Exporting services

India should sustain the momentum

One of the shining spots in the Indian economy over the past few decades has been the momentum in services exports. It has not only helped contain the trade gap but has also been a source of job creation in the economy, including high-skilled jobs. Given India’s success in the services sector, it is worth examining where it stands in the global pecking order and the prospects for the future. A research article in the latest monthly bulletin of the Reserve Bank of India (RBI) notes that India’s services exports in dollar terms have grown at a compound annual growth rate of over 14 per cent in the past three decades (1993-2022). This is significantly higher than world services export growth of 6.8 per cent. As a result, India’s services exports share went up eight times during the same period from 0.5 per cent to 4.3 per cent, making it the seventh-largest services exporter in the world. India was at 24th position in 2001.

India currently ranks second in telecommunication, computer and information services exports, and sixth in cultural and recreational services exports. India has clearly benefited from technological advancement and adoption. It also has a large pool of English-speaking workforce and engineering talent. Further, the domestic digital infrastructure and policy focus have helped India gain a significant global market share in information technology (IT) and IT-enabled services. This is also reflected in the establishment of global capability centres (GCCs) by large multinational corporations in India. Between 2015-16 and 2022-23, the number of GCCs increased by about 60 per cent to about 1,600. The increased adoption of digital technologies across the world has clearly benefited India. The export of digitally delivered services was 37 per cent higher in 2022 than in 2019, which helped India significantly. Aside from the tech sector, India’s travel export has been robust, though it is still suffering from the effects of the pandemic, and is partly driven by medical tourism. India has also done well in transport services exports and its rank in earnings improved from 19 in 2005 to 10 in 2022.
 

India has demonstrated its competitiveness in global services trade, particularly in telecommunication and IT-related areas, but will the robust growth continue in the medium to long term? Research by economists at the RBI shows external demand and price competitiveness significantly affect services exports. For instance, a 1 per cent increase in global gross domestic product results in a 2.5 per cent increase in India’s services exports. Also, the 1 per cent increase in the real effective exchange rate can cause a 0.8 per cent decline in real services exports. Given that global economic growth is expected to remain weak in the coming years compared to the recent decades, services exports could face headwinds. Recent analysis shows that developed economies have been pushing for “near-shoring” because of increased geopolitical tensions, which could pose challenges for Indian exporters. Further, the adoption of artificial intelligence is both a threat and an opportunity for India and it’s not very clear at this stage as to how it will affect services trade in the medium term. India has a comparative advantage in telecom and information-technology services exports, but it should also look to diversify the export basket and focus on other emerging areas.