Structure and growth of service sector; employment trends in Industry and Service sectors

Growth and structure of service sector in India and Telangana

Service Sector of Indian Economy contributes to around 55 percent of India’s GDP during 2006-07. This sector plays a leading role in the economy of India, and contributes to around 68.6 percent of the overall average growth in GDP between 2002-03 and 2006-07.

There has been a 9.4 percent growth in the Indian economy during 2006-07 as against a rise of 9 percent in the same during 2006-06. During this growth in Indian economy, the service sector witnessed a rise of 11 percent in the year 2006-07 against the 9.8 percent growth in 2005-06. The service sectors of Indian economy that have grown faster than the economy are as follows:

  • Information Technology (the most leading service sectors in Indian economy)
  • IT-enabled services (ITeS)
  • Telecommunications
  • Financial Services
  • Community Services
  • Hotels and Restaurants


The services sector is the key driver of India’s economic growth. The sector has contributed 57.12 per cent of India’s Gross Value Added at current price in H1 2018-19. Net service exports stood at US$ 38.95 billion in H1 2018-19 (P).  Nikkei India Services Purchasing Managers’ Index (PMI) stood at 53.7 in November 2018. The expansion in November 2018 was marked with boost in output, the strongest since July 2018.

The Government of India recognises the importance of promoting growth in services sectors and provides several incentives in wide variety of sectors such as health care, tourism, education, engineering, communications, transportation, information technology, banking, finance, management, among others.

Prime Minister Narendra Modi has stated that India’s priority will be to work towards trade facilitation agreement (TFA) for services, which is expected to help in the smooth movement of professionals.

The Government of India has adopted a few initiatives in the recent past. Some of these are as follows:

  • The government has identified 12 sectors under the Champion Services Sectors Initiative which is aimed at formulating cross-cutting action plans to promote their growth. These include Information Technology & Information Technology enabled Services (IT & ITeS), Tourism and Hospitality Services, Medical Value Travel, Transport and Logistics Services, Accounting and Finance Services, Audio Visual Services, Legal Services, Communication Services, Construction and related Engineering Services, Environmental Services, Financial Services and Education Services. Further, the government has set up a dedicated fund worth Rs 5,000 crore (US$ 693 million) which will be utilised to support sectoral initiatives under the Champion Services Sectors Initiative.
  • Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Central Government increased incentives provided under Services Exports from India Scheme (SEIS) by two per cent.
  • Government of India is working to remove many trade barriers to services and tabled a draft legal text on Trade Facilitation in Services to the WTO in 2017.

Employment trends in Industry and Service sectors

The two most interesting trends in recent employment figures deserve a closer look. There has been an increase in organised sector manufacturing employment during the period January 2000 to December 2011 to the tune of about 5 million, more than half of which is on the basis of contract. More recently during March 2014 to July 2015, total employment in manufacturing including organised and unorganised declined in absolute terms while there had been increase of 0.32 million employment in organised manufacturing and this time the share of contract workers of newly employed in organised manufacturing went up to 85 per cent. In the case of unorganised manufacturing, the only segment that recorded growth in employment is the Own Account Manufacturing Enterprises (OAMEs) which are basically one person enterprises meaning self-employed who do not hire any labour and mostly employ family labour. According to the NSSO survey on Unincorporated Non-agricultural Enterprises (excluding construction) total employment in unregistered manufacturing increased from 34.8 million in November 2010 to 36.04 million in 2015-16, a meagre increase of 1.24 million in five years. The rise has been higher in OAMEs to the tune of 1.84 million. Perhaps the more important fact is employment declined in establishments that are relatively larger in size within the unregistered segment and employ one to ten hired workers, have employed 0.67 million less workers during the same period. Therefore, the rise in employment in the organised manufacturing sector was primarily driven by contractualisation and in the unorganised segment, employment increase was accompanied by fragmentation of productive activities. The situation has further worsened because of demonetisation and introduction of GST, causing suffocating effects on the unorganised segment of the economy that employs 92.8 per cent of India’s workforce.

