Now, services sector feels the heat of global meltdown

Written by Soma Das | Updated: Dec 31 2008, 07:02am hrs
Gripped by the slowdown syndrome and reeling under the global credit crunch and higher interest rates, the domestic services sector showed signs of fatigue and non-performance during the later half of the year. Only three sectors that include emerging segments like Internet and broadband have registered a growth rate of over 20% during April to November 2008 period, compared to 12 sectors that had shown similar growth trends in the previous year. The number of sectors suffering a negative growth rate has soared to six from one since last year, in the above mentioned period. The sub-sectors, where the cause of concern has heightened due to negative growth rates include domestic airlines and insurance.

The number of service sub-sectors witnessing a growth rate in the range of 10 to 20 % has also dipped to nine this April to November period, compared to 14 last year, according to a Ficci survey that mapped growth across 31 sub-sectors in services.

The worrisome trend is highlighted in the turbulent domestic airline sector that saw a negative growth of 4.7%, against a positive growth of 20% last year. The growth in domestic air passenger traffic also plunged to 4.7%, compared to a growth of 22.5% last year. The sector saw a substantial rise in operating costs, mainly due to higher prices of aviation turbine fuel and different sales tax rates ranging between 20 to 30 %. The fuel cost accounts for 40 % of total cost of operations. The sector faced a blow with the announcement of zero commission to Indian travel agents by the airlines (domestic and international) for the major air transport and travel agents associations. According to the industry, the system of commission to agents should be restored, since the industry finds it difficult to adhere to a changed business model. Problems related to land acquisition for new projects, as well as expansion of the existing ones compounded. Projects in Goa and Gujarat are cases in point.

The financial services came under tremendous pressure with assets mobilised by mutual funds recording a negative growth rate of 50% as against a growth of 64% last year. Assets under management of mutual funds also suffered a setback of 26% growth rate compared to 50% growth rate last year. The number of defaulters has increased over the years and recovery of loans has become a problem because of inadequacies of Indian recovery law and procedures, claims the industry.

Other victims of the slowdown syndrome include the infrastructure and logistics sector comprising some segments in railways, ports, logistics industry, courier industry and the construction industry, which saw positive but arrested growth rates in single digits compared to double digit growth rates in the same period previous year. In roads, issues relating to toll fixation that differs from state to state and environmental clearances acted as major roadblocks. The Indian shipping industry whined about paying 12 different taxes that include minimum alternative tax , service tax, corporate income tax, lease tax, customs duty, fringe benefits tax, dividend distribution tax among others.

The Ficci survey confirms a state of uncertainty gripping many services sectors including financial services, IT, ITES, BPO, civil aviation and real estate. Many segments in the services sector, particularly those dependent on foreign institutional investment have fared dismally. Non-availability of finance for preparing locally relevant, viable and business-oriented content are specifically cited as reasons for under performance in the IT and BPO sector that registered a poor performance of 15% growth as against 33% in the concerned period last year.

The feedback gathered from industry shows that while during the first half of current fiscal, that is (April-Sept 2008), there was a moderation in the growth of several segments of the service industry, while the period starting from October 2008 felt a marked deterioration in performance in many areas.