Introduction

While industrial and agricultural sectors have been extensive fields of study for economists,
the service sector remains ignored by them. However, in India, the importance of service
sector is growing from past 25 years. Structural change in industrialized countries underlines
two stages of development. Firstly, we see increase in both service and industrial sector
shares when a country move to lower-middle income from low income. Secondly, when
moving to upper-middle and high income, we see portion of service sector increasing and
industrial sector decreasing.
This paper’s objective is to commence a taxonomy that presents a relevant conjunction of
service sector in India. It allows defining small sub-sectors with different impact on growth
of economy, BOPs, employment creation, services-led growth sustainability, poverty &
inequality in income, in developing countries.

Scope: Choice of sub-sectors

It’s categorized into 5 broad groups: structural, productivity enhancing technologies,
employment, services’ trade into International markets, and factor use: Capital intensity and
Skill intensity. Characteristic of these 5 groups can be used to analyze the increasing share of
service sectors in developing countries. To analyze dissimilarity in these characteristics, we
can consider different sub-sectors like financial & non-financial services or retail &
wholesale, etc. The choice of division of sub-sector is classified into 2 factors: it should
facilitate meaningful economic analysis and availability of data onto selected variables
beyond the level of division

Methodology to develop taxonomy in India for the service sector

One of difference between the public & private economic activities is our taxonomy. In India
the public sector is divided into three segments: administrative, departmental enterprise &
non-departmental enterprise. Services that are privately provided are also called market
service &services that are provided by public are called as non-market services. This also
provides the distinction between the services for which the consumer must pay directly &
those that need to be paid through taxes.
In the data below, the contribution of Public sectors in the service sectors GDP is shown
Wholesale & retail trade, Hotel & restaurant,Railway, transport by different
means,Storage,Communication,Banking & insurance,Real estate, renting & business,Public
administration & defence, Other community, social & personal services have percentage of
GDP as 3.8 , 2.1, 100,26.2,30.4,56.9,55.9,0.5,100 and 34 respectively . This data is from the
year 1993 to 2008
In data above the numbers are simple average & annual data is used for calculation from
1980–81 to 2004–05. Simple averages helpto definevarious threshold points to study the
variables.
From the data of the Z scores of the various sectors it is observed that these sectors fall within
the standard deviation of 0.67, greater than or less than the mean. The values that lie within
this limit are included in partly public & partly private category. If the values are greater than
the standard deviation of 0.67, greater than the mean than they are included in largely public
category.If the values are greater than the standard deviation of 0.67, less than the mean than
they are included in largely privatecategory. With this technique, the sectors are classified as
below
1. Largely public: defence, administration of public& railway.
2. Largely private: renting & business services, hotel&restaurant, wholesale& retail
trade& real estates.
3. Partly public& partly private: social & personal service, banking&insurances,
communication ,transport, storage
Of the above two composition -real estate/renting and social&community services can be
studied, these compositions have diversity internally. For the purpose of classification we can
disaggregate the mentioned groups, for that we can use information that is available to reach
to a qualified conclusions. Below is the example for the same
During the period 1993–94 to 2008–09, National Accounts statistics show that, radio ,TV
broadcasting & sanitary services constituted for 17% of GDP of the groupings .Of this 17%,
just a few partwas provided publicly. Therefore, we categories personal& entertainment
service aslargely private.Wecan thereforeassume that theabove grouping is
completelyprivate.We also compute that during the period 1993-2009,public sector
contributed 44.3% in community services segment . Sothe classification of community
services ‘part public, part private’.
Intuitive judgement &patterns in data are used to draw thresholds. For example we can adopt
the below criteria for classification
a) The sector is classified ‘largely public’ if the component of public sector in the GDP
is greater than 80%
b) The sector is classified as ‘largely private’ if the component of public sector in the
GDP is below than 20%
c) Sectors which are not the part of above two criteriaare categorized as partly public&
partly private.
There two thresholds are formed with the data of the GDP in public sector in various
subsectors. Thecomponent of public sector is 80% while the component of public sector is
20% of the sectors complete output. These attributes are than divided into three groups:
largely public, largely private & partly public& partlyprivate.
Data below is the Z-scores of contribution in the output for various sector by public sector
Wholesale & retail trade, Hotel & restaurant,Railway, transport by different
modes,Storages,Communication, Insurance&Banking,Real estate,Administration of public&
defence, Other communityservices have Z scores -0.95 , -1, 1.9,-0.29,-0.16,0.62,0.59,-1,1.9
and -.6 respectively . This data is from the year 1993 to 2008
Taxonomy
 Organized Vs Unorganized economic activities
Unorganized sector helps to create job opportunities for less skilled people ofgrowing
countries.The importance of organized & unorganized sector can be studiedwith respect
to thecontribution they have in output/unemployment.In this literature output data is
studied at disaggregated level & gives a clearpicture.
From the data table, the subsectors are classified into three categories based on the normal
deviation above & below mean. The categories are defined as below
1.Largely organised consists of communication, banking & insurances, public
administrations&defence, business service, railway& community service.
2. Largely unorganised consists of wholesale & retail trade, real estate & renting service,
&personal& entertainment service.
3.Partly organised, partly unorganised consists of hotel & restaurant, storages, &different
means of transport.

