Service Sector's Growth Steady; FDI Inflow Concerns Loom: Data
The services sector has seen substantial credit inflows from domestic banks, with a YoY growth rate surpassing 20 per cent since April 2023
The Indian services sector has demonstrated a robust growth trajectory over the past decade, driven by strategic government initiatives, technological advancements, and increased global engagement. However, recent trends indicate a few emerging challenges that need to be addressed to sustain this momentum.
The services sector witnessed a real growth rate of more than six per cent in all the years in the last decade except in the pandemic-affected FY21. Globally, India’s services exports constituted 4.4 per cent of the world's commercial services exports in 2022. This remarkable growth underscores the sector's resilience and its pivotal role in driving India's economic expansion.
However, it is crucial to note that the growth rate of Gross Value Added (GVA) has seen a deceleration in FY24, registering a year-on-year increase of 7.6 per cent, compared to 10.0 per cent in FY23. This slowdown raises concerns about the sector's ability to maintain its growth trajectory amidst various global and domestic challenges.
Another significant area of concern is the moderation in Foreign Direct Investment (FDI) equity inflows into the services sector. Data highlighting a decline from the peak levels observed in FY20. The FDI inflows have been impacted by higher global interest rates, geopolitical conflicts, and rising protectionism, which favour domestic sourcing.
The services sector has seen substantial credit inflows from domestic banks, with a YoY growth rate surpassing 20 per cent since April 2023. The financial year ended with an outstanding services sector credit of Rs 45.9 lakh crore in March 2024, with a YoY growth of 22.9 per cent. This indicates strong domestic financial support, which is crucial for sustaining growth in the sector.
India remains a significant player on the global stage. The country was ranked 15th in terms of FDI inflow in 2023 by the United Nations Conference on Trade and Development (UNCTAD). Furthermore, India ranks second in the number of international project finance deals and 4th in the number of Greenfield project announcements, showcasing its continued attractiveness as an investment destination.
The government's measures have been instrumental in fostering the growth of the services sector. Initiatives like the Digital India campaign, export promotion schemes, and infrastructure development have provided a conducive environment for growth. Additionally, skill development programs have enhanced workforce capabilities, aligning them with the sector's evolving needs.
Specific sectors such as healthcare, tourism, logistics, and digital services have particularly benefited from targeted government efforts. The focus on improving infrastructure, easing regulatory compliances, and leveraging India's extensive coastline and inland waterways for logistics and transport services promises to enhance efficiency and reduce costs.
Looking ahead, the services sector is poised to continue its growth trajectory, driven by technological advancements and diversification of services exports. However, addressing the slowdown in GVA growth and reversing the decline in FDI inflows will be critical. Strengthening policy measures to boost investor confidence and further enhancing the skills of the workforce to meet the demands of the rapidly digitizing services sector will be essential.
