The service sector in India has consistently gained-in importance, contributing more than 50 per cent in total GDP. GDP from the service sector has been growing at an average annual growth rate of 7.4 per cent from 1996 to 2006. This includes services which either directly or indirectly link with finance, tourism, trade and professions. Tourism is an important component of service sector and foreign exchange earned from foreign tourist arrivals in India has been increasing at an average of 20 per cent per annum since 2003. This has contributed to an average annual growth of the service sector by 12.54 per cent during 2003-2006.

As the graph illustrates, for the period 1996 to 2006, growth cycles of service sector GDP and foreign tourist arrivals have been closely related. Cross correlation (0.36) and Granger causality (4.78) results demonstrate that the growth of foreign tourist arrival precedes growth of GDP from service sector by one or two quarters respectively. This reinforces the fact that foreign tourist arrival in India leads service sector growth.
It is well established that, tourism fosters economic growth in terms of employment and income. It has potential for impacting regional development and can help to remove inequalities between different regions of the country specially lagging regions like the North East.
The North East, a home to several tribes each with distant geography, culture and social identities, comprises of 8 states. This region has all the features for becoming an attractive tourist destination as it is abundant in natural beauty, wild life, flora and fauna. However, less than 1 per cent of total tourists to India visited this region. The tourist potential in this area has been explored in a limited fashion, notably Assam for its tea (similar to Makaibari in West Bengal) plantations. Many are not even aware that Manipur is described as the Switzerland of India while Meghalaya, Mizoram, Nagaland, Tripura and Arunachal Pradesh are not even fully explored as tourist potential destination. Given India’s increasing concerns for the economic upliftment of lagging regions, and the clear linkages between service sector GDP and tourism, tourism policy for the North East needs a boost. The government should contribute towards development of tourism infrastructure and political stability in the region to make it a popular tourist destination.