written by | October 11, 2021

Challenges Faced by Service Sector in India: A Detailed Overview

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Table of Content


India's service sector is one of the most important sectors globally, contributing up to 60 per cent of the country’s GDP. The SSE employs nearly 50 lakh individuals in over 100,000 businesses. In fact, by 2020, about 57 per cent of all new jobs would be created within traditional service-based enterprises. It has maintained a dominant presence in almost all sectors and generated a sizable portion of employment opportunities in the country. But every successful enterprise is an idea, only if it transforms into growth and action.

Did you know?

The Organisation for Economic Co-operation and Development (OECD) countries account for 78 per cent of GDP: services, including government, business and personal services, account for 54 per cent of GDP. 

Contribution of the Service Sector in GDP

The total contribution of the service sector in GDP (at constant prices), which includes trade, hotels, transportation, storage, and communications, banking, insurance, real estate, community, and personal services, but not construction, increased from 28.5 per cent in 1950-51 to 31.8 per cent in 1970-71, and finally to 51.3 per cent in 2013-14.

However, the overall contribution of the service sector in GDP, excluding construction, climbed fast from 30.5 per cent in 1950-51 to 50.8 per cent in 2010-11. And then to 55.7 per cent in 2011-12 at factor cost (at current prices). If construction is included, the services sector's share of GDP has climbed from 56.8 per cent in 2000-01 to 59.6 Percent in 2013-14.

Also Read: Different Types of Industries- Primary, Secondary & Tertiary

MSME - The Way Forward

It will be seen that the recent absence of service sector businesses in the defaulter's list also indicates positive growth in this sector. While India is known for its IT Software and BPO sector, the manufacturing sector has been the major driver of our economic growth. However, since economic liberalisation happened in the early 90s, persistent influence of demonetisation, lack of tax efficiency, ill-defined segment parameters have led to a situation where MSME segment business owners find it tough to manage their businesses efficiently. The recent pandemic and subsequent lock-down in many northern cities didn't help matters either. Traditional service sector businesses were hit hard by this as clients went into closure mode due to the pandemic and shutdown.

Growth of Service Sector in India

The services sector has contributed more to India's GDP due to its growth in all sectors. The services sector is considered one of the most important sectors when analysing the state of an economy. It is made up of industries, which fall into one of the following categories -

  • Wholesale and retail trade
  • Hotels and restaurants
  • Transportation and storage 
  • Real estate
  • Business and financial services
  • Information and communications technology 
  • Public administration and defence 
  • Education
  • Health care
  • Arts and recreation
  • Other community services
  • Private households with employed persons

The growth of the service sector in India is due to growing wealth and people's hopes based on a longer life expectancy. In recent decades, the production complexity of computers, cars, and other consumer goods has led to growth in the service industry. There is also an increase in services related to entertainment.

Challenges Faced by Service Sector in India

Lack of Skilled Labour

Small and medium enterprises in India are highly labour-intensive. The SMEs cannot provide enough wages to the workers and adequate working conditions to retain them. Many skilled workers migrate to other countries where they can find jobs with better wages and working conditions. This shortage of a skilled labour force makes it difficult for SMEs to run their business and productivity.

Moreover, due to the lack of skilled labour, MSMEs in India have to hire untrained or unskilled employees. Hiring these unskilled workers often causes a decrease in the quality of products produced by MSMEs as they cannot meet international or domestic standards.

It is also noteworthy that SMEs face quite a few problems regarding finance. The complicated procedure followed by banks and financial institutions makes it difficult for SMEs to obtain business loans or, for that matter, even personal loans for their employees. 

People Dominant

As mentioned earlier, this Indian service sector depends on human contact and is also people-centric. The social distancing norms have severely impacted their ability to survive, and the severe restrictions on movement and the fear of infection further add to the pressure. A large section of businesses is likely to get permanently shut down, while others may require substantial government support to survive. 

The pandemic has caused massive disruptions across sectors, with many businesses facing temporary or permanent closure. However, some sectors such as technology platforms, e-commerce firms, healthcare services, FMCG companies, etc., have witnessed growth in demand and supply.

Taxation

The sector suffers from multiple direct and indirect taxes and it makes it one of the most taxed sectors at present. The contribution of the service sector to the Indian economy has seen significant growth over the years, with the employment generation focusing on this sector. It has played a pivotal role in our development endeavours and continues to do so. There is no allocation of tax holidays or incentives specifically earmarked for this thriving and rapidly growing service sector segment by either the state governments or central Government. However, both focus on creating a conducive environment, particularly addressing the financial challenges MSMEs and SME segments face due to increasing input costs.

Lack of Infrastructure

The development of infrastructure facilities and services is the responsibility of both the Central and State Governments. In India, different infrastructure facilities exist under different departments and agencies such as electricity, urban transport, road transport, railways, water supply, sewerage and solid waste management, and telecommunications.

The lack of infrastructural facilities leads to higher costs for business organisations, and it makes them dependent on the Government for support for investment in these facilities. The Government should provide incentives to the private sector to develop infrastructure projects.

The availability of infrastructure facilities has always been a big challenge, especially in rural and semi-urban areas. Most small businesses are located in rural or semi-urban areas where access to finance is difficult due to the lack of banking and other financial services such as banking products, insurance products, capital market products, etc. It has further contributed to their low growth rate over the years.

Also Read: Get Your Local Marketing Up & Running

Market Barriers

India's trade within the sector of merchandise and services with its Non-WTO Partner countries has been hampered by several market entry barriers. Several market entry hurdles have impeded India's commerce with its Non-WTO Partner countries in the product and services sectors. 

For instance, even though the US is one of India's most important trade partners, there are several barriers to entry. These include -

  • Licensing of skilled service providers that are usually regulated at the state level in the US 
  • The restrictive regime in the case of shipping services in the US with many types of assistance to the domestic shipping sector, such as a minimum of fifty per cent of government shipments for the US-registered ships

Conclusion

India is undergoing a structural change in the service sector in the present emerging scenario. But this structural change has created more opportunities for self-employment and innovation, and however, it has made India face the problems of unemployment and skill employment. In the future, these structural changes in service sectors may make India's manufacturing sector leaner, more competitive, and technologically refined. The service sector is essential for almost every middle-class family. The poorest of Indian society also need to improve their living conditions, but it will not be entirely possible without the betterment of the service sector.

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FAQs

Q: How does the service sector in India improve human development?

Ans:

The service sector is growing rapidly in India. We are facing problems like unemployment. But this is not a problem because the service sector is helping our economy grow.

Q: What is the role of the service sector in the Indian economy?

Ans:

The service sector plays a vital role in the economy of any country. It gives employment to a large number of people, provides services, and also makes the trade. The contribution of the service sector to the Indian economy is inevitable, and India is no exception to it. The Indian economy could not go forward without the service sector being one of the largest economies worldwide. Though the manufacturing sector and agriculture play their part in the betterment of the Indian economy, they only lack many things that can be achieved through the service sector.

Q: What are the major components of the service sector in India?

Ans:

The major components of the service sector are banking and insurance, transport and communications, real estate, power generation and distribution, education, health services, hotels, restaurants, etc

Q: What is the service sector?

Ans:

The service sector in India is an extremely broad term that refers to the industry producing intangible goods (services) as output. The service sector is not limited to business services, like hospitality and education, and information technology and media are also considered part of the service sector.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.