Press Information Bureau

Government of India

Ministry of Finance

15-March-2012 12:41 IST

Services Sector Proves Saviour of Indian Economy During the Global Crisis; Grows by 9.4% Despite Slowing GDP Growth

The global recession only partially succeeded in slowing the Indian economy thanks to the continual offsetting growth of service sector to nearly 10% in the year 2010-11. The Economic Survey 2011-12 presented in the Lok Sabha today, suggests that the Services Sector continues to remain growth engine for Indian Economy. The Economic Survey points out that the Services Sector grew by 9.4% which was little higher than 9.3% in the previous year. The dampening effect of international investment into industry sector slowed the GDP growth rate to 6.9% unleashing a flurry of worries for the Government. The industry sector contributes nearly 26% to the GDP. However, maintaining the growth momentum the Service Sector recorded expected growth rate to bottom out the industrial slow down across the globe. The Sector along with the agricultural sector, placed India in the top fastest growing economies of the world despite Euro zone crisis and North American economic instabilities.

The Survey clearly says that the economy has successfully navigated the turbulent years of the recent global economic crisis because of the vitality of this Sector in the domestic economy and its prominent role in India’s external economic interactions. The Survey reveals that the share of services in India’s GDP at factor cost (at current prices) increased from 33.5 per cent in 1950-1 to 55.1 per cent in 2010-11 and to 56.3 per cent in 2011-12 as per Advance Estimates (AE). If construction is also included, the Service Sector’s share increased to 63.3 per cent in 2010-11 and 64.4 per cent in 2011-12. Projecting the employment figures the Survey says that while agriculture continues to be the primary employment-providing sector, the Services Sector (including construction) is in second place. As per the National Sample Survey Organisation’s (NSSO) report on Employment and Unemployment Situation in India 2009-10, on the basis of usually working persons in the principal status and subsidiary status, for every 1000 people employed in rural and urban India, 679 and 75 people are employed in the agriculture sector, 241 and 683 in services sector (including construction) and 80 and 242 in the industrial sector, respectively.

The combined FDI share of financial and non-financial services, computer hardware and software, telecommunications and housing and real estate is 41.9 per cent of the cumulative FDI equity inflows during the period April 2000-December 2011. With the inclusion of the construction sector (6.5 per cent), the share of services in FDI inflows increases to 48.4 per cent. Following the general trend in FDI inflows, FDI inflows to the Services Sector (top five sectors including construction) have also slowed down in 2009-10 and 2010-11, with negative growths of -7.5 per cent and -42.5 per cent respectively in rupee terms. In 2011-12 (April to December), again following the trend of overall FDI inflows, which increased by 50.8 per cent to reach US$ 24.19 billion, FDI inflows to the top five Service Sectors (including construction) also increased by 36.8 per cent to US$ 9.3 billion to the Services Sector in 2011-12 (April-December).

Analysing the States’ performance in the Service Sector the Economic Survey 2011-12 notes that the highest growth rates of the Services Sector are in the north-eastern States of Arunachal Pradesh (34.9 per cent) and Sikkim (30.1 per cent). Among the other States, Goa with 20.1 per cent and Bihar with 16.6 per cent growth top the list. This is over and above their very high growth rates in 2008-09. Other States with higher than national average growth in the sector are Kerala, Tamil Nadu, Maharashtra and Mizoram.

The Survey, while outlining the performance of major services like Tourism including hotels and restaurants, Shipping, IT and ITeS and Construction Services expresses no cause for worry despite a slight moderation in services growth to 9.4 per cent (as also in 2010-11). It says this moderation is due to the steep fall in growth of public administration and defence services reflecting fiscal consolidation. In fact growth in trade, hotels and restaurants is more robust at 11.2 per cent and retail-sector growth is expected to be more robust in 2012-13. With hardening of interest rates, the real worry would be with the real estate ownership of dwellings and business services segment, the growth of which has started decelerating and construction services with growth falling by nearly half. The outlook of the Services Sector in the domestic economy is linked to the prospects of the sector externally. While software service exports have continued to be steady, the unfolding events in the euro area could lead to some sluggishness in this sector. The fair-weather business services exports which have already shown signs of declaration may not get better, observes the Economic Survey.

DSM/RM/DK/bs

Services sector resilience sustains national growth despite industrial slowdown, driven by rising GDP share and FDI attraction. The Services Sector remained the principal engine of aggregate growth, recording sustained expansion and cushioning an overall GDP slowdown driven by weaker industrial performance. The Survey reports a services growth rate modestly above the prior year, a rising share of services in GDP (both excluding and including construction), and a central role in foreign exchange earnings and FDI inflows when financial and non financial services, IT/ITeS, telecommunications and real estate (with construction) are aggregated. Identified risks include fiscal consolidation effects, construction deceleration, interest rate pressures and external exposure to euro area developments.