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Role of Service Sector in Economic Development

Paper Type: Free Essay Subject: Economics
Wordcount: 2552 words Published: 27th Jul 2021

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As civilization progresses human desires increase leading to the evolution of economic activities. Normally primary activities such as hunting, animal husbandry and agriculture emerged. Later on as science and technological development tookplace which led to the evolution of industrial sector. The expansion of both these sectors made the advancement of service sector.

Fisher (1935) and Colin Clark (1940) have divided the economy into primary sector, secondary sector and tertiary sector. The primary sector which covers tangible goods in agriculture, forestry, fishing, and hunting. The secondary sector includes mining, manufacturing and such activities as gas, electricity and water supply involving activities with a tangible and product. The tertiary sector consists of trade and public services. But this is not a clear cut division on economic activities as economist change the activity in the list and also there is overlapping of economic activities.

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Later on the economic activities have been shifted from one sector to other sector. At present the primary sector includes agriculture, forestry, animal and husbandry and fisheries etc., the secondary sector activities incorporate mining, manufacturing, electricity, gas, water supply, construction etc., the service sector activities include trade, commerce, transport, communications, hotel and restaurant, banking and finance, health and education, tourism, share market, film industry, insurance, astrology industry, advertisement industry, sports, legal service, publishing industry, mass media etc.,

Service sector also known as the tertiary sector of the economy is expanding at a faster rate. It is one of the three sectors of the economy. “Soft” part of the economy in the service sector includes all activities which people offer their knowledge and time to improve productivity, performance, potential and sustainability and also known as advice, experience and discussion include the service sector. Service sector involves of activities beginning from the production of goods and service until it reaches to the consumer. For the last 30 years there has been a substantial shift from the primary and secondary sector to the service sector. Now it has become a largest sector of the economy. Further, the service sector activities can be grouped into:

  1. Trade, hotel and restaurants.
  2. Transport, storage and communication. Transport includes roads and railways, airways and inland and overseas, water transport.
  3. Financial institutions, insurance, real estate and business services.
  4. Community, social and personal services. Community services include government establishment and it’s departments and personal services such as health, and education, NGOs etc.

Even though there is a thin margin in distinguishing between private sector and public services, because some services are being provided by both the sectors. We can classify the service sector activities coming under the both sectors. Private services include trade, commerce, transport, communication, hotel and restaurant, tourism, insurance, cinema, advertisement, sports, health and education, level service and NGOs etc. Government sector includes government establishment including legislature, executive, judiciary, its various departments at central and state government and its autonomous bodies and local bodies.

1.1 Role of Service Sector in Economic Development

In any country economic development depends on the growth and evolution of the three sectors of the economy. However in recent years the service sector growing at a very faster rate in the developing countries and is contributing a major share in terms of output, income and employment. Even the productivity per worker is becoming higher in service sector when compared to agriculture and industrial sectors. Already the service sector is dominant in the developed countries. If agriculture sector is stagnant, new service activities are emerging and adding to the service sector making the economy to grow. Hence service sector is playing a major role in economic development of any country.

The importance of the services sector can be gauged by its contributions to different aspects of the economy.

Business include both domestic trade as well as foreign trade. Trade as a service sector activities facilitates the exchange of the goods and services between producers and consumers. Domestic trade refers to the exchange of goods and services with in the country. Which provides income and employment to the people who have engaged in this activities. Foreign trade plays a major role in the development of the country. Imports of machinery and equipment which cannot be produced in the initial stages at home are essential. Such imports which either help to create new capacity in some lines of production or enlarge capacity in the other lines of production are called developmental imports. The imports which are made in order to make a full use of the productive capacity are called maintenance imports.

Finance as a service sector activity plays an important role in undertaking any economic activities. Finance refers to funds of monetary resources required by individual, business houses and the government. People needs funds to meeting their current requirement or day to day of expenses for buying capital goods. A business house require funds for paying wages and salaries, for buying raw materials, for purchasing new machinery or replacing an old one etc. Government needs funds to provide various services to its subject. Finance institutions provides funds to various groups of people for variety of activities. In this process the service sector activities provides income and employment to the people of a country.

In the previous days this sector is responsible for distributing the output of the primary and secondary sectors for the intermediate and final consumption and also for the providing a variety of services to producers as well as consumers. Trade, transport and storage activities ensure distribution of goods and services where and when needed by consumers. Business and financial services facilitate mobilization of resources and their development in the activities of different sector of the economy.

Service sector activities generally require relatively less capital investment than activities in other sectors. But a majority of these activities also require relatively less space for operations service sector is a knowledge intensive sector and substantial HRD inputs are the necessary for developing most of the services sector activities.

1.2 Service Sector in India

Today, in India service sector accounts more than 50 percent of India’s Gross Domestic Product (GDP). There is a significant changes in sectoral contribution of each sector to India’s GDP over a period of time. In 1950-51 the primary sector was contributing about 56.5 percent to the Indian GDP. It is followed by the secondary sector with 13.6 percent and tertiary sector with 29.9 percent. During 1990-91 the share of agriculture sector in India GDP was 34 percent. It was followed by secondary sector with 23.2 percent and tertiary sector with 42.8 percent. During 2007 the contribution of primary sector came down to 18 percent, and industrial sector increased to 29 percent sector to 53 percent (Misra and Puri, 2009). During 2008-09 the share of primary sector was 15.7 percent, the share of secondary sector was 28 percent and the share of service sector was 56.4 percent (GOI, 2010) which highlights the fact that the share of tertiary sector is raising constantly over a period of time.

