India: The Rapid Growth Of The Service Sector

India: The Rapid Growth Of The Service Sector


Over the last decade India has emerged as a Newly Industrialised Country. However, unlike many of its Asian rivals the transformation of the Indian economy has been led by the service sector rather than by the manufacturing sector. The success of India’s service sector is impacting on a number of MEDCs, including the UK.

small globe iconIntroduction

With in excess of one billion people, India (Figure 1) has the second largest population in the world. In terms of Purchasing Power Parity ($PPP) India is now the world’s fourth-largest economy (Figure 2), although it is further down the global league table under the traditional method of calculating GDP. India is the ‘I’ in BRIC, the new buzzword for the economies tipped for rapid growth: Brazil, Russia, India and China. However, even with 17% of the world’s people, India still only accounts for 1% of world trade.

small globe iconA Newly Industrialised Country

Because of its recent rapid economic growth (Figure 3), India is classed as a Newly Industrialised Country (NIC). Annual average growth in GDP per person increased from 1.2% in the 1970s to 3% in the 1980s and 3.9% in the 1990s. However, unlike other Asian economies, such as South Korea, Taiwan, Thailand and Malaysia, which all became NICs at an earlier date, the recent transformation of the Indian economy has been based more on the service sector than on manufacturing. This has been at least partly due to a low level of foreign direct investment in manufacturing, a situation that has begun to change in recent years with the introduction of a number of important economic reforms. Figure 4 shows the rapid increase in the importance of India’s service sector since 1980. Services are now responsible for more than half of India’s GDP.

small globe iconThe globalisation of services in international business

The country has a large number of highly qualified professionals whose skills are in demand in other countries, particularly in the English-speaking world. Demand and supply have been united by:

  • Telecommunications resulting in a considerable level of outsourcing from MEDCs to India
  • Worker migration from India to the USA, UK and other countries.

India is playing a significant role in the ‘globalisation of white-collar work’. The most impressive growth areas in the Indian economy have been in software and ICT services, but other parts of the service sector have been buoyant too. These include media, advertising, retail, personal financial services, entertainment, tourism and leisure. For example:

  • The Indian stock market, known as the MSCI India index, has risen 72.2% over the past 3 years. Although the Indian market accounts for just 0.24% of global stock markets by value, a number of analysts see it growing substantially. Seven Indian companies are now listed on the New York stock exchange.
  • India has the highest growth market for telecommunications, with an expected 35 million new subscribers in 2005, an 18% increase from 2004.
  • Construction of new multi-storey shopping malls is proceeding in all major cities. It is estimated that this will account for 2.3 million square metres of organised retail space by 2005 (Figure 5).
  • Nearly 3 million foreign tourists visited India in the year ending 2003, an increase of almost 19% on the previous year.
  • Medical tourism is becoming increasingly valuable, with India now the third most important centre in Asia after Singapore and Thailand. This is when people go to another country for medical treatment, particularly cosmetic surgery, because it is considerably cheaper than in their own country. They often stay on for a holiday after treatment.
  • The Indian government plans to spend at least $17 billion upgrading roads, airports and ports between 2005 and 2010.
  • The strength of the Indian merchant fleet increased from 616 ships to 665 in 2004, illustrating the growing importance of transportation in the service sector.

The expansion of the service sector is very good news for the Indian economy, but at present the benefits of growth have been largely restricted to certain social groups, namely the English-speaking middle class in the main, and geographical areas, with the more dynamic states being in the south. However it must not be forgotten that the primary sector still dominates India in terms of employment. About three-quarters of the population are engaged in farming and other primary activities, which in total account for 25% of GDP. The majority of landholdings are farmed at subsistence level, resulting in a very high degree of rural poverty. In 1999, 44.2% of the population of India lived on less that $1 a day. So, with 17% of the world’s population, India still only accounts for less than 2% of global GDP and 1% of world trade.

