Role of Service Sector in Rebooting India’s GDP and Economy


March 25, 2021

Role of Service Sector in Rebooting India’s GDP and Economy

The service sector of India is considered to be the backbone of the national economic structure and has unremittingly acted as the rampart for the Indian economy. Through this sector, the Indian economy has excelled in providing large-scale employment to the youth as well as the middle-aged people and it covers in its ambit a wide variety of activities such as trade, hotel and restaurants, real estate, insurance, storage and communication, financing, business and personal services and services associated with construction. Considering the contribution of 55.39% provided by the service sector to India’s gross value added in the financial year 2019-20, the service sector of India has played a prominent role in the development of the Indian economy.

In addition to the key contributor to the GDP of India, the service sector has also attracted major foreign investment lately. As per the quarterly Fact Sheet on Foreign Direct Investment (“FDI”) from April 2000 to December 2020, the FDI to Service Sector for the period ranging from April 2000 to December 2020 has alone accounted for a total of INR 500,505Cr, which accounts to 16% of the total foreign investment inflow as compared to the cumulative FDI of 26% in telecommunication, trading, power, hotel & tourism, non-conventional energy, information and broadcasting, consultancy services, education, sea transport, air transport, etc.

Government Initiatives to ease FDI in the service sector

The service sector is the major contributor to the GDP of India, the Government of India understands the importance of promoting the growth of the service sector and has thus, been very liberal while deciding the capping limit for FDI in the service sector industries. We have discussed below, in brief, a few initiatives undertaken by the Indian government for the further development and FDI in the service sector:

A Memorandum of Understanding entered between the Ministry of Communication and Information Technology and the Department of Digital, Culture, Media and Sports of the United Kingdom was signed by the Union Cabinet on November 4, 2020, to cooperate in the field of telecommunication/information and communication technologies;

(b) The Government of India also announced in September 2020 to infuse INR 200 billion in public sector banks through recapitalization of bonds;

(c) The State Government of Tamil Nadu announced a new electronics and hardware manufacturing policy aligned with the old policy to increase the state’s electronics output to US$ 100 billion by 2025. Under the policy, it aims to meet the requirement for incremental human resources by upskilling and training more than 100,000 people by 2024 and;

(d) The Government of India has also increased incentives provided under the Services Exports from India Scheme (SEIS) by 2% under the mid-term review of Foreign Trade Policy (2015-2020).

In addition to the foregoing, the Government of India has also formulated the Consolidated FDI Policy which is in effect from October 15, 2020, under which the Service Sector has been provided with the maximum leverage in order to ease the investment process in the service sector. The upper limit/capping for most activities performed by industries falling under the service sector has been pushed up to the maximum possible, 100%, and the investments so received, pass through the automatic route in most cases, which makes it all the more easier and convenient for the investors.

Conclusion: The service sector consists of the industries that generate the most revenue for India and also attract a large amount of FDI. With the Government of India already working on easing up the investment process in this sector and planning more fundamental changes that would have a positive impact on the revenue generation of the sector, the future of the service sector seems very bright. The Indian Government has also initiated the ‘Skill India’ program which aims at up-skilling at least 400 million Indians by the end of the year 2022, which would ultimately result in strengthening the service sector. Similarly, the Make in India and Start-Up India programs by the Indian Government would also have a similar positive impact on the boost of the service sector in India.

Based on the initiatives undertaken by the Indian Government for the service sector, it can easily be assessed that the service sector will attract increased FDI, which would help in growing the service sector further and eventually lead to an increased contribution to India’s GDP.

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