Why India’s services sector increased its share in GDP

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Services sector increased its share in GDP

The services sector’s share in India’s gross domestic product (or GDP) increased consistently since its independence. Also, the increase in the share in the economic output is almost consistent with the fall in agriculture’s share. It contributed half of India’s output at the beginning of the millennium. According to provisional figures for fiscal year 2014, it increased to nearly 60%.

At the same time, agriculture’s share came down from nearly 52% in 1951 to ~14% in fiscal year 2014. Now, India’s economy is focused on the services sector.

Share of Services sector in GDP

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The breakup of services

The Central Statistics Office (or CSO) is the government’s statistical information gathering and disseminating body in India. It classifies the services sector into four industries when reporting GDP and growth figures. The segments include:

  1. Trade, hotels, and restaurants
  2. Transport, storage, and communication
  3. Financing, insurance, real estate, and business services
  4. Community, social, and personal services

Contribution of Services Sub-sectors to GDP

According to data for fiscal year 2013, the financing, insurance, real estate, and business services segment had the largest share. It contributed over 19% to the overall GDP. Among its subindustries, real estate, ownership of dwelling, and business services had a slightly higher share at 9.8%. It was higher than banking and insurance. Banking and insurance contributed 9.4% to the overall GDP.

Trade, hotels, and restaurants was second after financial and real estate services. It contributed 16.1% to India’s overall GDP. Among its subindustries, trading contributed ~15% to the GDP. Hotels and restaurants contributed a little over 1%.

In the past decade, financing, real estate, and business services saw an average growth of 10.55%. This has been more consistent than the other three major segments. For example, trade, hotels, and restaurants saw a growth of 1.2% and 4.4% in fiscal year 2012 and fiscal year 2013, respectively. They grew by nearly 12% in fiscal year 2011.

Although the services sector remained strong during the global economic slowdown, it reported slower growth in the last two years. However, a revival in global growth bodes well for the sector. There will be an increase in services—like IT and retail.

You can invest in India’s services sector through exchange-traded funds (or ETFs) like the WisdomTree India Earnings Fund (EPI) and the iShares MSCI India ETF (INDA). The iShares S&P India Nifty 50 Index Fund (INDY) is an index that tracks India’s benchmark—the CNX Nifty Index.

Also, some of the most well-known and US-listed Indian software service providers are Infosys (INFY) and Wipro Limited (WIT).

In the next part of this series, we’ll discuss the third contributor to India’s GDP—the industrials sector.

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