Figure 1 – Population and domestic product per person, broken down by state.
Figure 1 –
Population and domestic product per person, broken down by state.
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Figure 2 – GDP based on PPP of the 12 largest economies.
Figure 2 –
GDP based on PPP
of the 12 largest economies.
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Figure 3 – India’s real GDP for 1950–2002.
Figure 3 –
India’s real GDP for 1950–2002.
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Figure 4 – Division of India’s GDP by sector (%).
Figure 4 –
Division of India’s GDP by sector (%).
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Figure 5 – New shopping mall in Vashi Maharashtra, India.
Figure 5 –
New shopping mall in Vashi Maharashtra, India.
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small globe iconThe outsourcing of software and ICT services

The software and ICT service sector has been at the forefront of the country’s economic growth over the past decade, with employment increasing rapidly. Figure 6 shows that the fastest growth area has been call centres. Outsourcing to India began with software development, but quickly moved on to other aspects of ICT (Figure 7). NASSCOM, which represents the ICT sector in India, estimates that exports from software services, other IT services and business process outsourcing companies reached $12 billion in 2003. Figure 8, an extract from The Economist, illustrates the latest phase of outsourcing to benefit the Indian economy – infrastructure management services. Deutsche Bank recently estimated that this sector is worth $86 billion globally. India aims to gain an increasing share of this valuable market (Figure 9).

Figure 7 – ICT: The three stages of development of outsourcing to India.

Figure 8 – After the call-centre, now the IT department is off to India.

Figure 9 – India’s share of the global IT services sector, 2003.

A milestone in India’s economic progress was reached in 1999 when Infosys Technologies became the first Indian company to list on a US stock market. In 1995 there were no IT companies in the list of India’s top ten companies. By 1999 there were four in the top ten. These were Wipro (2nd), Infosys Technologies (3rd), Niit (9th), and Satyam Computer Services (10th). Indian ICT expertise operates both at home and abroad. It is well represented in America’s Silicon Valley and many other high-technology centres in MEDCs. Founded in 1968, Tata Consultancy Services (TCS) has long been a leader in India’s booming IT industry. The company claims to be Asia’s largest IT company, with 2003/04 sales of $1.5 billion and 28,000 employees working in 32 countries. In India, it pioneered offshore operations when it began working in the USA in 1973.

The centres of India’s ICT industry are:

  • Bangalore
  • The Delhi suburbs of Noida and Gurgaon
  • Mumbai
  • Pune
  • Hyderabad
  • Chennai.

The country’s biggest ICT companies, such as Infosys, Wipro and Satyam, have all developed from these dynamic clusters of industry. In each of these high-technology locations, the process of cumulative causation can be recognised. Figure 10 is a simplified diagram of this important process.

India’s ICT sector has benefited from the filter down (global shift) of business from MEDCs. Many European and North American companies which previously outsourced their IT requirements to local companies are now using Indian companies. Outsourcing to India occurs because:

  • Labour costs are considerably lower than in MEDCs.
  • A number of MEDCs have significant IT skills shortages.
  • India has a large and able English-speaking workforce (there are about 50 million English-speakers in India).

The filter down of employment to India has been dominated by business links with North America and Europe, with a relatively low level of involvement from Japan and the other dynamic Asian economies.

In 1999 India established a Ministry of Information Technology. The Ministry’s main task is to increase software and IT services revenue for the country. From low-technology beginnings, Indian companies are migrating to high-value software services, e-commerce, and business consultancy and technology research. This is all to maximise India’s real cost advantage, which is in brainpower and not manpower.

The early growth of the sector was driven by foreign companies, mainly American. It has only been relatively recently that the number of home-grown companies has significantly increased. Most of these companies have been formed by Indian IT professionals who have gained valuable experience working for American or European companies. For example, Texas Instruments, which has had facilities in Bangalore since 1985, saw half a dozen of its top Indian engineers leave the company in 2000 to strike out on their own.

Over the past decade India has exported its IT expertise to many other countries. However, it is possible that India itself may suffer IT manpower shortages in the future. According to a recent survey by India’s National Association of Software and Services companies, demand for IT professionals is expected to rise from 340,000 in 2000 to 800,000 by 2005. Major companies are very much aware of this possibility. For example, Cisco has pledged the Indian government $10 million to set up 30 ‘networking academies’ across the country.

The Indian government hopes that Indian firms and individuals who have either made big money abroad, or through doing contract work for foreign companies in India, will invest in fledgling Indian enterprises in the form of venture capital. This process has already begun and could become very significant indeed in the coming years.

Figure 6 – Breakdown of employment in the IT sector (000s).
Figure 6 –
Breakdown of employment in the IT sector (000s).
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Figure 10 – Simplified model of cumulative causation.
Figure 10 –
Simplified model of cumulative causation.
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small globe iconBack office functions

A number of the financial journals describe India as the ‘back office of the world’. The term ‘IT-enabled services’ is often used to describe the back office functions that Indian companies perform. NASSCOM estimates that India’s total IT and related exports will top $50 billion in 2008 (Figure 11). A report to the Electronics and Computer Software Export Promotion Council, a government body, sees the industry’s exports to America growing from $264 million in 2000 to over $4 billion in 2005.

