On an average, world trade in commercial services has grown faster than trade in merchandise (8 per cent versus 7 per cent per annum) over the last 30 years (1980-2011) according to the World Trade Report, 2013.
In dollar terms, world exports of commercial services could grow by 2 per cent to 4.3 trillion in 2012, while exports of merchandise remained stagnant at $18.3 trillion.
Given the predominance of the tertiary sector in India’s GDP, it would be pertinent to examine how India fares in the global export of commercial services.
Can services provide the much-needed support to India’s policymakers in dealing with unsustainably high current account deficit at 4.9 per cent of GDP (Q1 FY2013-14)? How bright are the prospects of India’s services export? Going forward, does India need a change of focus or can it continue depending upon a few developed countries for its export of commercial services?
As the table shows, exports of most commercial services, including transportation and tourism, posted moderate growth rates while exports of communication, financial services, and royalty and licence fees declined in 2012.
Computer and information services could grow by 6 per cent in 2012 to $ 265 billion. The exports of other business services that include engineering , accounting/legal, management consulting, advertising and trade-related services went up by 2 per cent while that of personal, cultural and recreational services went up by 3 per cent in 2012.
The US and West European countries still remain the largest importers of commercial services. However, the BRICS nations — China (19 per cent), Russia (16 per cent) and Brazil (7 per cent) — were the fastest growing import markets for services in 2012. Now, China and Hong Kong together account for 8.2 per cent of the global import of commercial services as compared to 9.9 per cent by the US. Other fast growing import markets are Australia, Japan, South Korea and Nigeria.
Export of services
Unlike manufacturing, the export of services is not so dependent upon quality of basic infrastructure or regulatory regime. India scores over other countries on availability of a technically qualified workforce with knowledge of English. However, the contribution of the tertiary sector to India’s total exports of goods and services is not more than 33 per cent even though it accounts for roughly 57 per cent of GDP. Despite the hype about India’s comparative advantage in services, compared to China’s 4.4 per cent, India’s share in global exports of commercial services stood at around 3.4 per cent in 2012.
India’s export of services has a narrow base (in terms of product offerings and market mix) with the share of IT and ITES alone being 40 per cent. Of that, more than 75 per cent goes to just three countries — the US, the UK and Canada.
In 2012, India’s share in global export of computer and information services was 18 per cent compared to 4 per cent in other business services, the largest component of the global commercial services pie.
India’s free trade agreements (FTAs) mostly cover trade in merchandise. Even where trade in commercial services is covered under its comprehensive pacts, in the absence of mutual recognition agreements (MRAs), businesses do not benefit from preferential market access.
The best examples are the India-Korea and India-Japan trade pacts. The slow progress of trade in services agreement under India-Asean FTA has not helped the situation.
The way forward
The proposed change in the US visa regulations and growing sentiment against outsourcing will further constrain India’s export of IT and ITES to the US.
India will thus need to push export of business services in addition to traditional services such as travel and tourism that possess immense untapped potential. In 2012, India’s share in global export of travel and tourism stood at just 1.6 per cent ($18 billion) compared to China’s 9.2 per cent ($102 billion).
Given the growing share of emerging nations in import of commercial services, the future growth in India’s export has to come more from countries such as China, Russia, Brazil and Nigeria. China, Hong Kong, Russia, Brazil, Australia and Japan imported $700 billion worth services in 2012.
Out of this, other business services alone were worth $146 billion while computer and information services were close to $20 billion.
The rising cost of skilled employees in a bleaker external environment can adversely affect India’s export of services, as also increased competition from new players such as China or the Philippines. Sharp depreciation of the rupee will somewhat improve the (dollar) cost competitiveness of India’s services, but it will not be enough.
In the short run, India needs to expedite its MRAs for pushing services exports through the preferential route. The long-term solution lies in ensuring adequate supply of skilled workers, in addition to broadening the offerings in services and reaching out to key emerging markets.
Moving up the value chain is the way to go if India does not want to compete on labour cost alone. That calls for intensifying the R&D effort.
A serious flaw in India’s negotiating strategy is putting too much emphasis on getting market access for Mode 1 (covering BPO/KPO) and Mode 4 (covering movement of professionals) that are politically difficult to swing, especially in the current macroeconomic environment when outsourcing is increasingly being seen in the EU and US as transferring jobs abroad.
Besides, given the trans-boundary presence of Indian businesses, it is time India developed its offensive trade interests in Mode 3 (commercial presence in the country of service receivers).
India enjoys the legacy of delivering IT and ITES offshore that can be leveraged for export of non-IT business services.
(Singh is Group Economist of a corporate house. Pachouri works with a consulting firm. The views are personal.)