INTRODUCTION

DEFINITION OF SERVICE

According to Christopher and Wirtz

“A service is an economic activity that creates value and provides benefits for customers at specific times and places by bringing about a desired change in, or on behalf of, the recipient of the service.”

CHARACTERISTICS OF SERVICE

1.Customers do not obtain ownership of service.

2.Service products are ephemeral and cannot be inventoried.

3.Intangible element dominated value creation.

4.Other people may be involved in the production process.

5.There is greater variability in the operational inputs and outputs.

6.Many service are difficult for customers to evaluate.

7.The time factor assume great importance.

8.Diatribution channels take different forms

ACOORDING TO ESTIMATE OF 2005.

MAJOR  SERVICE SECTORS OF INDIA

Ø      Wholesale/Retail

Ø      Hotels and Restaurants

Ø      Railways

Ø      Other Transport & Storage

Ø      Communication (Post, Telecom)

Ø      Banking

Ø      Insurance

Ø      Dwelling, Real Estate

Ø      Business Service

Ø      Public Administration, Defence

Ø      Personal Service

Ø      Auto Components

Ø      Consultancy

Ø      Healthcare services

Ø      Tourism

Ø      Media and Entertainment

Ø      IT and IT enabled services

India'S IT Market reached a turn over of US$ 16.2 billion in 2004-05. The IT Sector employs 697,000 people and this is likely to reach 2 million by 2014. IT Companies are expected to account for 8-10% of GDP by 2008 from 1.4% in 2001. India is considered as a global player in Information Technology with software exports of US Dollars12 billion in 2003-2004 and $ 17.2 billion in 2004-2005. The revenue from exports of IT and related services is expected to reach US$ 57 billion by 2008.  Turnover of the top three companies namely Tata Consultancies, Infosys and WIPRO, are over one billion dollars each.

-Of the Fortune 500 companies 220 outsource their software from India.

-Infosys has a turnover of around US$ one billion with a market cap of $ 12 billion. Wipro has sales of US$ 900 million with market cap of US $ 11 billion.

BPO Sector

India's IT workforce is 650,000. This is projected to reach 2 million in the next ten years.

The BPO Sector has been growing at 60-70% annually and its turnover in 2004-05 reached US$5.8 billion from US$565 million in 1999-00. It is projected to increase to US$ 12.3 billion by 2006 and create employment opportunities for a million people from its current level of 200,000.

Consultancy

India's Consultancy Professionals possess capability and capacity to provide expertise especially suitable for developing countries. In addition it also offers consultancy in sophisticated areas like information technology, advanced financial and banking services etc. to developed countries like USA, UK, France, West Germany and Australia..

Expertise offered by Indian consultancy professionals covers areas like infrastructure, Economic& Social Sector, Water Resource Dam, Flood Control, Irrigation, Rural Development, Environment, Industries, Computer, Training of personnel and transfer technology

Health

India's health services (with highly qualified and experienced personnel), super-specialty hospitals specializing in both modern and traditional Indian medical systems (like Ayurveda, Unani, Siddha and nature- cure) supported by state-of-the-art equipment, are attracting patients from across the world, and constitute a larger portion in India's services sector.

Education

Education is another field which is not only a huge segment of the services sector within the country, but also a foreign exchange earner by way of NRIs and foreign students enrolled in major medical, technological and other institutions in India. We also export manpower even to the western world. The demand for teachers from India has started growing in the United States and England in recent times.

Retailing

The organised and corporate-owned retail business is about Rs 35,000 crore and is growing at a rate of 35 per cent per annum and is expected to grow at a rate of 35 per cent. The retail industry is being seen as one of the sunrise sectors. Of late, business houses in the country are turning to retail. Modern retailers like Trent, Shoppers’ Stop, Pantaloon, Piramyd and Globus have enetered the market and are in expansion mode.

