Services sector post-COVID: Shifting gears for the next ‘wave’!
The services sector has been India’s mainstay for over three decades post the economic liberalisation in 1991, when it comes to both GVA contribution and trade. However, with the rise of digitisation and automation, accelerated by the COVID-19 pandemic, India will have to evolve its strategic approach towards services in order to stay competitive.
- The services sector is the highest contributor to India’s GDP at over 50%. Unfortunately, it was also among the worst affected as a result of the pandemic.
- Even as services has witnessed a rebound in the current fiscal with a growth by 10.8% YoY in H1, there is a general consensus that the trend towards digitisation and automation will outlive the pandemic.
- While India is a leading services hub and has always retained a strong competitive advantage, it needs to improve its preparedness for this new era, where traditional advantages may no longer apply.
- For companies, this trend of digitisation has increased the emphasis on speed, efficiency and productivity, precipitating a shift towards outcome-based business models.
The services sector is the highest contributor to India’s GDP at over 50%. Unfortunately, it was also among the worst affected as a result of the pandemic. This happened largely due to the shocks faced by contact-based services such as tourism, retail trade, hotel, entertainment, and recreation, etc, that shrank by 18.2% in 2020-21. Public administration, defence and other services including government expenditure on health, education, recreation etc. also saw a decline of 4.6% in 2020-21, and the sub-sector ‘Financial, real estate and professional services’ declined marginally by 1.5% in its contribution to GVA YoY in 2020-21. The share of services in India’s GVA declined from 55% in 2019-20 to 53% in 2021-22.
Within services, however, the non-contact segments like IT, financial services, professional and business services were relatively unaffected, while tourism, retail, trade, hotels, entertainment and recreation were deeply impacted. The business community witnessed a sudden surge in the use of technology tools that enabled remote working, thereby bringing your entire office ecosystem to your laptop. Even as services has witnessed a rebound in the current fiscal with a growth by 10.8% YoY in H1, there is a general consensus that this paradigm of digitisation and automation will outlive the pandemic.
The world was already witnessing a rise in digitisation, and experts point out that the pandemic expanded the scale manifolds. A McKinsey Global Survey of Executives concludes that as a result of COVID-19, companies have accelerated the digitisation of their customer and supply chain interactions by 3-4 years, and Asia Pacific is at the forefront of this change. The survey points out how organisations are appreciating technology’s strategic importance as a critical component of business, not just a source of cost efficiencies. Companies that have proven more resilient to the crisis have identified strengths in a range of technology capabilities – filling gaps for technology talent during the crisis, use of more advanced technologies, and speed in experimenting and innovating.
While India remains a key services hub and a net exporter of services, it is important to understand how digitisation and automation could affect the global services landscape, and how it can impact India’s services competitiveness in the coming years. This is the focus of the article.
The services landscape has undergone multiple paradigm shifts over the past few decades. It started as offshoring based on cost arbitrage in the 1990s to outsourcing of non-core operations in the first decade of this century. Subsequently, there has been a shift to no-shoring and automation of high volume, repetitive activities, according to the Kearney Global Services Location Index (GSLI) report in 2021.
India has leveraged the first two waves quite well, exemplified by the growth that its BPO and BPM sectors have shown. But the recent trend towards automation provides both a risk and an opportunity. The availability of digitally savvy talent can become a huge differentiator for countries and regions. The report observes that startup ecosystems, government policies and talent availability are critical indicators of the emergence of identified digital hubs.
The concern is that while India has always been a leader in the GSLI overall, it ranks at 17 in the digital resonance ranking. The Kearney report concludes that India falls well short of expectations on digital resonance and digital outputs, despite its stature as being home to the world’s third largest tech startup ecosystem and a well recognised hub for technology talent. To understand the importance of improving India’s digital resonance for its services sector, we look at how some of the major sectors have been transformed by the pandemic.
The sector actually stands to benefit from the growing prominence of remote interactions and the demand for knowledge intensive and high technology services. Indian companies witnessed revenue growth of over 21% in H1, 2021-22, owing to demand for digital support, cloud services and infrastructure modernisation to address new pandemic challenges.
IT companies need to prepare themselves to tap on sunrise segments including remote collaboration tools, e-commerce and Industry 4.0 technologies. IT spending trends show the possibility of increased investments in cloud infrastructure services and also on specialised software. Emerging tech areas like IoT software, big data/analytics, AR/VR, etc are expected to grow the fastest by 104% between 2018 and 2024.
