UNIT 3

SERVICES SECTOR AND EXTERNAL SECTOR

3.1 Services Sector (Introduction)

The services sector also called tertiary sector consists of production of services for the consumers.  Telecommunication, hospitality, media, healthcare, consultancy, etc are the examples of services sector. In India’s case the services sector has not only shown considerably better performance but has also integrated Indian market and trade with that of other countries. The services sector has led the growth of Indian economy and that is a boon and a concern at the same time as the demand for these skill-based services are from outside world and not internally, which has fueled the debate of which sector is better suited to be the driving force of economy.

Key Takeaways:

1. The services sector also called tertiary sector consists of production of services for the consumers. 
2. Telecommunication, hospitality, media, healthcare, consultancy, etc are the examples of services sector.

3.2 Nature and Scope of services sector:

First of all, let us understand the various nature of the services sector. Understanding characteristics and nature is the first step towards better management and required reforms. Following are the most commonly accepted characteristics or different nature of the services sector-

1.  Intangibility:  It is the most basic and universally cited characteristic of services, as services are performances or actions rather than objects, they cannot be seen, felt, tasted, or touched like tangible goods. Consider this, when we buy a bathing soap, we can see, feel, smell and use to check its effectiveness in cleaning. But, when fees is paid for a semester in the university, it is paid for deriving knowledge, skills and education which is delivered to us by teachers. Hence Teaching is an intangible service.
2. Inseparability: In most cases a service cannot be separated from the person or firm providing it. A service is provided by a person who possesses a particular skill (singer, doctor, etc.), by using equipment to handle a tangible product (photo copier) or by allowing access to or use of a physical infrastructure (restaurant, train, etc.). Services are generally produced and consumed at the same time. The relationship between production and consumption dictates that production and marketing are highly integrated processes. A plumber has to be physically present to provide the service; the beautician has to be available to perform the massage. The service provider and the client are often physically present when consumption takes place.

3.     Heterogeneity: Since services are performances, frequently produced by human beings, no two services can be exactly same. The human element is highly influential in providing and rendering services and this makes standardization a very difficult task to achieve. The doctor who gives us complete attention in one visit may behave a little differently in next visit. The new bank clerk who encashes our cheques may not be as efficient as the previous one and we may have to spend more time for the same activity.

Human contact is minimal in the computerized reservation systems, but when we go to the hotel there will be a person at the reception to hand over the key of the reserved room. The way that person interacts with us will be an important factor in our overall assessment of the service provided by the hotel. The rooms, the food, the facilities may be all perfect, but it is the people interacting with us who make all the difference between a favorable and unfavorable perception of the hotel. Heterogeneity also results because no two customers are precisely alike; each will have unique demands or experience the service in a unique way. Thus, the heterogeneity connected with services is largely the result of human interaction (between and among employees and customers) and all of the vagaries that accompany it.

4.     Perishability:  It refers to the fact that services cannot be saved, stored, resold, or returned. Since services are deeds, performances or actions whose production and consumption takes place simultaneously, they tend to perish in the absence of consumption. Goods can be stored and sold at a later date in the absence of a customer but Services go waste if they are not consumed. For example, seat in a movie theatre or in a restaurant, an hour of a professor’s lecture, or telephone line capacity cannot be reclaimed and used or resold at a later time.

5.     No Transfer of Ownership: When someone buys a product, they become its owner-be it a pen, book, shirt, TV or Car. We pay for the service, but we never own it. By buying a ticket one can see the evening film show in local cinema theatre; by paying wages one can hire the services of a chauffeur who will drive his car, etc. In case of a service, the payment is not for purchase, but only for the use or access to or for hire of items or facilities; and transfer of ownership does not take place.

Services sector is the largest and the fastest growing sector of the Indian economy.  It accounts for 55% of the GDP but only 25% of the workforce is engaged in the services sector. Hence it is clear the services sector is highly efficient and it has deep and wide scope to grow even more. Following are few of many segments of services sector where India has huge scope.

