Service Sector in Business Environment

What is Service Sector?

The service sector is the producer of services (intangible goods) instead of goods. It includes various types of services are as follows:

The service sector is also known as the third tier or tertiary sector in an economy. Allan Fisher, Colin Clark, and Jean Fourastié proposed three sectors of an economy.

The service sector contributes maximum to the business sector of an economy. Businesses in this sector constitute a ‘knowledge economy,’ or the ability to gain a competitive edge by understanding customers’ needs and meeting those needs quickly and cost-effectively.

Types of Service Sector

The three main types of service sectors of industry in which a company can operate are:

  1. Primary Sector or Tier
  2. Secondary Sector or Tier
  3. Tertiary Sector or Tier

Primary Sector or Tier

It includes extraction of raw materials, mining, fishing and agricultural produce, forestry and other tangible goods.

Secondary Sector or Tier

It includes manufacturing tangible products such as cars, clothes, fuels, etc.

Tertiary Sector or Tier

It includes services such as consultancy, software development, transportation, etc.

Importance of Service Sector in India

The importance of service sector in India is as follows:

  1. Contribution to GDP
  2. Boost Exports
  3. Employment Generation
  4. Contribution to Human Development
  5. Contribution Towards Foreign Direct Investment (FDI)
  6. Contribution Towards Infrastructure Development
  7. Development of Social Services

Contribution to GDP

The expansion of the service sector was largely responsible for India’s economic growth since the 1990s when exports played a major role. After 1996-97, the percentage of services in GDP expanded significantly.

Boost Exports

The growth in services was largely associated with the surge in exports. India’s share of services in total exports (38%) is much higher than in countries such as China, Mexico, and Brazil, and is close to ratios in the US and the UK.

Employment Generation

Agriculture is still the dominant employer in India, but the service sector is quickly taking over. From 1999-00 to 2009-10, employment in the service sector increased by 25%.

Contribution to Human Development

The service sector provides valuable services for human development, such as health services, education, IT and Enabled Services (ITES), skill development, health tourism, sports, and cultural services. These services help to empower and improve the quality of life of the public at large.

Contribution Towards Foreign Direct Investment (FDI)

Modest growth of the service sector has streamlined the flow of FDI into India. The combined FDI share of financial and non-financial services, computer hardware and software, telecommunication and real estate was 40.5% of cumulative FDI equity from April 2000 to December 2012. If the construction sector is also included, then the FDI inflows increase to 47%.

Contribution Towards Infrastructure Development

The service sector plays a key role in developing, expanding and managing transportation and communication infrastructure.

Development of Social Services

The service sector also plays a significant role in the development and expansion of some social services, such as sports and cultural services. These are core sectors of job creation and a vehicle of cultural identity. They promote valuable social services and enrich society.

Emerging Service Sectors of Indian Economy

There are numerous service sectors within the Indian economy which are expected to swiftly grow and quite large in the near future. these emerging service sectors of the Indian economy are as follows:

  1. Food Processing
  2. Healthcare
  3. Retail
  4. Education and Training
  5. Tourism and Hospitality

Food Processing

The food processing sector received an FDI of about $ 7.54 billion from April 2000-March 2017. According to the Confederation of Indian Industry (CII), this sector will attract up to $ 33 billion in FDI over the next decade and employ about 9 million person-days. Key initiatives to boost this sector include:

  • FDI in marketing and e-commerce of food products through automatic routing
  • Research in the fertiliser sector with international cooperation
  • Enhancement and development of skills in the food and food processing industry
  • Adoption of international food safety and quality assurance mechanisms
  • Good Manufacturing Practices (GMP) and Good Hygiene Practices (GHP).


The growth in the healthcare market is estimated to be INR 8.6 trillion by 2022. The average growth of medical tourism in the country is 22%-25%. By 2025, the government will increase health expenditure to 2.5% of the country’s GDP.

The government’s Pradhan Mantri Jan Arogya Yojana (PMJAY) provides health insurance of INR 5 lakhs to more than 100 million families every year. Ayushman Bharat National Health Protection Mission is the world’s largest government-funded health scheme.

The diversified healthcare sector provides opportunities for both public and private players. More and more companies are now getting Abbreviated New Drug Application (ANDA) approvals.


The retail market is likely to increase by 60% to achieve $ 1.1 trillion by 2020 due to rising disposable incomes, quality of life and digital connectivity. India’s e-commerce market is phenomenally growing due to robust investment, rapidly increasing Internet users, increasing disposable income, entry of foreign players and positive demographics.

Education and Training

India has the world’s largest population from the age of 5 – 24 years. This provides a great opportunity for the education sector, which is forecasted to reach $ 10.1 billion in 2019. India is the second-largest e-learning market after us.

By 2021, e-learning is expected to reach $ 1.96 billion. Due to the need for developing skills in the growing economy, education infrastructure development has assumed considerable significance.

Tourism and Hospitality

The Indian tourism and hospitality industry is an emerging sector that has the potential to provide a large scale of employment and generate massive FOREX capital. The rising disposable income is a strong contributor to the growth of domestic and international tourism.

Financial Sector of India

India’s financial sector is dominated by the banking industry. It has several structural weaknesses, which cannot be removed without radical reforms. However, these reforms are not sufficient, as they do not resolve structural challenges such as:

  • High level of government involvement in the financial sector
  • Inadequate financial inclusion of a large scale of population
  • Wasteful misallocation of capital
  • Poor governance.

Problems in the Banking Sector of India

Here we have discussed the structural problems in the banking sector of India:

  1. High level of State Ownership
  2. Distorted Financial System
  3. Liquidity Risks
  4. Financial Exclusion
  5. Constrained Credit
  6. Misallocation of Capital
  7. Shadow Banking

High level of State Ownership

The public sector banks own about 70% of deposits and 50% of loans. Although they are listed on the stock market with minority shareholders, these banks are mostly used as the tools of government policy. The top appointments in banks are politically influenced.

Distorted Financial System

About 25% of the loan share is through private banks. Due to the existence of public banks, private banks choose to operate in commercially profitable segments. As a result, public banks have to bear most of the cost of servicing remote areas and unprofitable accounts. This has led to artificially-high valuations for some private sector banks.

Liquidity Risks

The deposit base of private banks is not adequate to finance lending growth. Their high loan-to-deposit ratios make their liquidity vulnerable in wholesale money markets.

Financial Exclusion

There are still around 190 million people in India who have no bank account.

Constrained Credit

To improve the capital ratios of banks, the Reserve Bank has imposed a Prompt Corrective Action Plan. As a result, more than half of the public sector banks cannot expand lending, which hurts small borrowers, such as farmers.

Misallocation of Capital

The government prefers public sector banks to grant loans to its business backers and state-owned enterprises, which become NPAs in the downturn of the economic cycle. Multiple governments have been unwilling to deal with bad debts, which ties up their capital.

Shadow Banking

It is a term used to describe the non-bank financial intermediaries which provide financial services, such as loans and other services to individuals or business entities. This type of banking is usually related to risky investments, pawnshop and peer-to-peer lending. Shadow banking is widespread in India.

FAQ Related to Service Sector

What is Service Sector?

The service sector is the producer of services (intangible goods) instead of goods. It includes various types of services. The service sector is also known as the third tier or tertiary sector in an economy.

What is the Importance of Service Sector in India?

The importance of service sector in India is as follows:
1. Contribution to GDP
2. Boost Exports
3. Employment Generation
4. Contribution to Human Development
5. Contribution towards Foreign Direct Investment (FDI)
6. Development of Social Services
7. Contribution Towards Infrastructure Development etc.

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