It was observed that while there was a rise in the contribution of organized sector real
estate ,business sector& rent opportunities in NDP.At that timethere was also rise in the
portion of business service in their joined NDP ,this increase was observed in the year
2007-08 as compared to 1993-94.This suggest that business services falls in largely
organized category .
In the Unorganised Sector a study was conducted according to the study organised sector
contribution to the GDP is 81.3 % of health and education services. Community service is
classified into ‘largely organised’ category. & personal&recreational come in largely
unorganisedcategory.
Below data tells about the percentagesand the Zscores of the various organised groups in
the NDP of service sector
Wholesale & retail trade, Hotel& restaurant,Railway,Public administration & defence,
Other community, social & personal services ,transport by different
means,Storage,Communication,Banking & insurance,Real estate, renting & business
service as percentage of NDP is 17.6,40.6,100,100,63.3,40.2,49.4,81.9,90.2 and 20.8
respectively with Z score -1.37,-0.63,1.26,1.26,0.09,-0.64,-0.35,0.69,0.95,-1.26
respectively. This data is from the year 1993 to 2008

Intermediate versus final consumption

Final demand is based on end user customers so final consumption consist of consumer
households, investment or capital formation, exports and government final consumption.
Intermediate consumption includes goods purchased for resale and goods used for further
production. For e.g.: Milk purchased by Dairy shop(resale) and Milk purchased for making
sweets.
The division of demand for output of sector of Final and Intermediate goods is being
measured by analysis of expenditure on final consumption expenditure. All the services serve
final demandand intermediate demand by studying from input flow matrix which will give us
a ratio of outputs and its consumption as inputs.Noting here that International transactions are
excluded from this matrix
The different subsectors classified are given below:
 Relatively more intermediate
 Relatively more final and
 Partly intermediate and partly final

Barriers to Education for job aspirants

Identifying barriers for education requires analysis on number of people in labour force sector
broadly classified between illiterates and graduates. If we look at primary data, it consists of
seven education classes: illiterate, literate but no junior school, with junior school,high school
then secondary and then degree holder and above. The paper has chosen the end points of
these seven classifications because it will provide a better comparison between sectors and
will create meaningful insights. And also, too many classifications would make complex to
draw comparison.
The sectors are classified below as high or low based on the Z parameters for graduate people
and as well as illiterates only because it will provide a better comparison between sectors and
will create meaningful insights. Also, too many classifications would not create clear
distinction
 Low: few examples- transport, storage entertainment services etc
 Medium: few examples- railways, communications etc
 High: few examples- banking, business services
Capital intensity
Capital intensity of a firm is measured by capital labour ratio. As time goes on the capital
labour ratio increases due to capital investment and productivity improvements. It is also
estimated that capital stock enhances the capital formation with economic growth and future
production growth. Net capital stock includes three type of assets: machineries, constructions
and also software. Categories of these sectors are low, medium and high. Here business and
renting services are excluded. According to the data used in the paper, high capital intensity
is mostly driven by renting services and land and buildings (real estate) business. According
to the facts/tables given in paperit is seen thatyield of renting and real estate business is 4
times the creation of increase in employment. And so real estate and renting services comes
under the category of high capital intensity whereas business service under medium capital
intensity.
Skill intensity
The intensity of a sector is divided between- professional and technical workers (which
includes engineers, doctors, scientist); administrative and managerial workers (which
includes corporate managers and government officials). The classification of occupation
includes five moreclassification: sales,service,clerks, farmers,production employees.Here
also the sectors are divided into three categories:
 Low: few examples- railways, storage entertainment services etc
 Medium: few examples- banking, communications etc
 High: few examples-business and community services