1. Tourism: India is blessed with immense potential for tourism industry; from religious, traditional and cultural places to places of breathtaking beauty and technological marvels. Indian tourism has capacity to generate large number of jobs, which is what exactly required for the population like India.
2. Information and Technology: India has all the components for IT services like BPO, engineering services, R&D and software products. India has huge youth population which provides the cheap labor. Also English is widely spoken language in India, which makes easier to communicate with the foreign clients.
3. Legal Services:  The legal systems of USA, India, Canada, Britain and many other commonwealth countries are rooted in British common laws hence it makes Indian lawyers practices law in any of these countries without much additional training.
4. Consultancy services: It is one of the fastest growing segments of the services sector. Technical and Management consultancy services spearhead this segment. Although the Indian consultancy services market is largely occupied by MNCs, steps taken by our government gives even the local consultancy services lucrative opportunities.
5. Research and Development services: India has huge presence in this market, accounting for almost 22% of the global R&D segment. Presently India’s R&D expenditure is very low at only 1% of GDP. Given the potential of this sector more investment is required.
6. Space Services: India’s space programme is important in numerous ways; like military, agriculture, disaster management, etc. Satellite based mapping and satellite launching are the couple of sectors where India has made a significant mark. India foreign exchange earnings from space launch has also increased in recent years.
7. Shipping and port services: Most of the global trade takes place through water.  India is geographically placed really well for this segment of services sector also the long coastline helps in this regard.

3.3 Recent trends in Banking industry, Insurance industry, Healthcare industry and Tourism industry

Banking Industry:

 Indian banking industry’s prowess and fineness has been acknowledged globally. Banking sector and the personnel working in it managed the humungous task of getting the country through demonetization very well but also at the same time it has been plagued by problems like NPAs. Let us look at the recent trends in the Indian banking industry presented by an RBI report to understand this topic in  a better way-

1. Losses in UCBs: The balance sheet of Urban Cooperative banks moderated in 2019-20 due to lower deposits and negligible expansion in credit.
2. NBFCs: Deceleration in the balance sheet of NBFCs due to stagnant growth in loans and advances.
3. Decline NPAs:  Scheduled commercial bank managed to reduce their gross nonperforming assets (NPAs) from 9.1% in March 2019 to 8.2% in march 2020 and it further declined to 7.5% by the end of September 2020.
4. Stronger CRAR ratio: Capital to risk weighted ration grew stronger from 14.3% in March 2019 to 14.7% in March 2020 and it further increased to 15.8% by the end of September 2020.
5. Frauds: The number of frauds reported by banks reduced significantly from  march 2019 to march 2020.

Insurance industry:

Insurance sector plays very important role in the national economy. This sector protects assets of people and helps them to cope with any untoward incident. The COVID 19 Pandemic has highlighted the importance of this sector. Following are the few of the recent trends in the sector:

1. Customer interaction: Initially conversion of contacts to business had to be through personal interaction but today it has been largely replaced by the digital interface. The growth of online insurance platforms and increase in digitization has changed the customer interaction and has also made the customer much more aware.
2. Data analytics: Probability and emerging changes affect insurance sector in a great manner. Data analysis increases efficiency in this regard.
3. Digitization: Online data storage, online payments, has increased efficiency, transparency and accountability.
4. Diversification of products: Customer needs are evolving due to changing environment insurers are also evolving   accordingly. This has caused increase in outreach and customer education
5. Large young population: Today’s youth demand accuracy and speed, also they have large data and options at hand, which increases their bargaining power. Hence there has to be assured benefits. Insurance companies are evolving themselves to meet the needs of young generation.
6. Motor industry: Alike life and health insurance, the Indian motor insurance industry has also done significant changes like scrapping the long-term motor comprehensive insurance packages for three years for 4-wheelers, and five years for two-wheelers.

Healthcare industry:

The Indian healthcare sector consists of hospital, medical tourism, health insurance, medical equipments, telemedicine, clinical trials and other medical services. This sector is on a great rise due to increase in diseases caused by changes in lifestyle, rising income, greater health awareness and improved health insurance. In India public sector plays a key role in planning and regulating health care services. However, health services in public sector are multifarious with governance and regulatory failures, so there is dominance of private sector. The Indian government a has taken extraordinary steps to improve the healthcare sector in the country by allowing 100 per cent foreign direct investment (FDI).

