The dynamism of services exports

Funding research in a set of autonomous or private knowledge organisations will help

The dynamism of exports is particularly important for India today. Two sectors stand out: IT exports and “other business services”. These are the two most important areas where things are going well for India. The magnitudes are starting to become considerable. Decision makers in the private and government sectors can gain by harnessing this megatrend.

 

Consumption, investment, and government spending are all facing a difficult environment. The dynamic sector in India, the source of hope, is services exports. The table above looks at exports growth, the data being quarterly, across a decade: From the quarter ended December 2012 to the quarter ended December 2022. We in India are used to expressing exports in US dollars (USD) so as to avoid the problems of inflation in India. But inflation in the US has also misbehaved in recent years. Hence, the values are expressed in real terms in 2012 USD.
 

Overall exports grew at a compound annual rate of 2.9 per cent (in inflation-adjusted USD). If this rate holds, exports will double in 23 years. Goods exports grew at a compound annual rate of 1.2 per cent, and at this rate they will double in 56 years.
 

Services are where the dynamism lies. Overall services exports grew at a compound annual rate of 5.7 per cent, and they will double in 12 years at this rate. Of particular importance was “other business services”, which grew at a compound annual rate of 8.7 per cent, and at this rate they will double in eight years.
 

We in India have known an IT and IT-enabled services revolution for a very long time now. Citicorp Overseas Software Ltd (COSL) was flourishing in the Santacruz Electronics Export Processing Zone in the mid-1980s and the Infosys initial public offering took place in 1994. But even as the veterans of that world are now coming to the end of their careers, the IT revolution is the gift that keeps on giving. IT has  become the biggest industry1 and high exports growth continues. The most important economic idea in India is that of finding labour arbitrage between producing using the upper tail of Indian human capital, and selling in countries of the Organisation for Economic Cooperation and Development.
 

Summing up IT and “other business services”, the annual run rate of exports is at about $310 billion a year (expressed in 2022 USD). A doubling over about a decade means additional exports of about $300 billion a year. This is a remarkable possibility: To obtain new exports of $300 billion a year (expressed in 2022 USD) from these two sectors alone. These are very large numbers compared with the size of the Indian economy.

This has important implications for the private sector. Whether we think about the business plans of non-financial firms, or the industry exposure of financial firms, this scenario re-emphasises the importance of riding export-oriented IT and IT-enabled services, either directly or through adjacencies.

In the services export story, the rate-determining step lies in human capital. All elements of this workforce are struggling on the problem of adequacy of knowledge. Individuals, services employers, and knowledge organisations need to push on obtaining and disseminating knowledge, so that a significant chunk of persons in India can become peers to the upper end of workers in advanced economies in engineering and in user areas. What is required of government in this area is funding research competitively in a set of autonomous or private knowledge organisations, without management control, centralisation, or regulation.
 

The poor performance of goods exports raises conceptual questions about the things that policy makers have tried for the past 20 years. While India’s share in global trade has risen alongside the global retreat from engagement with China, this aspect does not suffice in generating success in exporting. There is a need for strategic thinking and a reorientation of policy.
 

Heavy lifting is required in the tax system: Eliminating various kinds of cess, and getting to a frictionless goods and services tax (GST) on imports plus zero rating of exports. The patchwork tapestry of free-trade agreements (FTAs) is creating numerous oddities with inverted duty structures. The approach of 1991-2011 —unilateral removal of trade barriers — is a superior one, considering that the important export destinations for India in any case have low trade barriers and there is relatively little for India to ask for in an FTA.
 

The stroke-of-the-pen initiative that would assist exporting from India is the removal of all Customs duties and cesses. Goods producers — and services producers — would benefit by paying lower prices for inputs (and getting all upstream GST refunded through zero rating). Alongside this, policy makers need to reorient themselves towards solving the difficulties faced by firms operating in India such as tax administration, capital controls, economic freedom in operating overseas, foreign workers, the burden of the Financial Action Task Force/Prevention of Money Laundering Act, the burden of the Companies Act, labour law, and regulators.
 

Traditionally, our understanding of underdevelopment ascribes a prime causal role for the emergence of sound state institutions. Growth in China and India has been a puzzle when it took place under weak institutions. The puzzle is resolved by seeing that growth came about in the parts of the economy that have a low engagement with the state. In China, this was in special economic zones, where the state created an environment of freedom. In India, the dynamic sector is now services exports, where the Indian workforce is connected into the global economy while having a low surface as seen by the state.
 

Would more infrastructure help? The reforms of the 1990s and the 2000s brought ubiquitous broadband lines and directly laid the foundations for the services exports revolution. This is consistent with the traditional arguments in favour of infrastructure. But private investment peaked in 2011, at about the time when significant improvements in physical infrastructure were coming about. This raises questions about the causal connections from export success to better infrastructure2 . The choke points now lie in the working of the Indian state, and not in moving goods and people.

1 . blog.theleapjournal.org/2022/03/the-industry-structure-of-indias-large.html

2 . mayin.org/ajayshah/MEDIA/2022/infrastructure_growth.html
 

The writer is a researcher at XKDR Forum