Digitisation, diversification reshaping India's services sector: Eco Survey

The Survey also talked about positive transformations in the regulatory landscape of the service sector which have helped in creating a conducive business environment

The rapid technology-driven transformation of domestic service delivery and the diversification of India’s services exports are two significant transformations that are reshaping India’s services landscape, the Economic Survey 2023-24 said.

“India’s services sector has thrived on low-cost offerings. The digitisation of services, coupled with appropriate policy nudges, kept progressively transforming the nature of service delivery almost irreversibly during the early part of the last decade. This trend accelerated post the pandemic… At the same time, India’s services exports are diversifying beyond software to include Human Resources (HR), legal, and design services in line with emerging global demands,” the Survey explained.

 

However, the survey cautioned that in the short run, tentative global economic outlook and commodity price uncertainties present a serious challenge to input costs and demand for services.

“Thus, sustaining positive demand trends and effectively managing rising costs and competitive pressures will be critical for the services sector’s continued growth and resilience in the upcoming year. The post-pandemic dynamism shown by the economy and the services sector, in particular, should help transcend these uncertainties and challenges,” it added.

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The survey also underscored the importance of relatively less-skilled dependent sectors like tourism for employment generation, on the basis of a report which argued that artificial intelligence (AI) could reduce India’s services export growth by 0.3-0.4 percentage points in the next decade. It urged the private sector and governments at all levels to realise the potential of the tourism sector.

Moreover, the survey cited studies that suggested application of AI is expected to restrain the business service exports, posing challenges to job creation.

“Thus, focusing on human capital to take advantage of the agglomeration effects of large, well-functioning cities is critical for the growth of services,” the survey argued.

On the other hand, the survey said India’s skilling initiatives need to plan and equip themselves to meet emerging job demands in the service sector and create millions of jobs by 2030, with a greater focus on technologies like AI, Machine Learning, Blockchain and Cloud Computing.  

“The World Economic Forum’s report highlights an increasing focus on cognitive abilities (like complex problem-solving and creative thinking), digital literacy, and proficiency in AI and big data. This shift underscores the strategic imperative for businesses and the workforce to adapt to technological advancements and meet global market demands,” the Survey explained.

The survey also talked about positive transformations in the regulatory landscape of the service sector which has helped in creating a conducive business environment.

“Further enhancing the simplification of procedures through single-window systems, streamlining legal provisions, and digitising government processes at all administrative levels can significantly boost economic efficiency,” the survey elaborated.

It also suggested streamlining loan processes and expanding the reach of credit schemes to the service sector.

The survey underlined the government’s role in fostering India’s service exports growth in the form of creating an enabling environment, facilitating market access and enhancing skill levels, as the service sector contributed roughly 55 per cent to India’s Gross Domestic Product (GDP) in FY24.

It said the contact-intensive service sectors witnessed a contraction due to pandemic-induced lockdown but rebounded back when the restrictions were lifted, while non-contact service sectors like IT and professional services experienced a steady growth with increased digitization.

“The services sector witnessed a real growth rate of more than 6 per cent in all the years in the last decade except in the pandemic-affected FY21. Globally, India’s services exports constituted 4.4 per cent of the world's commercial services exports in 2022. The contribution of the services sector to the overall GVA has increased significantly in the last decade,” the Survey highlighted.

The Survey further noted that the service sector has the highest number of active companies in India (65 per cent). It said India’s service exports amounted to 44% of its total exports in FY24 with growth seen in the ‘Other Business Services’ segment, while India’s growing reputation as a preferred destination for Global Capability Centres (GCCs) boosted India’s software exports. Moreover, the share of information and computer-related services in the total Gross Value Added (GVA) has increased from 3.2 per cent in FY13 to 5.9 per cent in FY23.