Service Sector Dynamics and Role in the Indian Economy

Services have been a dynamic sector in the Indian economy, significantly contributing to India’s GDP, FDI inflows, and exports. Services have played a key role in India’s integration with the world market, particularly due to the performance of segments such as IT and IT-enabled services and business and professional services. The sector has also outperformed manufacturing in terms of growth, productivity, and share in global trade. In large part, its dynamism can be attributed to economic liberalization and regulatory reforms undertaken in India since 1991. This chapter discusses the growth, development, and productivity dynamics in India’s service sector till date and its potential role in shaping India’s future growth prospects. It outlines trends in the sector’s GDP growth and contribution to the Indian economy, highlighting differences in performance within the service sector and relative to other sectors, and places this performance in the context of the debate surrounding India’s services-led growth paradigm in contrast to the traditional primary to secondary sector growth model. The chapter also provides an overview of key regulatory, policy, and other developments in the services sector, with a focus on selected services, and analyzes their implications for not only the growth and development of the services sector but also its implications for the larger economy, through direct and indirect linkages with other sectors. The chapter concludes by outlining policy measures that are needed to leverage emerging opportunities as well as address challenges in services.