Employment Trend: private healthcare boom endures despite the slowdown. Over a period of 18 months, when most industries were busy with their restructuring operations, cleaning up books or optimizing their costs, Indian pharmaceutical and healthcare industry was adding manpower.

Rousing Opportunities: There are number of opportunities in main healthcare sector as well as in allied services to provide effective and efficient healthcare services like Medical Council of India (MCI) accepting Emergency medical service as one of the specialty, there are huge opportunities for personnel in this area especially Nurses, Paramedics, Technicians and Emergency medicine specialized doctors.

Also India has become first choice as a destination for medical tourism which serves its consumers with well trained, English speaking medical staff, state-of-the-art private hospitals and diagnostic conveniences, and comparatively low cost of treatment as compare to developed countries hospitals and diagnostic conveniences, and comparatively low cost of treatment as compare to developed countries.

Tourism Industry:

The Indian tourism sector is witnessing new trends supplementing the old ones. There are many travelers both solo and group who are extending the boundaries and exploring the land. Social media, cheap smart phones, increase in earnings are few of the reasons behind it.

The IT sector and its 5 day work culture especially in the metropolitan cities has given rise to the trend of short weekend getaways. This is mainly popular among youth. Travellers are majorly interested in the travel destination in the radius of 200-250 km. Many MNCs tie up with the tour managers to arrange office trips, this helps in development of local tourist spots.

Modern life can throw its share of challenges. Increased stress and repetitiveness can lead individuals into distress. Solo travelers often reinvent themselves and their life goals by heading out for solo travel trips. Solo travelers meet new people, explore new places, overcome fears, and most significantly enjoy freedom by discovering themselves. Along with that travelers earn money by video logging the place.

Now some travel companies are also facilitating solo trips. WOW Club has added their name to the list of companies that promote solo travel and is facilitating women solo travelers exclusively.

There are many travel enthusiasts but could travel as much as they would like to due to lack of holidays or economic restrain etc for them Travel blogging is a great alternative. Tourism ministry and private tour managing companies pay such loggers for promotion.

One more trending concept of travelling is Wellness tourism. The concept of wellness tourism has taken off in a big way in India. At places, it is often linked to spiritual tourism. The main reason for its gaining popularity is the immense work pressure of modern life. However, the trend is not completely new. It has been well-chronicled in Bengali literature and was popularly known as hawabodol or change of air. Doctors often suggested this to ailing patients and the popular destinations near Bengal were Ghatshila, Giridih, McCluskieganj and the dry dills of Bankura and Purulia districts.

Key Takeaways:

1. The Indian healthcare sector consists of hospital, medical tourism, health insurance, medical equipments, telemedicine, clinical trials and other medical services.
2. The Indian tourism sector is witnessing new trends supplementing the old ones. There are many travelers both solo and group who are extending the boundaries and exploring the land.

3.4 EXTERNAL SECTOR

The sector of the economy which interacts with other economies is called External sector. It involves import, export or cash flow. Let us see few economic features of external sector of India:

1. Foreign exchange reserves: Foreign exchange reserves are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.
2. The balance of payments (also known as balance of international payments and abbreviated B.O.P. or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.
3. External debt: It is the total debt which resident of the country owe to the foreign lenders.  The money includes money owed to private commercial banks, foreign government, and international financial institutions.
4. Foreign direct investment: It is an investment in the ownership of enterprise/business in one country by the company belonging to some other country.

3.5 STRUCTURE AND DIRECTION OF FOREIGN TRADE

Since independence, composition of export trade of India has seen some change. Before independence, we used to export agricultural products and raw materials, like jute, cotton, tea, oil seeds, leather, food grains, cashew nuts, and mineral products. We also exported manufactured goods. But now exports mostly include  manufactured items like, machines, ready-made garments, gems and Jewellery, tea, jute manufactures, Cashew Kernels, electronic goods, especially hardware’s and software’s which occupy prime place in export.

