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Services - Redefining the Landscape of the Indian Economy
Venkatesh G | 17 Sep 2013

From an agraeconomy, India moved to being a manufacturing economy and now we are living in an era of Service Economy. Services are contributing to about 57% of GDP in India. Though this percentage is far less as compared to the contribution of services to GDP in developed countries like US, Australia, Europe, India and China are following the trail of the developed countries.

Automation in manufacturing has resulted in many employees becoming redundant and so this working population was available to work in service industries. Added to this, increase in the population has resulted in a large number of skilled work force available in India at a cost that is far less than the cost of labour in developed economies.

Large segments of the Indian market remain un-penetrated. This has thrown up a plethora of opportunities to tap this market. India has had a history of bureaucratic approvals delaying the setting up of new industries by foreign players. However the scenario has vastly improved in the post liberalization phase. The Government’s recent moves to attract more FDI to arrest the current account deficit is a move in the right direction but one has to watch the receptiveness of these policy changes by foreign players in the current phase of economic downturn.

The keen interest shown by foreign players (multinational corporations) in doing business in India is proof of the fact that the future of services in India appears to be bright. Starbucks did research for close to 5 years regarding its decision to invest in India. In Oct 2012, Starbucks opened its first outlet at Horniman circle, Mumbai. CEO Howard Schultz claims that this outlet has been designed in such a way that it is the first Starbucks outlet in the world to have such a design (example: Physical Evidence). This is a good sign for India’s image in the international community.

Despite the onerous challenges facing it, India’s growth story remains an undisputable reality. Any doubts in this regard can be quelled merely by observing the growth of Bangalore in the last decade. Sectors like Retail, BPO, IT, ITes, insurance, automotive, banking have shown tremendous growth in the last few years. Cities like Bangalore, Chennai, Gurgaon have pushed back other metros in terms of attractiveness for the industry to set shop. Coimbatore is following in the footsteps of Bangalore and is all poised to witness a major upsurge in the sheer number of firms that wish to open their offices.

The added attraction towards Coimbatore is propelled by the availability of land as well the image of Coimbatore as a city that has some top-class educational institutions. Expectedly, the growth of business leads to a consequential rise in employment which triggers the growth of services like hotels, restaurants, coffee shops, pizza outlets, malls, education etc. Increase in the disposable incomes is further adding fuel to this growth.

To cite an example, educational institutions in Bangalore are witnessing an increase in student numbers by student enrolments from North, East and West. Why would students come to another city to do (let us say, a MBA program) unless they find the prospects attractive for employment?

Decades ago, the Indian economy did experience sporadic downturns. But post the 2008 economic crisis (famously called “the subprime crisis”) that resulted due to the fall of Lehman Brothers and other wrong policy decisions, we are now facing economic recession quite frequently. This is clearly a result of increased globalization. Close on the heels of the sub-prime crisis, we had the Euro-zone crisis. Thus, though globalization contributes to the immense growth of an economy like India, it also presents us with challenges that were hitherto unknown to us. Growth has certainly resulted - but at a price. As they say, gain always comes with a pain.

Many service firms shut shop with hardly any notice leaving the employees high and dry. In a recessionary climate, employees who are fired find it difficult to find another job and they have to subsist on their savings. The aviation sector is one sector which has been unable to keep pace with the vagaries in the economy and the changes in the cost structure over the last few years. This has ensured that the survival of the fittest in the market for aviation services.

 Instances such as these are a grim reminder that we continue to remain vulnerable to the dictates of the globalized economy and unless a company is future-ready to proactively predict these changes, it will continue to succumb to the pressure of market forces. The quality of decisions made is going to make a major impact in the future survival of business. As services are dependent on the state of the economy, firms operating in this space should be much more circumspect about their goals. It makes better sense to be realistic rather than being over-ambitious.