The healthcare ecosystem was brought to desperate fire-fighting mode during the pandemic. Shortage of essential equipment (even if available, it was often not available when needed) like oxygen, medicines, PPE kits and hospital beds took a toll.
This tragic period has also made us realise both the importance of technology, and its relatively weak penetration in healthcare (as compared to sectors like food delivery and e-commerce). Tele-health systems had to evolve in quick time to respond to the increasing demand. Patients looking to access medical services, for instance, had to quickly move online, due to the risk of infection as well as a highly strained medical infrastructure owing to rising cases.
In July 2021, McKinsey concluded that telehealth services had risen 38X from the pre-pandemic baseline. Buoyed by this trend venture capitalist (VC) firms invested 3X more money in digital health startups in 2020 as compared to 2017. India’s healthtech industry, valued at US$ 1.9 billion in 2020, is expected to reach US$ 5 billion by 2023, growing at a CAGR of 39%.
Telehealth tech, continuous and remote diagnostics, remote mental healthcare, virtual fitness, and aging-in-place technologies are expected to continue to grow post the pandemic.
As per World Economic Forum, even before COVID-19, there was already high growth and adoption in education technology, with global EdTech investments reaching US$ 18.66 billion in 2019 and the overall market for online education projected to reach US$ 350 billion by 2025.
COVID -19 has acted as a catalyst to accelerate the pace of adoption of online teaching tools. Whether it is virtual tutoring, video conferencing tools, or online learning software, there has been a significant surge in usage in India.
Indian edtech startups raised US$ 4.7 billion in 2021 with three unicorns, making it the third most funded sector during the year. Indeed, these startups saw massive increase in paid user base across domains. Edtech is also a major focus of the New Education policy, focusing on maximising online education opportunities. The growing propensity towards online and hybrid learning models provides new opportunities for focussed learning programmes with huge scale-up potential.
This was clearly among the most impacted sectors as a result of the COVID-19 pandemic, as the ceasing of global travel led to millions of job losses and huge value destruction. World Travel & Tourism Council estimates a loss of nearly US$ 4.5 trillion. Domestic visitor spends fell by 45% while international visitor spends dropped by 69.4% compared to 2019.
Consulting firm Oliver Wyman forecasts a sharp rebound in global tourism, expecting it to exceed pre-pandemic levels by 2023, basing their forecasts on herd immunity/vaccination trends and travel sentiments apart from other statistics. Revenge tourism is expected to be a key driver led by higher savings, propelling leisure travel and even a convergence of business and leisure. It is an apt time to attract global travellers and offer them bespoke experiences to chart a new growth trajectory in the post-pandemic period.
It is felt that the rise of platform-based business models and digital transformation will be key to the recovery of the sector. This digitisation could lead to some job losses in the short term, necessitating reskilling of the workforce. Companies that effectively leverage data to understand and adapt to consumer sentiments and market trends will be more likely to stay ahead of the curve.
Media & Entertainment
While film production and exhibition have been deeply impacted in the pandemic period, digital platforms and OTTs had more than their moment in the sun. Traditional TV and home video, newspapers, and consumer magazines have seen decline in market share post-pandemic, while OTT video, video games, internet advertising, and virtual reality saw a rise.
While there will be obvious rebound to some extent post pandemic, World Economic Forum believes that some of this changed behaviour could become deeply embedded, which indicates promise for these segments in the coming years. According to Research Dive, the global OTT marketplace is expected to post a CAGR of 19% by 2026 (16% pre-pandemic) to reach US$ 438.5 billion.
Financial services firms have a major role to play in reviving business and economy post-pandemic as well as ensuring large scale financial inclusion with seamless digital access to services. Fintech firms are leading the way in this regard, playing a critical role in taking financial services like payments, neobanks, lending, insurance and stockbroking to the last mile.
While banks have come under severe stress, fintech startups received total funding of US$ 9.3 billion in 2021 with creation of 12 new unicorns, according to Tracxn. The sector is expected to grow to a size of US$ 150 billion by 2025 from US$ 50-60 billion in 2020.
