Economic Survey 2021-22: Ch. 9 SERVICES

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ECONOMIC SURVEY 2021-22: CHAPTER 9

SERVICES

 

BIRD'S EYE VIEW

  • The services sector as a whole has mostly recovered from the impact of the nationwide lockdown imposed during March-May 2020 and localised lockdowns during the second covid wave in April- May 2021, although some of the sub-sectors continue to be impacted.
  • During the first half of 2021- 22, the Services sector grew by 10.8 per cent.
  • High-frequency indicators such as services purchasing managers’ index, air freight and rail freight bottomed out in 2020.
  • The impact of the second covid wave in April-May 2021 on these indicators was much more muted as compared to during the full lockdown in MarchMay 2020.
  • Services exports, after the initial slump during the first three quarters of 2020-21, surpassed its pre-pandemic level in Q4 2020-21.
  • During H1 2021- 22, services exports grew by 21.6 per cent, deriving strength from global demand for software and IT services exports.
  • During the first half of 2021-22, the Services sector received over US$ 16.7 billion FDI accounting for almost 54 per cent of the total FDI inflows into India.

INTRODUCTION

  • The services sector contributes over 50 per cent to India’s GDP.
    • While the Covid-19 pandemic has had an adverse impact on most sectors of the economy, the services sector has been the worst affected as its’ share in India’s GVA declined from 55 per cent in 2019-20 to 53 per cent in 2021-22.1
  • Within the services sector, the effect of Covid-19 has been varied.
    • While non-contact services such as information, communication, financial, professional and business services have remained resilient, the impact has been much more severe on contact-based services such as tourism, retail trade, hotel, entertainment and recreation, etc.

IMPACT OF COVID-19 AND SEQUENTIAL RECOVERY

  • The services sector contracted by 8.4 per cent Year on Year (YoY) in 2020-21.
  • This decline was driven by a sharp contraction of 18.2 per cent YoY in the sub-sector ‘Trade, hotels, transport, communication & services related to broadcasting.
  • During the first half of the current fiscal year FY22, the services sector has registered a steady recovery
  • As per the first advance estimates, the Gross Value Added (GVA) of the services sector is estimated to grow by 8.2 per cent in 2021-22.
  • A part of this growth is attributable to the low base in 2020-21.

TRENDS IN HIGH-FREQUENCY INDICATORS

SERVICES PMI

  • India’s services sector activity, gauged by PMI services, which had contracted for five consecutive months since March 2020, recovered sharply in October 2020.
  • It dropped again for three consecutive months (May, June and July 2021) as a consequence of the second Covid-19 wave.
  • With the easing of restrictions, PMI Services started to grow once again from August 2021 to 58.4 in October 2021.
    • PMI index moderated to 55.5 in December 2021.

FREIGHT TRAFFIC

  • Increase in freight loading by railways compared to a pre-pandemic year
  • Air freight is slightly lower compared to a pre-pandemic year
  • The cargo traffic recorded so far in April-December 2021 has almost reached the pre-pandemic level
  • Railway passenger traffic, on the other hand, is still much below the pre-pandemic levels

SERVICES SECTOR SHARE AT THE STATE AND UT LEVEL

  • The services sector accounts for more than 50 per cent of the Gross State Value Added (GSVA) in 12 out of the 33 states and UTs.
  • Chandigarh stands out with a particularly high share of services in GSVA at 74 per cent while Sikkim’s share remains the lowest at 24.25 per cent.
  • Due to the Covid-19 pandemic and restrictions in movement, GSVA in the services sector declined in 2020-21 relative to the pre-pandemic year 2019-20.
    • This is true for 13 out of 20 states for which data is available.

FDI INFLOWS INTO THE SERVICES SECTOR

  • According to UNCTAD, India was the fifth-largest recipient of Foreign Direct Investment (FDI) in 2020 improving its rank by four places, from the ninth position in 2019.
    • In 2020-21, India registered the highest ever annual FDI inflows of US$ 81.97 billion.
  • The country has received US$ 43.12 billion FDI inflows in the first six months of 2021- 22.
  • During H1 2021-22, services sector received US$ 16.73 billion FDI equity inflows.
    • This is over 29 per cent lower than the FDI equity inflows into services in the corresponding period last year.
    • Nonetheless, the services sector still accounts for over 50 per cent of the total FDI equity inflows into India during this period.

TRADE IN SERVICES SECTOR

SERVICES EXPORT

  • India remained among the top ten services exporter countries in 2020, with its share in world commercial services exports increasing from 3.4 per cent in 2019 to 4.1 per cent in 2020.
  • The impact of Covid-19 induced global lockdown on India’s services exports was less severe as compared to merchandise exports. During 2020-21, India’s goods exports (BoP basis) declined by 7.5 per cent while services exports declined by only 3.3 per cent.

  • India’s software exports, with a share of 48.5 per cent in total services exports, remained relatively resilient during the Covid-19 period with higher demand for digital support, cloud services and infrastructure modernisation catering to the new pandemic challenge
  • During H1 2021-22, with vast inoculation drive and pickup in global demand, India’s services exports increased by 21.6 per cent as against a fall of 7.8 per cent during the same period a year ago.

