An alternative export strategy

Instead of focusing on one over the other, India needs to view services and manufacturing as complementary, not exclusive activities

In a recent interview, Raghuram Rajan, the former governor of the Reserve Bank of India, has suggested that exports of information technology-enabled services (ITeS) along with professional services such as consultancy, legal, medicine, accounting should, instead of manufacturing, become the mainstay of India’s export strategy (The Wire, February 24).

While it is true that ITeS, software and consultancy services have accounted for a major proportion of India’s services exports in the past, and more significantly during the pandemic, a focus on these services as a growth driver for India’s exports (1) may, however, be misplaced. Given that professional services involve skill-intensive jobs, they may not provide a solution to one of the most pressing problems that India is facing today, that is, rising levels of unemployment and underemployment among low-skilled workers in the informal sector, which accounts for 85 per cent of total employment. This structural problem has been further accentuated by the large number of informal sector workers who have been rendered unemployed during the pandemic. An expansion of high-skill professional activities will only lead to a relatively greater demand for the more qualified consultants and professionals, further aggravating the unequal, K-shaped recovery pattern that has been evident during the pandemic.

In addition, the necessary regulatory policies for liberalisation of these services include, among others, issues of data privacy, storage and localisation that have been difficult for India to negotiate, both in the preferential trade agreements (PTAs) and at the multilateral level. The discussions by the plurilateral groupings that have been initiated for liberalisation of these services and/ or governance rules in the digital trade domain under the aegis of the World Trade Organization (WTO), have in the past been based on provisions of PTAs among the member economies. India has raised doubts on the legality of plurilateral agreements under the WTO, and has generally stayed out of these discussions. India is also not a member of the mega regional trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that have taken the lead in liberalisation in the digital trade sector outside the WTO. Even more importantly, “mode-4”/ movement of professionals — considered, thus far, as India’s predominant comparative advantage in the services sector — has been the single most important factor for India’s prolonged and often stalled services sector negotiations in preferential trade agreements as well as at the WTO Doha Development Agenda.

Illustration: Binay Sinha

Furthermore, even where mode-4 liberalisation has been included in the bilateral agreements, such as in the India-Japan comprehensive economic partnership agreement, actual movement of professionals remains subject to difficulties of getting visas, language and cultural barriers. All these aspects should, in fact, be reasons for India to revisit its approach to exports of services. Indeed, it may actually be timely for India to consider focusing on services that are an integral part of manufacturing sector exports and hence adopt an integrated approach to its services sector exports, liberalisation and international negotiations. Within this, emphasis on employment-intensive services supporting manufacturing activity would be a far more realistic and fruitful export strategy for India at this juncture.

Global trade in value added data (TiVA, OECD) shows how services are increasingly exported as “embodied” and “embedded” in manufactured goods and processes. This is referred to as “servicification” and/ or “servitisation” of manufacturing. Among these services that come bundled with goods are wholesale/retail, distribution, marketing, transport, maintenance/ repair, technical support, warranty/ insurance, after-sales services, logistics and R&D engineering, IT and back office support. More and more companies offer these services with their products to add value and edge out competition. Some manufactured goods can be sold only when coupled with appropriate labour services, such as sophisticated machinery that requires installation, repair and maintenance.

From 2000 to 2018, the value-added contribution of total business services to gross exports of manufacturing increased almost four times both, for the OECD and the G20 economies (TiVA, OECD). The United Nations Conference on Trade and Development or UNCTAD (2) observes that for a select set of economies when services within manufacturing are considered, the services sector value addition to overall exports is close to two-thirds. Servicification is observed to have increased not only in dynamic global value chain (GVC) sectors like electronics and motor vehicles but also in sectors like food processing and chemicals, which are among India’s leading export sectors.

Other than the OECD economies, countries that show a high content of embedded services in value added of gross exports include Turkey, Poland and China. Recent literature on the subject provides evidence of such services contributing to higher manufacturing sector productivity, export capabilities and employment. Several studies have noted that the number of workers in support services/ manufacturing related jobs have increased more relative to those in core manufacturing jobs. Undue restrictions in services supply and discriminatory regulations on foreign entry have been found to limit the positive economic gains from these services.

The services trade restriction index (STRI) for India is relatively high compared to most other countries in the OECD, 2021, database. Rail freight and distribution services, among the most employment intensive sectors, remain relatively more restricted service sectors in India with almost no evolution in India’s STRI values in these sectors since 2014. In India’s gross exports in 2018, value addition contributed by employment-intensive services like transport and storage and wholesale/ retail is observed to be only a third and half, respectively, of the value added contribution by information and communication and computers, programming, consulting and information services (TiVA, OECD). Reforms and further liberalisation towards creating a facilitative regulatory framework for private/ foreign ownership and participation in these sectors will lead to not just enhanced services but also to manufacturing productivity. Efficient transport and distribution services are at the core of GVCs and just-in-time inventory management. Higher productivity of these sectors gets automatically transmitted to downstream and related activities. In the case of India, emphasis on reforms in the rail freight services sector may also complement the “dedicated freight corridor” project under the Make in India initiative. Logistics efficiency would be a natural outcome of this process.

Services and manufacturing have therefore to be viewed as complementary and not as exclusive activities. A realignment of India’s export strategy that views services as an integral part of manufacturing and structures the regulatory and trade policies consonant with this view, will provide multiple benefits of enhanced productivity, manufacturing competitiveness, export and employment potential, all of which are essential inputs for a strong post-pandemic recovery.  

The writer is professor, School of International Studies, JNU. Views are personal

(1) For more on this see my book “India’s Trade Policy in the 21st Century”, forthcoming, Routledge: London

(2) Measurement of services value added in exports and analysis of related services and trade policies.