The acquisition of the legacy Punjab and Maharashtra Cooperative (PMC) bank by payments and financial services startup BharatPe and Centrum Financial Services has been seen as the signal for a new paradigm in the sector. From being considered just an extension of the financial services ecosystem, fintech firms seem to be moving centrestage at a brisk pace, which means they could also come increasingly under regulatory lens.
When everything else stalled during the pandemic induced lockdowns, e-commerce witnessed a 10-year growth boost in just the three months starting from March 2020, according to Shopify. IBM’s US Retail Index suggests that the pandemic hastened the transition to e-commerce by 5 years. Emarketer further estimates that as a result of the pandemic, e-commerce will have a share of around 22% of total retail purchases. When it comes to India, Worldplay FIS (financial technology product and services provider) predicts that e-commerce will grow by 84% to US$ 111 billion by 2024 due to gains from demand generated by the COVID pandemic impact.
It is no longer the purview of traditional websites – consumers are equally tuned to making their purchases on social media sites, digital payment applications and also their Whatsapp. The e-grocery segment has been a major beneficiary, as users also started getting comfortable with making daily purchases through their mobiles. The essential-centric e-grocery market grew by a whopping 70% in 2020 and is expected to grow eight times in size in the next five years according to RedSeer. The consulting firm further estimates that the pace of online adoption will also accelerate the online penetration of food services, which is expected to double its GMV to US$ 13 billion by 2025.
The COVID-19 pandemic caused massive disruptions in supply chains across the world, thereby exposing their vulnerability and making logistics players realise the importance of realigning their strategies. In the post-COVID world, logistics companies are expected to focus on shorter/local supply chains that ensure quicker movement and lower vulnerability. As e-commerce booms, it is now very important to have the right level of inventory in the right time at the right place. Companies now want to move their warehousing as close to demand as possible.
Further, the role of automation, IoT, cloud computing, data analytics, etc; be it for automatic tracking and alerts, enhanced navigational abilities, real time digital tracking and route optimization and overall improving supply chain predictability, has become increasingly relevant. Going forward, companies having solid digital credentials with the capabilities to business online and provide cargo visibility/traceability in real time will be at an advantage.
As work from home gained momentum in 2020, it boosted the already emerging gig economy and hybrid work force. Backed by a robust digital infrastructure and well-drafted laws, the gig economy is sure to create enormous employment in the foreseeable future.
According to Oxford Internet Institute’s Online Labour Index, India has the highest number of gig workers, with 24% of global online labour. Boston Consultancy Group (BCG) projects that the gig economy has the potential to contribute 1.25% share in Gross Domestic Product (GDP) in the long term, adding 90 million jobs in the non-farming parts of the economy. Job losses across experience levels and influx of fresh graduates boosted the gig economy in 2020.
However, leveraging this requires creating a conducive growth environment and aggressive deployment of appropriate skilling programmes, particularly in potential sectors. Sectors like FMCG, Pharma, technology/BPO, services, manufacturing and banking, financial services and insurance (BFSI) are expected to substantially enhance their gig workforce, with companies increasingly looking for gig workers in HR operations, customer support, marketing and sales, software development, IT support, web and graphic design, content, marketing, programming, etc.
The road ahead for India
India has benefited immensely from its demographic dividend so far, but the digital transformation of the society means that the rules of the game have changed.
A report by OECD titled Digital Transformation in the Age of COVID-19: Building Resilience and Bridging Divides, Digital Economy Outlook 2020 highlights some of the major priorities for countries to ensure inclusive digital transformation in the post-COVID context. It is indeed critical for countries now to ensure widespread and trustworthy digital access and effective usage. Countries would also have to build a facilitative environment for digital innovation, which will correlate strongly with the growth and resilience of their startup ecosystems. Preparing the workforce will be a key objective, as will be focus on online security and preventing the rise of digital monopolies.
For companies, this trend of digitisation has increased the emphasis on speed, efficiency and productivity, precipitating a shift towards outcome-based business models. Barriers to entry are much lower today, and therefore companies and individuals have to work harder to stay competitive. BPM operations, for instance, are now more about revenue generation as opposed to cost control. Traditional functions like customer service are increasingly being taken over by bots, and businesses will compete on their ability to deliver insights, knowledge and consulting expertise. Upskilling of the workforce is no longer an option you can consider. It is an unavoidable necessity.