SERVICES IMPORT

  • India’s services imports exhibited a sharper decline of 8.4 per cent in 2020-21 in comparison with services exports primarily on account of a fall in travel and transportation payments.
  • During H1 2021-22, the growth of services imports was 20.7 per cent on account of relaxation in lockdown restrictions and resumption in domestic economic activity.
  • Business services is the largest category in India’s import of services.

MAJOR SERVICES: SUB-SECTOR WISE PERFORMANCE AND RECENT POLICIES

IT-BPM SERVICES

  • During 2020-21, according to NASSCOM’s provisional estimates, IT-BPM revenues (excluding e-commerce) reached US$ 194 billion, growing by 2.26 per cent YoY, adding 1.38 lakh employees.
  • Within the IT-BPM sector, IT services constitute the majority share (> 51 per cent)
  • The United States remained the biggest source of exports revenues amounting US$ 92.1 billion in 2020-21. This accounts for about 62 per cent of total IT-BPM exports (excluding hardware and e-commerce).
    • This is followed by the UK, which is the second-largest export market for IT-BPM services with a share of around 17 per cent.

PORTS, SHIPPING AND WATERWAYS SERVICES

  • Ports handle around 90 per cent of export-import cargo by volume and 70 per cent by value in India.

  • A key indicator of efficiency of the ports sector is the shipping Turnaround Time (TRT).
    • Over the last seven years, TRT at major ports has declined consistently from almost 3.64 days in 2015-16 to 2.25 days in 2021 (April-December).
    • The turnaround time is now the lowest at the JNPT port (1.16 days) and the highest at the Visakhapatnam and Mormugao ports
  • Port traffic has picked up in 2021-22 so far, registering a growth of 10.16 per cent during April-November 2021 over the same period last year

SPACE SECTOR

  • From being primarily a government-driven activity, the sector has been witnessing increasing participation of the private sector – not only in the traditional vendor role but also in taking up end-to-end space activities
  • Reforms:
    • New Space India Limited (NSIL)-the Public Sector Undertaking (PSU) in this sector –to “own” the operational launch vehicles and space assets of ISRO.
      • NSIL shall act as an aggregator of user requirements and obtain commitments.
    • IN-SPACe will act as an autonomous body, under DOS, as a single-window nodal agency for enabling and regulating space activities and usage of ISRO facilities by NGPEs.(Nongovernment/private entities)
    • Updated SpaceCom and SpaceRS policies, further liberalizing the traditional Satellite Communication and Remote Sensing sectors, respectively, thus enabling entrepreneurs/industries to take up end-to-end activities in these domains.
    • Drone Rules 2021
      • Several approvals were abolished; with the total forms to be filled reduced from 25 to 5
      • A Digital Sky platform is being developed as a single-window platform for one-step and one-time clearances for drone ownership and operation
      • Relaxations for Research and Development (R&D)
      • Reduced penalties: The maximum penalty under new rules has been reduced from Rs 5 lakhs to Rs 1 lakh.
    • Revised Guidelines for Acquiring and Producing Geospatial Data
  • At present, India accounts for only about 2 per cent of the space economy, much behind the major players – USA and China.

STARTUPS

  • During 2021, the Government recognised over 14,000 new startups as compared to only, only 733 new startups during 2016-17.
    • As a result, more than 61,400 startups have been recognised in India as of January 10, 2022.
  • Over the recent years, Delhi has replaced Bangalore as the startup capital of India.
    • Over 5,000 recognised startups were added in Delhi while 4,514 startups were added in Bangalore between April 2019 to December 2021.
    • With a total of 11,308 startups, Maharashtra has the highest number of recognised startups
  • India had a record number of start-ups (44) reach unicorn status in 2021.
    • It overtook the UK to emerge as the third highest country in a number of unicorns after the US and China.
    • As of January 14, 2022, India has 83 unicorns

PATENTS

  • Intellectual property, specifical patents are key to this knowledge-based economy. There has been a gradual increase in the filing and granting of patents in India.
  • India’s ranking in Global Innovation Index has climbed 35 ranks, from 81st in 2015-16 to 46th in 2021.
  • This is remarkable progress, but the number of patents granted in India is still a fraction compared to patents granted in China, the USA, Japan, and Korea.

ISSUES

  • India’s low expenditure on Research and Development (R&D) activities, was 0.7 per cent of its GDP in 2020.
  • Procedural delays and complexity of the process
  • The average pendency for a final decision in acquiring patents in India is 42 months as of 2020.
    • This is much higher than 20.8 months in the USA.
  • Low number of patent examiners in India.
  • The number of patent examiners in India in 2020 was 615 as opposed to 13,704 in China.

GLOSSARY

  • Services PMI:
    • The IHS Markit India Services PMI is based on data compiled from questionnaires sent to purchasing executives in around 350 private service sector companies.
    • The index tracks variables such as sales, employment, inventories, and prices.
  • Turnaround Time:
    • The turnaround time of a ship refers to the time the vessel reports at the anchorage of a port to the time it sails out from the berth.
    • It broadly reflects the efficiency of the port.



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