India’s back office industry has two sections:

  • ‘Captive’ operations of large Western companies seeking to cut back office costs without outsourcing. For example, GE Capital Services opened India’s first international call centre in the mid-1990s, which now employs over 5000 people. Other companies that operate major back office facilities in India include American Express, British Airways and Swissair.
  • ‘Shorter-term’ contracts between Western companies and subcontractors in India, often brokered by middlemen. An important element in this sector is medical transcription, in which companies convert dictation by doctors in America into written records. India has about 200 medical-transcription companies employing 10,000 transcribers.

Figure 12 illustrates the wide range of functions carried out by India’s outsourcing industry.

Figure 12 – India’s outsourcing industry.

small globe iconOutsourcing from Britain

  • The Communication Workers Union estimates that 33 large companies, including Lloyds TSB, Barclays and British Airways, have collectively outsourced 52,000 jobs serving customers in the UK, to India.
  • The outsourcing agency ICICI One Source estimates that British companies save £10 million a year for every 1,000 jobs they move to India.

small globe iconBangalore: high-technology city

Bangalore is the most important individual centre for the software and IT services industry (Figure 13). In 2003 it is estimated that international software companies arrived in the city at the rate of one a week. The strength of the industry in Bangalore is illustrated by Figure 14. In the 1980s Bangalore became the location for the first large-scale investment in high technology in India, when Texas Instruments selected the city above a number of other possibilities. Other multinationals soon followed as the reputation of the city grew. Bangalore’s pleasant climate (moderated by its location on a plateau over 900 metres above sea level) is a significant attraction to foreign and domestic companies alike. The city claims that US and European companies can make savings of 70% by outsourcing to Bangalore. Entry level salaries for a programmer can be as low as $200 per month, well below the demands of American and European IT professionals. In addition, top-quality office space costs $0.26–$1.00 per square foot per month, very low compared to equivalent locations in MEDCs. Apart from IT industries, Bangalore is also India’s most important centre for aerospace and biotechnology. Its economic strength has made the city a significant destination for rural–urban migrants.

Since 1981, the city’s population has more than doubled from 2.4 million to 6 million, while the number of vehicles has grown even faster from fewer than 200,000 cars and scooters to over 1.6 million. The city’s landscape has changed dramatically with many new glass and steel skyscrapers and numerous cybercafés. However, the city’s infrastructure is struggling to keep up with the pace of growth. A new mass-transit system has been promised to relieve congestion, but this is some way off at present. Congestion is now so heavy that Bangalore is among India’s most polluted cities. Work on a new airport is in progress and the city is served by its own low-cost air carrier, Air Deccan.

Figure 14 – Facts about Bangalore’s IT industry.

small globe iconMEDC backlash?

Various organisations in MEDCs have voiced concerns not only about the ‘export’ of jobs but also about standards of privacy and data protection. Nearly 200 pieces of legislation intended to limit outsourcing are at various stages in the US Congress and most of the country’s state legislatures. Some jobs that have been moved to India by American companies have been brought back after customer complaints.

small globe iconBiotechnology: the next major growth sector?

Some economic commentators see India as being on the threshold of a biotechnology revolution. India’s Foreign Trade Policy Document for 2004–09 has set aside funding for the setting up of biotechnology parks in a number of strategic locations. During the 2004–09 period, the biotechnology sector is expected to generate $5 billion in revenue and create over 1 million jobs.

small globe iconConclusion

The Indian economy is likely to continue to grow at a significant pace, with the service sector leading the way. In October 2004, the World Bank rated India as the best location among South Asian nations in improving investment climate. India was also rated as among the top economic reformers in the world, an important accolade in attracting foreign investment. Shares in Indian companies by foreign investors are at an all-time high, another indication of the degree of confidence in the Indian economy.

However, millions of people in India remain in poverty with a widening regional development gap between the poor north and the more affluent south. The Indian government hopes that the success of the southern states will give the northern states the impetus to undergo vital economic change.

Figure 11 – India’s back office services (projected for 2008, $bn).
Figure 11 –
India’s back office services (projected for 2008, $bn).
Click here to enlarge.
Figure 13a – International Tech park in Bangalore.
Figure 13a –
International Tech park in Bangalore.
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Figure 13b – A call centre for a British and US company in Bangalore.
Figure 13b –
A call centre for a British and US company in Bangalore.
Click here to enlarge.




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