Page 38 - DMGT522_SERVICES MANAGEMENT

Unit 2: Emergence of the Services Economy

2.3.1 Services Sector: International Comparison Notes

Conventional wisdom suggests that during the early development phase of any country,
expansion of output in manufactured goods precedes growth in the services sector. As a country
progresses further manufacturing often takes a back seat, giving way to the services sector in
terms of both output and employment, and manufacturing firms themselves become increasingly
service-centric in order to remain competitive. Some have argued that the decline in manufacturing
and corresponding shift to services is unsupportable in the long run as services depend critically
on manufacturing for their demand. Although this argument may be applicable for certain
services such as retailing and transportation, it does not entirely hold for many other services.
IT, in particular, has been a major force behind recent expansion in manufacturing rather than
the other way round. While internationally, the conventional wisdom of development holds
good, in the case of the Indian economy, it seems to have been turned upside down, with the
services sector taking a substantial lead over manufacturing. In India’s case, there are positive
spillovers from services growth to manufacturing, through income, demand, technology, and
organisational learning.

2.3.2 Services GDP: International Comparison

In 2010, the share of services in the US$63 trillion world gross domestic product (GDP) was
nearly 68 per cent, as in 2001. India’s performance in terms of this indicator is not only above that
of other emerging developing economies, but also very close to that of the top developed
countries. Among the top 12 countries with highest overall GDP in 2010, India ranks 8 and 11 in
overall GDP and services GDP respectively. While countries like the UK, USA, and France have
the highest share of services in GDP at above 78 per cent, India’s share of 57 per cent is much
above that of China at 41.8 per cent. In 2010 compared to 2001, India is the topmost country in
terms of increase in its services share in GDP (7 percentage points) followed by Spain and
Canada (5.3 percentage points each), the UK (4.5 percentage points), and Italy (3.2 percentage
points). In terms of compound annual growth rate (CAGR) for the period 2001-10, China at 11.3
per cent and India at 9.4 per cent show very high services sector growth. Russia at 5.5 per cent and
Brazil at 4.0 per cent are a distant third and fourth respectively. While India’s growth rate of the
services sector at 10.1 per cent in 2009 was higher than that of China at 9.6 per cent, in 2010 it has
decelerated to 7.7 per cent while China’s has remained constant. All this highlights the prominence
of the services sector for India. Despite the higher share of services in India’s GDP and
China’s dominance in manufacturing over services, the hard fact, however, is that in terms of
absolute value of services GDP and also in terms of growth of services, China is still ahead of
India in 2010.

2.3.3 International Trade in Services

Global trade in services has more or less mirrored the trend in merchandise trade, and, by
corollary, international demand. World exports of services have shown consistent rise in the
2000s decade with a healthy average annual growth of around 9.5 per cent, except in 2001 and
2009—periods of global slowdown and economic crisis. After having increased by 13 per cent in
2008 (as per WTO data), world exports of services fell sharply with negative growth of 12 per
cent in 2009, only to bounce back in

2010 with 9 per cent growth. In 2010 the value of services exports was US$3,695 billion, slightly
below the 2008 pre-crisis peak of US$ 3,842 billion. While world trade in services is dominated
by the developed countries, emerging economies like China and India are now playing an
increasing role. India is the most dynamic exporter of services and ranked seventh in the world
in both exports and imports of services in 2010.

LOVELY PROFESSIONAL UNIVERSITY 33