Imports of India can be divided into three components i.e. capital goods, raw materials and consumer goods.

Capital goods include metals, machines and equipments, appliances and transport equipments, and means of communications. Capital goods are essential for industrial development of the country. It includes the imports of cotton, jute, fertilizer, chemicals, crude oil etc. Large number of raw materials and intermediate goods has to be imported during the process of economic development. . Petroleum products include crude oil, petrol and lubricating oil. Imports of these products have ever been increasing.

Imports of consumer goods include the import of food grains, electrical goods, medicines, paper etc., India faced an acute shortage of food grains till the end of Third Five Year Plan. Hence India had to import food grains in large quantities.

Direction of Foreign Trade:

It means the countries to which India exports its products and from which India imports. In other words it implies destination of our exports and source of our imports.

During colonial era Britain used to be our number one trading partner. However after independence many India established many new trading relationships. Now India is a major trading partner with china, USA, Germany, Japan and many other countries.

India’s trade partners with their total trade in billions of US dollars for the financial year 2019–20 are given below:

3.6 INDIA’S BALANCE OF PAYMENTS SINCE 1991

The outcome of total transactions of economy is called Balance of payments. In other words it means the difference between inflow and outflow of capital. The Balance of payment is calculated on the principle of accountancy and it looks like balance sheet of a company.

 The balance of payment crisis of 1991 made India make many changes and caused liberalization of the economy. At the onset of the balance of payment crisis, India’s current account deficit accounted for 3% of GDP in the fiscal year 1990-91. Rupee devaluation, as an immediate measure by the Indian government to contain trade and current account deficit boosted India’s exports India took policy measures of international integration of the Indian economy led to capital inflows in the form of foreign direct investments (FDIs) and foreign portfolio investments (FPIs), which thus transformed the funding mechanism of India’s Balance of payment. 

The Government also launched the India Development Bonds aimed at mobilizing NRI sources of funds. With the assurance of external support through these efforts, the balance of payments position was gradually stabilized in 1991-92 and the foreign exchange reserves were restored to the level of $ 5.6 billion at the end of March 1992. In this connection, Economic Survey, 1995-96 observed, “The development in India’s trade and payments over the past five years mark a noticeable structural change towards a more stable and sustainable balance of payments. During the post-liberalization period, there has been a sharp improvement in the coverage of import payments through export earnings.”

The balance of payments (BOP) position of India has been gradually improving in the coming years. India’s BOP remained comfortable in 1998-99 partly due to anticipatory policy actions, such as issue of Resurgent India Bonds. The deficit in the current account of the BOP in 1998-99 had declined to about 1.0 per cent of GDP as against 1.7per cent in 1995-96 and 1.4 per cent in 1997- 98, India’s Balance of payments position in 1999-2000 remained comfortable. The current account deficit in 1999-2000 was contained to 0.9 per cent of GDP, despite an unfavorable international trade and financial backdrop including a near two-third like in India’s oil import bill.

India’s balance Of payments in 2001-02 exhibited mixed developments. While exports, on BOP basis, remained stagnant at previous year’s level, but imports declined by 2.8 per cent, thus resulting in a decline in merchandise trade deficit, as per cent of GDP, from 3.1 per cent in 2000-01 to 2.6 per cent in 2001-02. Moreover, the current account BPO turned into a surplus in 2001-02, after a gap of 24 years (last recorded in 1977-78).

After that the period of 2007-08 and 2008-09 were marked by adverse developments in the external sector of the economy, reflecting impact of global financial crisis on the emerging economies including India. India’s BOP exhibited considerable resilience during fiscal 2008-09 despite one of the severest external shock.

In recent time inspite of the pandemic India has shown significant improvement in exports and imports has fallen, this has lead to very strong Balance of payment. The exports in July 2020 are at about 91% export level of July 2019 figures and Imports are still at about 70-71% level as of July 2019.