Overall employment scenario in the recent past had been quite depressing. Labour Bureau’s annual household employment survey shows a decline in total employment in India from 480.4 million (2013-14) to 467.6 million (2015-16). According to the most recent Annual Survey of Industries that captures data for the organised manufacturing sector, employment has increased by a paltry 3,15,140 between 2013-14 and 2014-15. High frequency data provided by Labour Bureau Quarterly Survey suggests that during the quarter July-September 2016, increase in employment was 77,000 and that has come down to an increase of only 32,000 during the quarter October 2016 to January 2017.What seems paradoxical is the fact that expansion of employment in the organised segment and greater absorption of contract workers in proportion is not happening in traditional labour intensive sectors such as textiles, leather or food processing industries as generally expected to be the case. Instead the big ticket employment generators within manufacturing are relatively capital intensive sectors such as manufacture of motor vehicles, trailers and semi-trailers followed by the manufacture of machinery and equipment. The industry that witnessed the largest job destruction was manufacture of fabricated metal products. The overall dismal employment scenario with sluggish growth visible mainly in capital intensive sectors of the organised segment and higher dynamism playing out in the tradeable informal segment that is self-employed producing goods and services linked to global market, is a case in point. These facts are indicative of a particular trend in manufacturing employment, that is, segments which somehow managed to create some jobs are directly or indirectly linked to global market. Rising inequality, stagnating investment growth both in public and corporate sectors and depressing demand in the domestic economy didn’t seem to contribute in recent employment growth. In fact, manufacturing sectors that recorded some employment growth in recent past such as computer equipment, electrical equipment, transport equipment, motor vehicles, machinery, metals and chemicals are more integrated with the global production networks compared to traditional labour intensive sectors such as leather, textiles and light manufacturing.

The 2013 World Investment Report estimates that now over 80 per cent of global trade flows through global production networks led by transnational corporations. The ILO on the other hand estimates that one in five jobs in the world are somehow linked to global value chains. The OECD report in 2012 further indicated that between 1990 and 2010, the share of BRICS economies in the exports of parts and components increased from 0.78 per cent to over 14 per cent. OECD countries’ share, at the same time, declines from over 92 per cent of all exports of parts and components to 70 per cent by 2010. There has been a shift in manufacturing activities towards the global South in the recent past. However, this change need not be overestimated because 69 per cent of global manufacturing value added even today accounts for advanced countries and expansion of global production networks slowed down since the global financial crisis. But the point is, how this shift in manufacturing towards global South has impacted upon employment in the recent past. First of all, technology related unemployment is on the rise in advanced countries due to introduction of artificial intelligence and robotics. Repetitive manufacturing activities and standard services are increasingly replaced by machines. This is creating threat of huge unemployment in developed North which shows its early impacts on developing countries as well. Furthermore, relative cheapening of investment goods has facilitated capital intensive techniques that increasingly replace labour. On the top of that, information technology has reduced transmission cost to such a level that coordination from a distance has become possible. In such scenario, wage gaps between advanced and developing countries’ labour market offers a real opportunity for global multinationals in relocating production facilities to the South. This has led to offshoring of labour intensive activities to developing countries. But what are relatively labour intensive activities in advanced countries and those mainly offshored are actually capital intensive according to developing country averages. Hence global integration is visible more in relatively capital intensive sectors as mentioned above and not in traditional labour intensive sectors like textiles or leather. Secondly most of the developing countries usually having large labour surplus are trying to outcompete each other on the basis of labour costs. It is true that labour cost is not the only factor that provides competitive edge to a producer but it is also the most general element that a producer factors in apart from other favourable determinants that are more specific. Rise in contractualisation in the organised manufacturing is simply a response to such needs. The real wage of a contract worker is 24 per cent less than that of a regular worker leaving aside other benefits and entitlements. And at the terminal point of the chain, producers are increasingly relying on tiny enterprises in the informal segment where wages can be pushed below the value of labour power thus garnering super profits. But such strategy of depressing wages could not be unique for any particular country. Many countries in the global South persuade such strategy leading to a decline in their offer price as a group that ultimately enhances the gains of MNCs and TNCs. In fact, recent World Bank report (2017) on global production network suggests that developing countries, mostly involved in standard manufacturing and services are increasingly losing their share in the global value added. Competition in global market, by the way, takes place on the basis of unit labour cost and not actually upon wage levels. This is precisely the reason why out of top ten exporters of labour intensive goods, seven of them are advanced economies. In 2000 China’s real wage was less than that of India’s, today wages in China are more than double to that of India’s workers. But unit labour cost, that is, ratio of average wage to GDP per capita in China is lower than that of India. If the worker’s productivity increases say four times while wage doubles, then unit labour cost declines even if wages increase. Instead of relying more on R&D and enhancing human capacities competition, India continues to be on the ‘low road’ of depressing wages taking recourse to contractualisation and informalisation of labour process.









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