PPMS

ASSIGNMENT 1

TOPIC: GROWTH OF SERVICE SECTOR IN INDIAN PHENOMENON

SERVICE SECTOR

 In economics, a service is an intangible commodity. That is, services are an example of intangible economic goods.

Service provision is often an economic activity where the buyer does not generally, except by exclusive contract, obtain exclusive ownership of the thing purchased. The benefits of such a service, if priced, are held to be self-evident in the buyer's willingness to pay for it. Public services are those, that society (nation state, fiscal union, regional) as a whole pays for, through taxes and other means.

By composing and orchestrating the appropriate level of resources, skill, ingenuity, and experience for effecting specific benefits for service consumers, service providers participate in an economy without the restrictions of carrying inventory (stock) or the need to concern themselves with bulky raw materials. On the other hand, their investment in expertise does require consistent service marketing and upgrading in the face of competition.

DEFINITION

A type of economic activity that is intangible, is not stored and does not result in ownership. A service is consumed at the point of sale. Services are one of the two key components of economics, the other being goods. Examples of services include the transfer of goods, such as the postal service delivering mail, and the use of expertise or experience, such as a person.

 

CHARACTERISTICS

1. Intangibility

Services are intangible and insubstantial: they cannot be touched, gripped, handled, looked at, smelled, tasted. Thus, there is neither potential nor need for transport, storage or stocking of services. Furthermore, a service can be (re)sold or owned by somebody, but it cannot be turned over from the service provider to the service consumer. Solely, the service delivery can be commissioned to a service provider who must generate and render the service at the distinct request of an authorized service consumer.

2. Inventory (Perishability)

Services have little or no tangible components and therefore cannot be stored for a future use. Services are produced and consumed during the same period of time.

Services are perishable in two regards

·         The service relevant resources, processes and systems are assigned for service delivery during a definite period in time. If the designated or scheduled service consumer does not request and consume the service during this period, the service cannot be performed for him. From the perspective of the service provider, this is a lost business opportunity as he cannot charge any service delivery; potentially, he can assign the resources, processes and systems to another service consumer who requests a service. Examples: The hairdresser serves another client when the scheduled starting time or time slot is over. An empty seat on a plane never can be utilized and charged after departure.

·         When the service has been completely rendered to the requesting service consumer, this particular service irreversibly vanishes as it has been consumed by the service consumer. Example: the passenger has been transported to the destination and cannot be transported again to this location at this point in time.

3. Inseparability

The service provider is indispensable for service delivery as he must promptly generate and render the service to the requesting service consumer. In many cases the service delivery is executed automatically but the service provider must preparatorily assign resources and systems and actively keep up appropriate service delivery readiness and capabilities. Additionally, the service consumer is inseparable from service delivery because he is involved in it from requesting it up to consuming the rendered benefits. Examples: The service consumer must sit in the hairdresser's shop & chair or in the plane & seat; correspondingly, the hairdresser or the pilot must be in the same shop or plane, respectively, for delivering the service.

4. Inconsistency (Variability)

Each service is unique. It is one-time generated, rendered and consumed and can never be exactly repeated as the point in time, location, circumstances, conditions, current configurations and/or assigned resources are different for the next delivery, even if the same service consumer requests the same service. Many services are regarded as heterogeneous or lacking homogeneity and are typically modified for each service consumer or each new situation (consumerised). Example: The taxi service which transports the service consumer from his home to the opera is different from the taxi service which transports the same service consumer from the opera to his home – another point in time, the other direction, maybe another route, probably another taxi driver and cab.

5. Involvement

One of the most important characteristics of services is the participation of the customer in the service delivery process. A customer has the opportunity to get the services modified according to specific requirement.

Each of these characteristics is retractable per se and their inevitable coincidence complicates the consistent service conception and make service delivery a challenge in each and every case. Proper service marketing requires creative visualisation to effectively evoke a concrete image in the service consumer's mind. From the service consumer's point of view, these characteristics make it difficult, or even impossible, to evaluate or compare services prior to experiencing the service delivery.

Mass generation and delivery of services is very difficult. This can be seen as a problem of inconsistent service quality. Both inputs and outputs to the processes involved providing services are highly variable, as are the relationships between these processes, making it difficult to maintain consistent service quality. For many services there is labor intensity as services usually involve considerable human activity, rather than a precisely determined process; exceptions include utilities. Human resource management is important. The human factor is often the key success factor in service economies. It is difficult to achieve economies of scale or gain dominant market share. There are demand fluctuations and it can be difficult to forecast demand. Demand can vary by season, time of day, business cycle, etc. There is consumer involvement as most service provision requires a high degree of interaction between service consumer and service provider. There is a customer-based relationship based on creating long-term business relationships. Accountants, attorneys, and financial advisers maintain long-term relationships with their clients for decades. These repeat consumers refer friends and family, helping to create a client-based relationship.

 GROWTH OF SERVICE SECTOR: A RECENT PHENOMENON

In recent years, there has been an unprecedented growth in services across all countries. While in the advanced industrialized countries this is seen as a continuation of the economic transformation, the above average growth of the services sector as compared with manufacturing and agriculture is also seen in some less developed countries like India. The rise in the services sector has been attributed to a number of possible factors both from the demand as well as the supply side. 