Scope for economies of scale

Economies of scale refer to the proportionate saving in costs gained by an increased level of
production. Though the economies of scale can be analyzed by various measures like
employed capital, turnover, etc., this paper considered the number of workers employed by
units of firms to analyze. This paper segregated the enterprises sector by considering only the
firms which employs more than 20 workers.
Railways, business services, public administration and defence sectors have the high
proportion of enterprises will more than 20 workers (all in the range of 45- 50 with railways
being 100). Medium proportion is occupied by the sectors like banking, communications,
community services and transport (range inbetween 12 - 35). Wholesale and retail, hotels and
restaurants, real estate, entertainment services sector occupied the least proportion (range in-
between 2 - 6).

Trade in International markets

International trade in services is divided into four categories such as : producer moves to the
consumer(commercial presence abroad), consumer moves to the producer(consumption
abroad), producer or consumer moves to the other(cross-border movement), neither the
consumer nor the producer moves anywhere (cross-border supply). Due to rapid
technological changes, services are considered as tradable through cross-border supply mode.
In India, RBI compiles data on exports and imports as services as a percentage of GDP for
different sectors.Based on this percentage the following classification is made,
a) If it is more than 50%, the sector is classified as ‘high’ trade in international markets
b) If it is less than 5%, the sector is classified as ‘low’ trade in international markets
c) If it is between 5%-50%, the sector is classified as ‘medium’ trade in international
markets
On the basis of the above classification, different sectors are categorized as high, low and
medium. Wholesale and retail, railways, public administration and defence, real estate and
renting, storage, recreational and entertainment services are classified as low trade. Under
medium trade, hotels and restaurants, transport (22.8%), communications(15%), banking and
insurance and community services(19.4%) sectors are placed. Business services sector is
classified as high trade(85.8%).
Contribution to technological progress
The sector’s contribution to technological progress is calculated by finding out the research
and development (R&D) expenditure as a percentage of gross value added by a sample from
that particular sector which consists of 4000 companies. As R&D activity is highly intensive
and requires sophisticated technology, mostly it is done in large corporate firms.
Based on the R&D expenditure as a percentage of gross value added of 4000 companies, the
following classification is made,
a) If it is more than 10%, the sector is classified as ‘high’ contribution to technological
progress
b) If it is less than 1%, the sector is classified as ‘low’ contribution to technological
progress
c) If it is between 1%-10%, the sector is classified as ‘medium’contribution to
technological progress
On the basis of the above classification, different sectors are categorized as high, low and
medium. Wholesale and retail (0.1%), public administration and defence, hotels and
restaurants (0.1%), transport (0%),real estate and renting (0%), storage (0%), recreational and
entertainment services are classified as low contribution to technological progress. Under
medium contribution to technological progress, banking and insurance (2.6%) and
community services sectors are placed. Business services (18.7%) sector is classified as high
contribution to technological progress.

