to keep its head above water.
The tourism industry, which contributed nearly 10 per cent of GDP, is now witnessing a large-scale reduction in jobs and operating returns have plummeted to 10 per cent of previous revenues for most. If the CAPA Centre for Aviation is to be believed, the aviation sector is expected to have lost $3.6 billion in the three months leading up to June. The number of potential job losses in the sector gives an even harder jolt to an already dwindling economy. After holding rounds of meetings with industry representatives and making several references to its condition in speeches, the government is not aloof from the catastrophic consequences suffered by the sector. But its by-stander position would only worsen the situation.
From tourism, aviation, shipping, space to call centres and delivery services, the standstill in activities is bound to have a knock-out effect on employment, production and the economy as a whole. The big picture suggests that the current relief provisions for the primary and secondary sectors would also be nullified as a consequence of neglecting the tertiary sector. An immunity-building exercise through capital infusion and appropriate relaxation in relevant sectors will help the economy to survive the pandemic. Most of the services sectors are the worst affected and unfortunately, we don’t see any specific fiscal and monetary stimulus for them. In fact, some sectors would find it difficult to survive if the pandemic continues. In the short run, the government needs to make cuts in VAT, which ranges from 0-30 per cent on aviation fuel, make provisions for GST holidays, compensate for wages of workers under distress and draft flexible terms for working capital credit.
Since no great incentives were given to this sector in the reform package, it contracted for the fifth successive month in July (34.2 PMI). The government is also in the process of scrapping or rationalising most of the export-incentive schemes affecting both goods and services exports — these including the Merchandise Exports from India Scheme (MEIS), Services Exports from India Scheme (SEIS), schemes related to export-oriented units and the Export Promotion Capital Goods Scheme — due to certain issues raised by the department of revenue and also to make some of these schemes WTO-compliant. This is expected to further hurt exporters. Unless the government focuses on the sector in the forthcoming Foreign Trade Policy (FTP) by announcing schemes-based export incentives and provides interim relief by continuing with the existing schemes in the short run, the sector will take a long time to revive.
This article first appeared in the print edition on August 27, 2020 under the title ‘An unserviced sector’. The writers are Director (Research and Policy), Services Export Promotion Council (SEPC) and Intern at SEPC, New Delhi respectively. Views are personal