The segment of the economy that provides services to its consumers is the tertiary sector. This includes wide range of businesses and also including financial institutions, schools, transports and restaurants. And also known of the tertiary sector or service industry / sector.

India stands one of the leading economy because its growth has been led by the Service sector. It’s a larger part of the Indian economy both in terms of employment potential and its contribution to national income.

Demand and supply factors have led to this growth. In the demand side high growth of services is the economy was mostly due to the factors such as the increasing input usage of services by other sectors. In the supply side is the increased trade in services following trade in liberalization policies and other reforms of 1990s induced this growth.

The trade liberalization is responsible for the development of finance, transport communication and other service sector activity including in service hotel and restaurant. Along with this the increase in demand for health and education also led to expansion of these sector.

The services sector in future providing about the 70 per cent of the new job opportunities in the economy as the share agriculture in total employment already falling, in the coming years, the share of services would increase.

The Indian economy has contributed to the services sector of about 55.2 per cent share in G.D.P its growing by 10 per cent annually, contributing to the total employment, a high share in foreign direct investment and one-third of total exports and recording very fast at 27.4 per cent in export growth of the first half of 2010-11. While latest available data has been taken from the national and international sources.

Some services, such as infrastructure include the roads, railways, civil aviation, financial services and social services. The social services including the health and education play a major role in enhancing the contribution of service sector to its Indian economy.

1.3 Service Sector in Karnataka

Karnataka is one of the important state in the country in terms of economic development. Now the state is largely service oriented and agriculture and industrial sector contributing nearly 25 percent each to the Gross State Domestic Product (GSDP). During 2010-11, the tertiary sector has contributed 55.17 percent to GSDP at constant prices whereas primary sector and secondary sector contributed 16.22 percent and 28.61 percent respectively to the GSDP. (Special Correspondent, 2011).

1.4 Importance of the Present Study

Service sector is emerging as a dominate sector among the three sectors of the economy in recent years. In the developing countries even today more than fifty percent of the work force concentrated in the agriculture sector. In reducing the burden of the agriculture sector the service sector plays a major role. The employment share of the service sector can be increased to reduce it’s burden. Now a days service sector is contributing more than fifty percent of income to the national income. As economy grows there is a scope to expand service sector activities. When the primary needs from the agriculture sector is fulfilled, there is a less scope for the expansion of agriculture sector. But the expansion of industrial and service sectors could increase national income and output and also employment opportunities can be provided to labour force of the country. Service sector activities are able to generate new employment opportunities in the economy.

1.5 Need for the Present Study

In globalized era the service sector is expanding and is able to generate employment and income not only at macro level but also at micro level. The economic development can be made more inclusive by service sector expansion at grass-root level, which finally lead to sustainable development.

The development of service sector leads to the enlargement of the primary and secondary sectors. The development of service sector promotes and adds value to the agricultural sector. Service sector provides finance, marketing, transport, insurance for the development of the agriculture sector. The expansion of service sector activities boost the secondary sector activities as well. The service sector not only provides finance, marketing, transport to the industrial activities, but also crates demand for the goods generated by the sector. Hence the present subject is chosen for the indepth analysis.

Service sector can play a vital role in promoting balance regional development. As service sector activities can be established anywhere in the backward regions. Which would lead to the balanced development in the country.

Developing country like India has aboundent labour fource in relation to capital. So that the service sector can provide employment opportunity with minimum capital investment. Service sector can play a major role in reducing inequalities in the distribution of income in the economy. Service sector activities can be set up by the poor people with minimum capital investment leading to the economic empowerment of poor people and reduce inequalities in the distribution of income.

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At present India is encountering numerous socio-economic problem due to lack of economic opportunities. By expanding service sector activities the socio-economics problems can be resolved. During 2004-05 about 37 percent of the Indian population is leaving below the poverty line (Sridhar, 2009) they can be provided with employment and income in the service sector and lift them above poverty line. There is a scope in expanding the demand for service sector by the burgeoning Indian middle class, through which employment and income can be generated for the poor people of India.

Service sector can contribute to the redressing of balance of payment problem. The increase in the export of services can earn more foreign exchange and reduce the balance of payment deficit.


  1. Agricultural Statistics at a Glance 2010, Directorate of Economics and Statistics, Ministry of Agricultural, Government of India.
  2. Colin Clark: “The Conditions of Economic Progress”, Macmillan, London, 1940.
  3. Fisher G.B. Alan “The Clash of Progress and Security “, Macmillan, London, 1935.
  4. Government of Karnataka (2006), Karnataka Human Development Report 2005, Planning and Statistics, Government of Karnataka, Bangalore, p.15.
  5. Misra and Puri (2009), “Indian Economy”, 27th revised Edition, Himalaya Publishing House, Pvt. Ltd., Ramdoot , Dr. Bhalerao Marg, Girgan, Mumbai-400004, pp59 to 64.
  6. Ruddar Datt and Sundharam (2007), “Indian Economy”, 55th revised Edition, Chand and Company Ltd.,Ramnagar, New Delhi-110055, pp 742,830.
  7. Suryanaryanan S. S (1996), “The Service Sector And Its Role In Economic Development”, The Indian Journal of Labour Economics, vol. 39(1), 1996, pp.65.


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