Tipping point: India's export of services will soon exceed that of goods

As services exports succeed, the rupee will get stronger and the manufacturing sector will find it harder to compete globally, causing a shortage of domestic jobs for rural youth, writes T N Ninan

India may soon cross perhaps a unique tipping point when its export of services becomes bigger than its export of merchandise (other than oil and gems & jewellery). Over the first four months of this financial year, services exports fetched $74.05 billion, not far short of what was fetched by merchandise exports, excluding oil and gems & jewellery ($79.81 billion). Since the first is growing at over 8 per cent, and the second at less than 2 per cent, the tipping point may be no more than a year or two away.
 
This would be an extraordinary development, and not necessarily something to celebrate. Globally, services trade accounts for less than 20 per cent of total trade. In India’s case, if one takes all of exports (including oil and gems & jewellery), the share of services is 40 per cent. One could argue that it is in fact more: The export of gems & jewellery is classified as merchandise trade, though in reality what is being exported is the value created by the work of people who cut and polish imported diamond roughs and work on precious metals (also imported). Whatever the official classification, this is export of services.

 
There is supreme irony in this services-manufacturing denouement. When the US first proposed, in the 1980s, that a new round of global trade talks should be expanded in scope to include not just merchandise trade but also trade in services, India was a stout critic of the idea of opening up markets for trade in services. My fellow-columnist T C A Srinivasa-Raghavan was one of the few who saw that India might have a competitive advantage in this area (we have cheaper technologists, doctors, accountants, space scientists, etc, than almost all other countries). But his voice was lost in the anti-American cacophony.

 

Today, the boot is well and truly on the other foot. In the prolonged negotiations for RCEP (Regional Cooperation for Economic Partnership), India has been offering a two-sector deal to the leading economies of the Asia-Pacific: If they open up on services trade, New Delhi will open up further on merchandise trade. There have been no takers so far, and RCEP is stuck.
 
Consider other ironies. Among the things that India is pushing for is liberalisation of something classified as “Mode 4” in the multilateral trade services agreement. This covers the movement of “natural persons”; the blunt argument is that other countries must allow more work migrants from India (think H1B). The counter-argument from across the table is precisely the one that India uses to try and stop the flow of migrants from Bangladesh: the movement of “natural persons” is a citizenship issue, not one of trade. Common sense tells us it is both.

 
There is nothing which says countries must be consistent; they can and do follow their perceived self-interest. So what should concern those in charge of economic affairs is not the tactical nature of negotiating positions but the structural flaw at the heart of the Indian economy, which finds reflection in the export pattern: The failure of domestic manufacturing, specifically the Make in India programme, and the consequentially outsized share of GDP and trade accounted for by services. Bear in mind that high-value services exports create fewer jobs than manufacturing (think vendors, dealers, after-sales servicing).
 
Yet the likely prospect is that the manufacturing-services imbalance will grow. It is easier to realise the untapped potential of some forms of services export than it is to improve the country’s physical infrastructure, which today hobbles manufacturing. The relatively high cost of power, land, transport, port charges and shipping rates, combine with inefficiencies in the labour market, all of it made worse by an unrealistic exchange rate for the rupee, to limit manufacturing exports. Indeed, as services exports continue to succeed, the rupee will become stronger and large parts of the manufacturing sector, with their smaller profit margins, will find it steadily harder to compete internationally. This will almost certainly result in a shortage of domestic job opportunities for millions of rural youngsters who have acquired a basic education and who do not wish to go back to tilling the land.