Services sector in need of revival package

The services sector in India has grown exponentially over the past few decades to become the most dominant segment of the economy. It now occupies the biggest share of the GDP at over 60 per cent. It has even eclipsed agriculture in becoming the topmost employer. According to projections made by the ILO, services account for a 44.2 per cent share of the total employed, compared to 43.2 per cent for agriculture in 2019.

In this backdrop, Commerce and Industry Minister Piyush Goyal’s plans to create standards for the services industries appear to indicate the high priority being given to this area. Yet, it is intriguing that the minister has spoken about the need for standardisation in a sector where some segments like information technology have flourished due to benign neglect from officialdom initially. In fact, the services industries currently are more in need of support to survive the rigours of the pandemic rather than regulatory tangles.

The fallout of Covid has been devastating on this sector, with many entities forced to a standstill last year during the national lockdown. They were limping back to normalcy when the second wave led to regional lockdowns that repeated the cycle of closures and job losses. The tourism and hospitality sector, for instance, has been severely affected and it has, in turn, impacted the livelihoods of millions.

Domestic tourism has revived slightly over the past two months, though the visuals of crowds in scenic resorts have raised concerns over the prospect of super-spreader events. International tourism, however, has completely shut down. The result is that tourism-dependent states like Rajasthan as well hotels and resorts all over the country are facing enormous revenue losses. The timing constraints on all categories of restaurants have also left workers stranded after many establishments had to suspend operations.

The repercussions of such closures can be visualised from the fact that 39 million jobs are reported to have been created in the tourism industry in fiscal 2019-20. This comprised eight per cent of the total employment in the country at the time.

The aviation industry has also been hard hit by the curtailment of domestic and international flights. There are several ancillary service sub-sectors linked to aviation that have been impacted by the curbs on flying. These include maintenance operations, ground handling, catering and inflight sales, all of which are huge employers. Some other sectors have been equally hit, including construction and real estate, call centres and delivery services.

In contrast, the vast segment of information technology and IT-related services has reaped a bonanza during the pandemic. The need for remote and online work has meant that IT has assumed enormous importance. The outcome has been that the profitability of IT firms, whether it be giants like TCS and Infosys or smaller companies and start-ups, has risen by big margins.

Similarly, social intermediary companies, much in the news lately due to tussles over complying with new Indian IT rules, have profited from the focus on online work and entertainment. They have not only gained followers but also drawn in higher advertising revenues.

But the rest of the services segment has been in a deep crisis ever since the pandemic was unleashed in March last year. Most job losses have been in this sector. Given the crisis as well as their enormous share in the country’s economy, it is baffling that the government has failed to include them in the various Covid revival packages unveiled over the past year. Services account for two-thirds of the total foreign direct investment inflows and 38 per cent of total exports.

Services exports, according to the government’s own data, have been far higher than goods exports in recent years. In fact, India’s share in global commercial services exports touched 3.5 per cent in 2018 as compared to 1.7 per cent of merchandise exports.

The traditional outlook on economic growth envisages that growth and development can be led only by the manufacturing sector. In other words, services can only be the product and not the driver of growth. The reality is that services have now been catapulted by technology to a position where they can be produced and traded just like manufactured goods. Studies by multilateral agencies like the World Bank are showing that services industries are contributing more than manufacturing to jobs and growth in many countries.

This is all too evident in India where services have rapidly outpaced manufacturing and become the main force, driving both jobs and growth. The government needs to take cognisance of this new reality by providing a supportive revival package to the badly affected services sector. Instead, it seems to be looking at a way to engulf service industries with regulations to create a system of standards. Most likely, these will be drafted by bureaucratic committees more interested in imposing controls than facing the industry’s realities.

When the Modi government came to power, it spoke reassuringly about minimum government and maximum governance. In fact, the reverse has taken place, with efforts to put in place increasingly more regulations and bureaucratic rules, rather than eliminating the existing ones. The services sector is being viewed in the same way as other industries, in other words, with suspicion, which is the opposite of the meaning of minimum government.

Guidelines and regulations have their due place but excessive distrust leads to more red tape and controls. Regulations for the tourism industry, for example, need to be eased considerably. Setting up and operating restaurants, resorts and hotels should be made much easier and the plethora of approvals needs to be cut down drastically. Providing an easier environment for services industries will improve job potential in sectors which rely heavily on skilled manpower for their success.

By neglecting the services sector or viewing it with distrust, the government is only going to constrain the development of the most significant segment of the economy, the one that has the potential to drive growth in the coming years. In case the approach to this sector continues to be hamstrung by the view that services are a peripheral element, it will be a lost opportunity at a time when there is a desperate need to make a push for higher growth.