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Indian services sector have the potential to garner higher economic benefits to the country. But there are many issues both general and sector specific including domestic regulations hinder the growth prospects of the services sector. If these issues are addressed deftly the sector could lead to exponential gains for the economy. The need of policy reforms10 in this regards are outlined in the following way:
There are some general issues related to the policy framework which hamper the healthy growth and expansion of the services sector in the country. They are broadly related to the following areas:
Nodal agency and marketing: Despite having strong growth potential in various services sub-sectors, there is no single nodal department or agency for services. An inter-ministerial committee for services has been set up to look into this. But services activities cover issues beyond trade and a more proactive approach and proper institutional mechanism is needed to weed out unwanted regulations and tap the opportunities in the services sector in a coordinated way. There is also need for promotional activities for service
exports like,
(i) setting up a portal for services,
(ii) showcasing India’s competence also in non-software services in trade exhibitions, c) engaging dedicated brand ambassadors and experts.
Disinvestment: There is plenty of scope for disinvestment in services PSUs under both central and state governments. Speeding up disinvestment in some services-sector PSUs could not only provide revenue for the government but also speed up the growth of these services.
Credit related: The issues here include ‘collateral free’ soft loans to support the sector’s cash needs and possibility of considering even export or business orders as collateral for credit-worthy service firms.
Tax and Trade Policy related: These include use of ‘net’ instead of ‘gross’ foreign exchange criteria for export benefit schemes, the issue of retrospective amendments of tax laws like,
(i) amendment to the definition of royalty to include payment of any rights via any medium for use of computer software,
(ii) tax administrative measures to tackle delay in refunds,
(iii) introducing VAT (value added tax) refund for foreign tourists, and
(iv) addressing the issue of bank guarantees based on past performance to avail of export promotion benef its in services.
Area-specific policy hurdles to the services sector are also there. Together with the general issues, these area-sepcific bottlenecks do not allow the sector to realise its real potential. The major ones in this area are being outlined below.
Tourism and hospitality sector: As per the latest data of world tourism, India’s tourism has not been competitive enough to attract tourist due to several reasons, such as,
(i) India’s share in world tourist inflows was only 0.64 per cent in 2012 (rank 41), while that of the USA was 6.47 per cent (rank 2) and China
5.57 per cent (rank 3).
(ii) India’s share in world tourism expenditure is relatively higher at 1.65 per cent (rank 16) implying that foreign tourists spend relatively more in India.
(iii) Singapore, a small country, attracted 11.10 million tourists in 2012, while a large country like India attracted only 6.97 million foreign tourists during 2013.
Some suggested measures in this area, as per the Economic Survey 2014– 15, are:
(i) creating world class tourism infrastructure even by PPP;
(ii) addressing multiple taxation issues;
(iii) skill and etiquettes training to cater to the needs of tourists;
(iv) special focus on cleanliness at tourist sites and safety of tourists;
(v) using the MGNREGA for creating permanent assets like tourism infrastructure and facilities;
(vi) organising mini India cultural shows on a daily basis at important tourist sites that will not only attract tourists but also generate employment for Indian artists; and
(vii) implementing urgently visa on arrival and E visa facilities at 9 airports to 180 countries barring 8 ‘prior reference’ countries (this decision has already been taken).
Port services: Indian ports are not world-class ports and lack the necessary draft. As a result, ‘third-generation ships’ are not able to enter the harbour and goods have to be offloaded outside in smaller ships, adding to costs. If India can develop world-class airport infrastructure and metros, there is every reason to attend the concerns of the port services. Its immediate focus should be on—
(i) building world class ports providing world class services that will also help the trade sector by reducing costs and turnaround time in ports, and
(ii) reducing port charges which are considerably higher.
Shipping, shipbuilding and ship repairs: Indian ships in the carriage of India’s overseas cargo has fallen sharply and Indian ships are ageing, too. Government-owned shipyards like Visakhapatnam are facing problems like
declining orders. India’s shipbuilding industry has the capacity and expertise but is functioning below capacity. Some of the suggested steps to boost the sector are:
(i) need to replace our ageing ships with new ones,
(ii) increasing shipping fleet (with prices falling on account of global slowdown),
(iii) a special financing mechanism needs to be developed.
(iv) utilising India’s shipbuilding and repairs yards and enhancing their capacity (as India needs to replace many old ships and growing ship repairs business in the world).
Railways: The FDI policy of Railways sector restricts FDI in rail transport, except in mass rapid transit systems. FDI and privatisation in the railways could be the next big ticket reforms. A proposal has been initiated by Indian Railways, for making suitable changes in the existing FDI policy in order to allow FDI in railways, to foster creation of world class rail infrastructure. The proposal envisages—
(i) allowing FDI in all areas of the rail sector except railway operations.
(ii) even in railway operations, FDI is proposed in PPP projects, for suburban corridors, high speed train systems, and dedicated freight lines.
While privatisation of railways has been successful in some countries like Japan, it has failed in some others like the UK. So this proposal needs to be examined carefully and quickly to allow privatisation and inflows of FDI in areas where it is feasible.