The service sector since 1990: banking, insurance, tourism, medical and software services

1. Growth of the service sector

The tertiary sector includes trade, hotels, transport, communication, banking, insurance, real estate, business services, public administration and other services. It is now the largest part of India’s GDP and the fastest growing for most years since 1990. Reasons:

• liberalisation after 1991 opened telecom, banking, insurance and aviation to private and foreign firms;
• a large English-speaking, technically trained workforce, which made IT and business-process services exportable;
• rising incomes, which raise demand for health, education, travel and entertainment;
• urbanisation and the growth of government services; and
• the telecom and digital revolution (mobile phones, internet, UPI).

The weakness is that services employ a much smaller share of workers than their share of output, and many service jobs are informal.

2. Banking: role in the Indian economy

1. Mobilising savings from households through deposits.
2. Providing credit to industry, trade, agriculture and households, which turns saving into capital formation.
3. Credit creation: banks create deposits through lending, and so influence the money supply.
4. Balanced regional growth: branch expansion into rural and unbanked areas after nationalisation.
5. Priority-sector lending to agriculture, micro and small enterprises, weaker sections, housing and education.
6. Financial inclusion: the Pradhan Mantri Jan Dhan Yojana (2014) opened basic savings accounts for the unbanked, used for direct benefit transfer of subsidies.
7. Payment system: cheques, RTGS, NEFT and UPI (2016).
8. Channel for monetary policy: RBI rate changes reach the economy through bank lending rates.
9. Financing foreign trade through letters of credit and foreign exchange.

Milestones and reforms. The State Bank of India was formed in 1955 from the Imperial Bank. Fourteen major banks were nationalised in July 1969 and six more in 1980. The Narasimham Committee (1991) recommended lowering CRR and SLR, deregulating interest rates, prudential norms on capital adequacy and income recognition, entry of new private banks and asset reconstruction; the second Narasimham Committee (1998) followed on bank strengthening. Later steps include the SARFAESI Act, 2002, the Insolvency and Bankruptcy Code, 2016, payments banks and small finance banks (licensed from 2015), and the merger of public sector banks in 2017–2020 into fewer, larger banks.

3. Insurance

Life insurance was nationalised in 1956 when the Life Insurance Corporation of India was set up, and general insurance in 1972 (General Insurance Corporation with four subsidiaries). The Malhotra Committee (1994) recommended opening the sector. The IRDA Act, 1999 created the Insurance Regulatory and Development Authority (IRDAI) and allowed private companies with foreign equity up to 26 per cent; the cap was raised to 49 per cent (2015), 74 per cent (2021), and 100 per cent by the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025. LIC was listed on the stock exchanges in 2022.

Role: protection against risk, long-term savings invested in government securities and infrastructure, health cover, and crop insurance. Penetration (premium as a share of GDP) remains low compared with developed countries.

4. Tourism

Tourism earns foreign exchange, creates jobs for less-skilled workers (hotels, transport, guides, handicrafts) and develops backward areas. Government measures: the “Incredible India” campaign (2002), e-visas, the Swadesh Darshan and PRASHAD schemes for tourist circuits and pilgrimage sites, and infrastructure status for hotels. Problems: poor infrastructure and sanitation, safety concerns, seasonal demand, and environmental damage at popular sites.

5. Medical services

Private hospitals expanded rapidly after 1990, and India became a destination for medical tourism because quality treatment costs much less than in developed countries, English-speaking doctors are available and waiting times are short; a separate e-medical visa is issued. The pharmaceutical industry, a major supplier of generic medicines to the world, supports the sector. Public health is served by the National Health Mission (2005, rural mission extended in 2013) and Ayushman Bharat (2018), whose PM-JAY component gives hospital cover to poor families. Problems: low public spending on health, urban concentration of doctors and hospitals, and high out-of-pocket expenditure.

6. Software services since 1990

Growth. Indian IT firms began with on-site programming for foreign clients in the 1980s. After 1991 the industry grew rapidly into one of India’s largest export earners. The Y2K problem at the end of the 1990s brought large orders and established Indian firms (TCS, Infosys, Wipro, HCL) internationally; IT-enabled services and business-process outsourcing followed, and global firms set up captive centres in Bengaluru, Hyderabad, Pune, Chennai and NCR.

Reasons for growth:

• a large pool of English-speaking engineers at low cost;
• Software Technology Parks of India (1991), which provided satellite links and tax benefits for export units; later, SEZs under the Special Economic Zones Act, 2005;
• the National Telecom Policy (1994, 1999) and cheaper bandwidth;
• the time difference with the USA, which allows round-the-clock work;
• the Information Technology Act, 2000, which gave legal recognition to electronic records; and
• industry bodies such as NASSCOM.

Problems: dependence on the US and European markets, visa restrictions, concentration in a few cities, and the need to move to higher-value work (products, AI, cloud, cyber-security) as routine coding is automated.

How this is examined

The June/July 2025 100-mark paper asked “Explain the role of banking sector in Indian economy” (16 marks): write the nine roles in section 2, then the reforms. “Software services since 1990” was a 6-mark note in June/July 2025: growth, reasons, problems. The other services are likely short notes.