Incorporation of technological advance

The incorporation of technological advance is identified by analyzing the trend rate of growth
of output per worker over a given period of time. The increasing adaptability of technology is
likely to yield an increase in the productivity in several sectors. Though the trend rate growth
of output per worker is not ideal to measure the incorporation of technological advance as
other factors like structural change within the sector will come into picture.
On the basis of the above classification, different sectors are categorized as high, low and
medium.
a) Low:real estate and renting services, storage, recreational and entertainment services.
b) Medium:administration and defence,wholesale and retail trade, hotels and restaurants,
railways, transport, community services.
c) High: communications, banking and insurance,business services.

The taxonomy used in this paper has segregated the services sector into sub sectors which
impact the economy differently and have different economic characteristics. We can conclude
from the analysis that the services sector is highly heterogenous. Each of these subsectors
have been analysed across the following parameters:
 Economic growth and growth accounting
  Feasibility of growth driven by services
 Employment, impact on poverty andincome inequality

The increasing share of services sector in the total output for India and t
his different trend in India as compared to other countries could be explained through this
analysis.

The services sector could be broadly divided into three categories:

1. The largely organised sector (Banking & insurance, Defence, Railway, Business
services, Community services, public administration), which have mid-high barriers
to entry, mid-high intensity of capital ,skill and economies of scale
2. The mostly unorganised sector (Wholesale and retail, land and housing, personal,
recreational and entertainment services), which have low barriers to entry, low to
medium skill intensity, varying capital intensity and low economies of scale
3. The sector which is has a mix of organised and unorganised (Hotels, transport except
railways, storage)
Economic growth
One of the biggest contributors to the economic growth during 1996-2004 has been the
services sector. The increase in the output of services can be attributed to one of the two
factors: gain in employment and gain in factor productivity. This paper analyses the gain
across the subsectors and tries to attribute it to one of these factors:
1. The mostly unorganised or mix of organised and unorganised sectors, provide
employment to several unskilled and semi skilled labours and hence for these sectors
the gain can be attributed to increase in employment.
2. For the largely organised sectors which have medium-high barriers to entry, gain is
mostly due to increase in factor productivity
3. For the largely organised sectors with medium entry barriers like railways,
administration and defence the gain can be attributed to either of these factors
Feasibility of Services led growth
This paper assesses whether the growth in services sector can lead to a corresponding growth
in overall productivity of the economy. The spillover effect that has been used here to explain
this refers to services contributing to technological progress which in turn increases overall
productivity. Services like finance and storage which are largely intermediate or transport
that is partly final and partly intermediate have these spillover effects. The growth in services
was thought to be not sustainable as growth in services would lead to an increase in need of
agricultural products. Without an increase in supply a demand-supply imbalance will be
created. However, there are certain subsectors within the services sector which have high
economies of scale, high contribution to technological advancement and incorporation. These
characteristics of some services show that a economic growth led by services is feasible.

Employment, Poverty and Inequality

This can be analysed based on the degree of capital and skill intensities across the subsectors.
 The subsectors which have low/mid capital and skill intensities employ a large
number of semi skilled and unskilled labour. This in turn increases employment and
reduces poverty. Examples of some such services are wholesale and retail trade,
hotels
  The subsectors which have mid/high intensity of capital and skill do not reduce
poverty directly as they mostly deal with the relatively skilled labours. However they
may have some impact on reducing poverty by trickle down effect. Examples of some
such sub sectors are finance, business, communication
The services sector hasn’t created as much employment opportunities as the output, but there
are many sub sectors within services which are labour intensive and have the potential to
generate employment and alleviate poverty.

In services characterized by skilled workers like finance, business and communication, the
workers will probably be benefited by increase in productivity-enhancing technology.
However services which employ large number of unskilled labour like retail trade, hotels
might not be able to benefit from productivity increase. Such a situation might widen the gap
between incomes of the different classes

Conclusion

The analysis of the different services in India hints that the services sector can be described as
highly heterogeneous. Different subsectors have different economic characteristics and
contribute differently to the economy. Studying the service sector as an aggregate doesn’t do
justice to understanding its impact on the economy and we need to study the service sector at
a disaggregated level. This will also enable us to understand why the trend in services sector
in India is different as compared to that seen generally.