Tourism

India is a subcontinent with varied geographical, climatic, ethnic, cultural, religious and social condition. So it is a top destination for any tourist .The tourism industry in the country is well equipped and also growing very fast to offer tourists all the services needed for making their visit memorable.

Entertainment

The FICCI Survey shows the entertainment industry has grown by 15 per cent to an estimated market size of Rs 19,200 crore in 2003 and is projected to grow by 17 per cent to Rs 22,610 crore in 2005 and Rs 42,300 crore in 2008. The Survey projects that Indian film and entertainment industry which enjoys export earnings of Rs 1,000 crore annually has a tremendous export potential. This is expected to grow by 70 to 80 per cent over the next 5 to 10 years.

Financial Sector

The FICCI Survey reveals that the Mutual Fund industry has witnessed tremendous growth during the last two years. Total assets under management have increased from Rs 89,238 crore in 2002-03 to Rs 1,43,688 crore in 2003-04 with about 61 per cent growth. This has swelled to more than Rs 160,000 crore in 2004-05 recording more than 11 per cent growth rate.                      

OPPORTUNITIES AND CHALLENGES TO NDIAN SERVICES

The three fastest growing service sectors namely, Business services (Financial & Telecom), Professional services (IT related) and the Tourism industry have been receiving higher FDI inflows, have witnessed faster growth and have created larger employment opportunities for the domestic economy. However certain sectors like retail distribution, legal services, air transport, real estate, postal services etc. have not been subject to domestic and foreign competition and have therefore not grown at a pace similar to others.

Notwithstanding the slow FDI inflows, access to growing external markets for services and gradual liberalization of the domestic economy has played a crucial role in creating a dynamic services sector in India. Presence of a highly skilled technical manpower, a relative lower wage structure (according to NASSCOM the wages of Indian software professional are 15% of the US wages), a large English speaking population and a compatible time zone with the US and EU has also helped in building a competitive service edge and achieving a larger share of the Professional services sub sector.

1. Barriers to foreign service providers in India

A sector  wise analysis will show that though India has autonomously liberalized

itself in a few sectors but a large number of restrictions still apply to foreign service providers which act as entry and exit barriers to trade.

In the IT sector although GATS commitment allows only investment up to 51percent, India has autonomously liberalized itself to permit 100 percent FDI through the automatic route with the exception of B2B electronic commerce where FIPB approval is required and the foreign promoters are required to disinvest 26 percent of ownership. Between 1991-2002, India could attract substantial FDI investment in this sector  i.e. USD 1.8 billion which account for 6.4% of the total FDI approvals within this period.

In the Telecommunications sector, under the GATS India has allowed 25 percent and 51 percent FDI investment for wire based/cellular services and data/message transmission services respectively. However the relaxation of foreign ownership restrictions far exceeds these commitments. Encouraged by this positive Policy environment, between 1991-2002 the sector has received FDI to the extent of USD 5.7 billion i.e. 19.7 percent of the total FDI approvals (making it the largest FDI recipient sector). A competitive market structure (with the presence of both domestic and foreign firms) in the telecom sector has also been instrumental in high IT related growth. However certain issues like uncertain interconnects usage charges and frequent changes in the tariff policy regime impact the performance and trade flows in the sector.

