T S Vishwanath: Look beyond IT services

India needs to create demand for other sectors in FTAs across Asia

Services negotiations form a significant pillar in India’s negotiations at the World Trade Organisation (WTO), or with important trade partners, while negotiating a comprehensive free trade agreement.

This sector is an important component of India’s economy because services account for about 60 per cent of the gross domestic product, 40 per cent of exports, 35 per cent of employment, 20 per cent of imports and 25 per cent of total trade. However, the main demand for India in trade negotiations has remained in Mode 4 — that is, movement of professionals to provide services, especially in the information technology (IT) services segment.

However, with India’s decision to not join plurilateral negotiations at the WTO on services, many analysts in India and outside are questioning the importance of services in India’s trade strategy. Twenty one members of the WTO, called the “real friends of services”, are negotiating to deepen the services commitment for each other through negative and positive lists approach. A negative list will mean that areas not on the list would be open for liberalisation, while a positive list will only list sectors that can be opened up for liberalisation. These 21 countries hope to carry negotiations over the next few months to finalise an agreement.

While India certainly has good reasons for not joining the WTO plurilateral negotiations, a recent Indian Council for Research on International Economic Relations (ICRIER)-Asian Development Bank study on “Integrating South and East Asia: The Case of Liberalising Services between India and Thailand” provides some interesting insights on India’s services competitiveness. The preliminary findings of the study done by Arpita Mukherjee and Tanu Goyal, which was presented at a Confederation of Indian Industry meeting recently, showed that India’s main area of interest within the services sector remains with the IT sector. Beyond this sector, New Delhi’s interests in the services arena remain limited at present.

It showed that 40 per cent of the Indian companies were present in Thailand on a project basis. Of these, 83 per cent provided computer and related services. Interestingly, 48 per cent companies get projects through agents, 14 per cent through competitive bidding, 10 per cent through joint venture partners and the remaining through their networks.

The study seeks to build a services value chain, which will work on the complementarities between India and her important trade partners in Southeast Asia, such as Thailand. The findings of the study point to the fact that South Asia has an advantage in knowledge-based services, while East Asia in infrastructure and travel services. Further, efficient trade and production networks require services market integration, which includes physical connectivity, people-to-people connectivity and institutional connectivity, making the services element in a free trade agreement critical to building synergies between the two partners.

Interestingly, growth in South Asia’s share in world’s services trade increased from one per cent in 1990 to four per cent in 2010. For East Asia, the share in world services export increased from eight per cent in 1990 to 12.8 percent in 2010, and share in world services import increased from 7.7 per cent in 1990 to 11.7 per cent in 2010.

With services becoming an important component in the economy, India will need to look at developing competitiveness beyond the existing strength in the IT sector, and move to demands other than Mode 4. It will need to have an aggressive position in investment in the services sector. With manufacturing accounting for a large portion of the exports from India, there is also a need to build strength in services that complement the manufacturing sector.

With India looking to grow at seven to eight per cent a year, it will be important to build strength in the services sector, such as infrastructural services, which will complement the manufacturing services.

To make the free trade negotiations more meaningful, India needs to build strength in areas such as tourism or medical services, where it can look at building services value chain across Asia, as suggested in the preliminary findings of the ICRIER study.

The writer is Principal Adviser at APJ-SLG Law Offices