3.7 FDI, FOREIGN CAPITAL AND TRANSNATIONAL COMPANIES IN INDIA, ROLE AND IMPACT OF SAARC, ASEAN AND WTO

Foreign Direct Investment:

Foreign direct investment can be defined as investment by an entity in foreign land. As far as India is concerned it is a major source of investment. Economic liberalization has brought huge sum of money through FDI and has created crores of jobs. Broadly there can be following types of FDI:

1. Horizontal FDI: In this firm expands same business to foreign land
2. Vertical FDI: In this, the business by moving to different level of supply chain expands in foreign country.

Also there can be two routes for investment viz; Automatic and Government.

• AUTOMATIC ROUTE: In this FDI is allowed without prior permission of government. For example Medical devices: up to 100%
• Thermal power: up to 100%
• Services under Civil Aviation Services such as Maintenance & Repair Organizations
• Insurance: up to 49%
• Infrastructure company in the securities market: up to 49%
• Ports and shipping
• Railway infrastructure
• Pension: up to 49%
• Power exchanges: up to 49%

GOVERNMENT ROUTE: In this business needs to take prior approval of government. The company is required to file  an application on Foreign Investment Facilitation Portal, this portal facilitates single-window clearance. This application is then forwarded to the respective ministry or department, which then approves or rejects the application after consultation with the DPIIT (Department of promotion and internal trade).  For example:

• Banking & Public sector: 20%
• Food Products Retail Trading: 100%
• Multi-Brand Retail Trading: 51%
• Mining & Minerals separations of titanium bearing minerals and ores: 100%
• Print Media (publications/printing of scientific and technical magazines/specialty journals/periodicals and a facsimile edition of foreign newspapers): 100%
• Satellite (Establishment and operations): 100%
• Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news & current affairs): 26%

However there also sectors where FDI is completely prohibited. Following are some of them:

• Agricultural or Plantation Activities (although there are many exceptions)
• Atomic Energy Generation
• Lotteries (online, private, government, etc.)

Advantages and Disadvantages of FDI:

According to the report released by UN in 2019, India was among the top 10 receivers of FDI. Even though there is no doubt that inflow of foreign investment brings many benefits like new technologies, skills, knowledge, employment opportunities, competition for business and improvement in the quality of products and services in sectors but at the same time there are disadvantages like adverse effect on domestic companies due to superior competitor and many small local companies may not be able to withstand that competition and FDI may also affect the exchange rate of the country.

Foreign capital and Trans-National companies in India:

Foreign capital is a comprehensive term which implies to any inflow of capital from foreign country. Commercial loans, Foreign direct investments, Foreign portfolio investments all come under Foreign capital.

In our country foreign capital plays very important role as it helps in filling the gap due to inadequate local capital, it helps in maintaining foreign exchange reserves, it reduces the balance of payments caused by huge imports and less exports.

In fact, in this era of globalization, it is generally considered that foreign capital transforms the productive structures of the developing economy leading to high growth rate. Also this investment generates a lot of employment opportunity which a dire need of a country like India.

Generally the companies bringing valuable FDI have their presence in number of countries; such companies are called transnational companies. These companies deal in international production of goods and services, foreign investments, management of assets in more than one country.

Although the transnational corporations share many common features with multinational corporations; there is a little difference. The multinational corporations consist of a centralized management structure on the other hand transnational corporations generally are decentralized, with many bases in various countries where the corporation operates. India is an attractive destination for transnational companies due to strong IT skills, cheap labor, and English speaking population. Companies like Toyota, Volvo and Hyundai manufacture cars in India. Companies like ASDA, BT and Virgin Media have call centres in India.

Transnational companies present advantages and disadvantages just like we discussed in case of FDI. TNCs have created jobs and offered education and training to employees, the additional wealth has led to the multiplier effect, also  the infrastructure of the country has been improved, with new roads and internet cabling, TNCs pay tax to the government, which is used for development projects

At the same time there also some disadvantages presented by TNCs; power corporation tend to violate environmental regulations and laws, many TNCs are owned by foreign countries so economic leakage occurs, where profit is sent abroad the best jobs are often given to foreign workers from the TNC's country of origin TNCs use many of the country's natural resources - a soft drink bottling plant in Kerala, India, was shut down due to its impact on local water supplies

Role and Impact of SAARC, ASEAN and WTO

SAARC:

SAARC stands for South Asian Association for Regional cooperation. It is a regional (South Asia) intergovernmental group. SAARC has eight member countries viz. India, Pakistan, Afghanistan, Bangladesh, Bhutan, Nepal, Srilanka, Maldives and nine observer members viz. Australia, China, Japan, South Korea, European union, USA, Iran, Myanmar and Mauritius. The SAARC member countries make up for 21% of world population and 4.21% of the global economy. The secretariat of SAARC is based in Kathmandu, Nepal.

