Will a services exports-driven economic growth strategy work for India?

While Covid hit services exports harder than manufacturing, the share of the former in global services exports seems to support the call experts have made in favour of the sector

India's services exports have lagged the outbound shipment of manufactured items, though the gap between the two was narrowing immediately before Covid-19 struck. However, the pandemic hit services exports harder than it did those of the manufacturing sector.

In 2014-15, services exports stood at $158.10 billion, constituting 62.46 per cent of India's manufacturing exports. In 2019-20, That number went up to 78.4 per cent, but came down to 77.74 per cent in Covid-hit 2020-21 and further to 71.05 per cent in the first ten months of the current financial year (See table).

Experts' take

In such a scenario, why are there so many arguments favouring a service exports-led growth strategy for India, and not a replication of the one adopted by China, which relied on manufacturing to record several years of double-digit economic growth?

Part of the answer could lie in the share of India's exports in services and merchandise in global outbound shipments. The country's share in global merchandise exports was just 1.57 per cent, and this include manufactured items in 2020. On the other hand, its share in global services exports stood at 4.12 per cent that year, according to the data provided by the World Trade Organization (WTO).

Also, the share of manufacturing in India's gross value added remained in the range of 15-17 per cent since the Modi government came to power at the Centre.

The arguments against going the China way were provided by former RBI governor Raghuram Rajan and Rohit Lamba, an economist at Pennsylvania state university. In their recent article in The Times of India, the authors sought to emphasise the difference in economic environment and the nature of polity in India and China. China, they said, grew at a rapid pace initially by suppressing wages and consumption and keeping borrowing costs in check by lowering interest paid to households. Over time, China also created a more educated workforce and decent infrastructure and reduced tariffs. The initial part of China's strategy may be difficult and undesirable in a democratic India, they argued.  

They believe that India can tap those services that could be exported at a distance by using technology, such as legal and financial advisory, education and telemedicine, provided the country protects privacy of data, reforms its education system etc.

Naushad Forbes, co-chairman of Forbes Marshall, says Raghuram Rajan was exactly right in advocating a real goods-focussed, service sector export-oriented drive. Forbes was, however, skeptical whether it would add millions of jobs needed by the economy.

"I struggled to think how we will create millions and millions of good quality jobs only through services. Let us take services opportunities for exports that can be provided at a distance. Where are those opportunities? Look at the bulk of jobs in developed countries. These are not in skill-intensive areas such as doctors, bankers and so on. Bulk of jobs are those serving food in restaurants, those cleaning homes, those who are nurses, more than doctors. These jobs are difficult to substitute through remote exports," Forbes said.

Madan Sabnavis, Bank of Baroda chief economist, said post pandemic there is definitely scope for India to strengthen its base in export of services.

"We are strong today in IT-related services and the same can be advanced to other areas such as education, health etc. This is an idea that has to be built carefully and will take time to construct," he said.

Huge reliance on telecommunication, computer and information services for exports is evident from the fact that these stood at $30.82 billion during the second quarter of 2021-22, constituting half of total services exports at $61.4 billion.

Akshat Pande, co-founder and managing partner, Alpha Rajan & Partners, says export of legal services is already very regular and that’s how legal fraternity advises foreign clients on Indian laws.

"The real game-changer will be when Indian law firms start setting up international offices and advise on Indian laws sitting in other countries, for which currently there are very few examples," he says.

For this, the Indian legal regulator will have to allow reciprocity, as most country’s laws insist on it in order to allow foreign lawyers to practice their laws on their soil.

Until the Indian regulator allows foreign firms to set up in India, export of legal services will be limited to what it is today, he said.

Icra chief economist Aditi Nayar says services exports hold the potential for a sustainable elevation in the value of Indian exports. "This reduces the pressure on merchandise exports to provide jobs as well as foreign exchange inflows. Moreover, merchandise exports remain susceptible to cyclicality in commodity prices," she points out.

Sabnavis says both, the services and the geographies need to be identified, and the two should be mapped.

"When we are talking of internationalisation of the rupee, this is the idea for making inroads into financial services. Today, the world is dominated by the dollar and euro and unless the rupee becomes global, we will not be able to leverage this (internationalisation),"he says.

He says India can build on services where it has intellectual capabilities. "For this we have a cost advantage that can help get business from the western world. While this works for telemedicine, others like legal or education can have issues in terms of our services being geared to local conditions rather than global," Sabnavis points out.

Pande says legal services and regulations are at present archaic and require a number of changes at fundamental level. However, the legal fraternity has to be taken into confidence and such changes need to come from the community itself, he argues.

Services vs manufacturing: Exports in $ bn

Year	Manufacturing	%age growth	Services	%age growth
2014-15	253.12

0.74

158.10

4.14 2015-16

231.98

-8.35 154.31 -2.40 2016-17

244.55

5.42 164.20 6.41 2017-18

265.00

8.36 195.09 18.81 2018-19 283.71 7.06 208.00 6.62 2019-20 271.72 -4.20 213.19 2.49 2020-21 265.23 -2.38

206.09

-3.33 2021-22(Apr-Jan) 287.84 37.64

204.52

23.08

YoY % growth in brackets; Sources: Icra, RBI