Sectors like financial services, construction and related engineering services; health and air transport services are examples of areas where the policy regime is moderately liberal with some explicit barriers. In the Banking and other financial services (except insurance) FDI is permitted unto 49 percent. However foreign banks can operate only as licensed branches or subsidiaries. Limitations on the number of annual branch licenses (both for new and existing banks) and priority sector lending requirements ( a certain proportion of funds to be disbursed to small scale industry and for export credit) also exist. Moreover voting rights of shareholders of foreign banks are restricted to 10 percent and a move to increase this limit is being actively debated. At present there are 18 foreign banks operating in India and this sector has attracted USD1.25 billion of FDI between 1991-2002 i.e. 4.4 percent of total FDI approvals. Foreign sector participation in the insurance sector is limited to 26 percent and foreign firms can only set up firms through partnerships or joint ventures. Nine foreign firms (both in the life and non-life segments) have started operating insurance joint ventures in India. FDI is not permitted in the real estate sector. The construction sector growth is restricted because of complex tenancy laws, rent control, high stamp duties and poor enforcement of building regulations. Issues like minimum acreage development (100 acres), minimum capitalization requirements ($ 10 million) and a three year lock in period before repatriation of proceeds limit the attractiveness of this sector to foreign firms. There is no cap on FDI in the health sector but foreign individuals are prohibited from providing services for profit and are subject to the registration requirements of the respective medical associations in India.

B. Growing Threats

Though India remains as an attractive outsourcing location but competitive

pressures are not far behind. Lower wage costs in countries like China, Brazil, Vietnam

etc., territorial proximity of certain countries like Mexico/Brazil to US and being in a similar time zone, familiarity with desired standards of service in US by certain countries like Philippines etc. are some of the probable reasons for exportable services to be provided by other countries. Privacy concerns on electronic commerce transactions being imposed by EU could also affect the IT sector potential. Having adequate data protection rules and enforcement mechanisms in place will only lead to higher costs of doing business and negate the basics of services trade i.e. comparative advantage.

4.0VARIOUS COMMENT FROM INTERNATIONAL INSTITUTIONS

The WTO statistics show that India has emerged as one of the dynamic suppliers of services in the world and is ranked 21^st in export of  services and is 27^th in service  imports .

 WTO statistics reveal that during 2002-2004 export worldwide of services trade rose by 190.8 per cent to USD 1540 billion and about 60 per cent of service  trading is concentrated among the 10 developed nations of the world.

 NASSCOM (National Software Association) studies, till 1998, the BPO services namely data entry/conversions, medical transcriptions, insurance claims, call centers, database services etc comprised of only 4 percent of total exports and the balance 96 percent were IT related services. Since then the BPO sector has grown at an average rate of 100 percent annually and constitutes roughly 24 percent of software exports. The studies suggest that off-shoring i.e. services supplied within India has become the dominant mode of delivery of software exports and constitutes 58 percent of total exports. Various reports have also indicated that India’s IT related services are expected to increase to $ 57 billion (2010) and India shall also receive a large share of the off-shore financial services estimated to be about $ 350 billion (2010).

The FICCI Survey says the demand for teachers from India has started growing in the US and England in recent times. There is a huge outsourcing opportunity for India from Education Process Outsourcing (EPO).

It projects EPO by developed countries from India can be big business for India in future. Imparting education, training, coaching, sending education materials through internet has become a profitable business proposition for many training institutions and professionals and this sector has huge potentialities in India.

 With the Service Tax collection estimated to grow by 61.97 per cent (Rs 8,800 crores) to Rs 23,000 crores in the current financial year 2005-06, Chidambaram has set a target of 50 per cent growth (Rs 11,000 crores) to aim at Rs 34,500 crores in 2006-07 from Rs 23,000 crores estimated in 2005-06.

Now the pertinent question is: Why is Service Tax getting more attention from the Finance Minister? The answer lies in understanding the very dynamics of Service Tax and the emerging role of the service sector in an expanding economy.

As Chidambaram explains in simplistic terms, the service sector is estimated to contribute 56 per cent of Gross Domestic product (GDP). Naturally it should also contribute to the exchequer.

A latest survey conducted by the Central Statistical Organization (CSO) shows trade services, transport and communication forming 44.1 per cent share in services sector GDP has increased by 11.2 per cent.       Financing, insurance, real estate and business services which occupy 22.9 percent share has grown by 6.8 per cent. Community, social and personal services contributing to 23.8 per cent share has recorded 6 per cent growth rate. Construction having 9.2 per cent has grown by 6.2 per cent.