The SAARC works on promotion and development of economic and regional integration. The main motto of SAARC is to work in a cohesive manner towards social, economic, and cultural growth of all people belonging to the region.

The SAARC member countries have chalked out an action plan to work  on agriculture, rural development, transport, environment, forest conservation women and children and healthcare.

SAARC has had significant impact on region and India. The presence of all SAARC heads in the swearing in ceremony of PM Narendra Modi in 2014 rejuvenated the group. SAARC is a relatively new organization but still it has produced considerable work like establishment of Free Trade Agreement which would increase trade. Establishment of SAARC University in India, a food bank and energy reserve in Pakistan are also considerable achievements of SAARC.

SAARC has India’s one hostile neighbor as a member country and other one as an observer, so this group also gives much needed platform for the representatives to have a dialogue. SAARC helps to build the much-needed atmosphere of mutual trust and respect.

ASEAN:  

ASEAN stands for Association of South East Asian Nations. Like SAARC, ASEAN is also a regional intergovernmental organisation.  Vietnam, Thailand, Singapore, Brunei, Philippines, Malaysia, Laos, Indonesia, Cambodia, Myanmar are the member countries and Papua New Guinea and Timor leste are the observer countries. The organisation promotes intergovernmental cooperation and also works on economic, political, security, educational and socio-cultural integration of the region.

The group also actively collaborates on matter of mutual interest in the economic, social, cultural, technological and administrative fields. Also it promotes south Asian studies and maintains close relation with international and regional organizations.

India has strong relationship with all the ASEAN countries, which is a key pillar in India’s Act East policy. ASEAN is India’s fourth largest trading partner; it presently stands at 10.6% of India’s overall trade and the exports to ASEAN stands at 11.28% of our total exports. India and ASEAN have signed Free Trade Agreement.

India and ASEAN also have student exchange programme, special training courses for diplomats and exchange of parliamentarians. We have also established assistance funds. We have established ASEAN- India centre to undertake policy research, advocacy and networking activities.

ASEAN and India also share same security issue from china. Cooperation on matters of international importance like South China Sea can also be strengthened in the time to come.

ASEAN plays central role in India’s vision peaceful and prosperous coexistence.

WTO:

It stands for World Trade Organisation. It is an intergovernmental organisation which regulates the international trade between nations. It was officially established on January 1 1995.  WTO regulates goods, services and intellectual property between participating countries by providing framework for negotiation of trade agreements and dispute resolution.

It is duty of WTO to review and propagate the national trade policies and also ensure coherence and transparency. It is also responsibility of WTO to give assistance to less well to do countries to adjust to WTO rules.

World Trade Organisation has made a huge positive impact on global and regional trade. The WTO’s system helps to reduce the trade barriers through negotiations and it operates with complete non-discriminatory approach. It reduces the price of production and price of finished goods and services as the result of cheaper imports.

The WTO has stimulated economic growth and employment generation. It encourages the international trade.

Multiple studies have shown that WTO has caused boost in trade. Research has shown that in absence of WTO, an average country would bear increase of around 32% points on their exports. One of the biggest reasons for the increase in trade is WTO’s fair dispute resolution mechanism.

Presence of WTO has made the world listen to the voice of smaller countries, which would have been a difficult task in its absence. WTO also stabilizes the world economy by discouraging any sudden backward steps in policy; it reduces protectionism and increases openness, hence acting as confidence builder.

Especially in the time like this where the world is witnessing protectionism and trade war, the role of WTO becomes very important.

References

1. Introduction to Agricultural Economics by Pearson Education
2. Agricultural Economics by Reddy