It has also been pointed out that there is a difference in nature and type of services between the advanced industrial countries and the countries that are still at lower levels of income. While services sector employment in advanced countries may not imply low quality employment, in case of less developed countries a large proportion of the service economy has low quality employment.  According to one argument, services sector occupations in less developed countries (LDCs) arise out of scarcity of employment opportunities in other sectors. In this context, “rightly observed that cheap supply of labour and social prestige consideration of the upper strata of population make possible the employment of a large number of domestic servants in LDCs.” Thus while labour productivity in the services sector in advanced countries would be on par with or higher than in manufacturing, in less developed countries the labour productivity in services sector is relatively lower. Secondly, accordingly to the distributive services inthetertiary occupations (trade and transport) in LDCs are low‐productivity and low ‐income type as compared with advanced countries; and finally services sector occupations in advanced countries are highly capital‐intensive, whereas on the contrary inless developed countries there is very little use of capital. Thus, it may be concluded that a part of the services sector growth in less developed countries such as India should be treated with caution and should not be taken as an indicator economic growth.

HOW SUSTAINABLE IS INDIA’S SERVICES-LED GROWTH?

India’s services growth has generated a lot of interest among academics and practitioners and there has been considerable research trying to explain the “services revolution” in the country (Hansda 2002a and 2002b, Gordon and Gupta2003, Salgado 2003, Banga 2005, Verma 2006, Eichengreen and Gupta 2010). However, the sustainability of services-led growth in India has been questioned (Mitra 1988, Bhattacharya and Mitra 1990, Arunachalam and Kumar 2002). In particular, the literature attributes the lack of increase in services employment to the inability of the services growth process to draw people away from agriculture, with associated implications for income distribution and convergence  

All these studies, however, look at the performance of services at the national level and to the best of my knowledge, there is not much literature exploring the services phenomenon at the sub-national or state level in India. I not only bridge this gap in research by using sophisticated techniques, but also challenge existing literature by suggesting that services growth in India may be able to reduce disparities across states in the long run (Shingal 2012). Further, I find that external demand is an important determinant of services value added in a number of states, and that this demand emanates from all over the country. This suggests that the benefits from services growth are being distributed more widely than is perceived to be the case.

AN OVERVIEW OF SERVICE SECTOR PERFORMANCE AT THE STATE LEVEL

I conduct a state-level analysis of services contribution to Gross State Domestic Product (GSDP) and employment across Indian states by sectors for the period 2000-2007. In general, trade, hotels and restaurants; real estate and business; and construction services have been the traditional big contributors to services sector in terms of value added over time across a majority of Indian states. Hence, the structure has been fairly similar across regions as well as over time. The 1990s witnessed the rising importance of banking and insurance, while communication services have gained significance in the years since 2000. 

As a share of GSDP, there seems to be a clear demarcation - transport services especially railways have been driving demand in low income states, while higher income states have been focusing on communication, financial and other business services. Trade, hotels and restaurant services have been important in both low and high income states. When it comes to growth rates, one or the other low income states seem to be “catching-up” with the high income states across sub-sectors.

An analysis of services contribution to employment across Indian states for the post-2000 period suggests that in terms of sectors, trade and distribution; hotel and restaurants; and community, social and personal services have accounted for almost two-thirds of all workforce employed in services. This structure has been fairly similar across all states. Construction and transport, storage and communication services come next, but the hierarchy between them has varied across states. I also see a lot more variation in the share of services in total employment across states compared to that in value added.

THE SERVICES CONVERGENCE STORY

A review of the literature studying income convergence across Indian states reveals that most studies find significant income divergence (accounting for differences in methodology, coverage of states and sample size). However, with the exception of Dasgupta et al. (2000) and Kar and Sakthivel (2007), none of the studies have looked at the sectoral pattern of GDP. Is it possible that any particular sector may in fact be showing evidence of convergence?

Using traditional measures of convergence from the growth literature (Barro and Sala-i-Martin 1992, 1995), I test our data for the presence of absolute convergence across 14 major states of India. The findings confirm the absence of income convergence. This is in line with the findings of the existing literature studying income convergence across Indian states. However, interestingly, when I replicate this analysis for individual sectors, I find evidence of absolute convergence in per capita services across the same states. These findings were also confirmed using more sophisticated techniques from the recent empirical literature (for details see Shingal 2012).

IMPLICATIONS

Our analysis reveals that at present, convergence in services is not resulting in convergence in income across states due to the offsetting impact of divergence in the industrial sectors, and the concentration of the labour force in agriculture. However, with services growth adding further to the share of services in GDP and employing a greater share of the country's labour force, this growth is bound to have positive implications for income distribution. Moreover, services growth is not restricted to modern sectors like Information Technology (IT), telecom, financial and business services which are spatially concentrated, but is equally visible in traditional services like construction, distribution, transport and tourism, where the benefits from the growth process are more widely distributed. Additionally, the human capital skill requirements are less intense in these sectors and the growth process would therefore involve a greater share of the labour force over time, drawing people away from agriculture. Services growth can thus be the answer to India's income divergence in the long-run. What is more, this makes services growth more politically sustainable than has been made out to be thus far. This is also corroborated by the recent economic performance of Bihar; significantly, the state shows a higher share of services in GSDP over 1990-2007 compared to other major Indian states at a similar level of economic development.