Prioritise trade

New markets and harmonised regulations necessary

The Reserve Bank of India (RBI) has released the data for services exports over the course of 2023-24, and there are lessons that the next government should draw for its trade policy. According to the RBI data, while services exports grew last financial year, they exhibited a deceleration. From $325 billion in 2022-23, they increased merely to $341 billion in 2023-24. What has worked for the sector, which has been growing at a healthy rate in recent years, is that services imports have gone down by 2 per cent, decreasing to $178 billion from $182 billion. Several reasons can be given for this slowdown, including the impact of weak demand and high interest rates on software-services purchases by global buyers. While there are certainly reasons to stay optimistic about India’s services sector, including the interest in building new-style and higher-end outsourcing centres by large companies — so called global capability centres — the recent trend is nevertheless concerning.

Services exports play a crucial role in India’s macroeconomic stability. As a vast energy importer, the country has a deficit in merchandise trade that is hard to bring down. Nor have goods exports done their share in reducing the trade deficit. In fact, according to the data from the Union Ministry of Commerce, goods exports in 2023-24 declined by over 3 per cent. The overall trade deficit was about $240 billion. While this is not so large that it can destabilise India’s external account, given the RBI’s reserves and reliable capital inflows into India, it is nevertheless a risk to maintain large trade deficits over the long term. It renders India over-dependent on capital inflows, which could reverse in times of crisis.

The government’s approach to managing trade deficits has focused on providing domestic subsidies and promoting import substitution. This is often aimed at replacing cheaper imports from China. This policy has been in place for several years now and has certainly aided in domestic production in exports in some specific sectors, such as mobile handsets. But the overall effect of this approach has clearly been insufficient to either boost Indian exports, whether of goods or of services, or to lower dependence on capital flows. It is time for a new set of ideas, ones that are better informed by economic theory and India’s history. The new administration that will take office in June should re-examine these decisions and recognise that there is no replacement possible for the policy changes that support the exports of goods and services. In both cases, new trade arrangements and agreements are of paramount importance.

Goods exports need easy access to developed-world markets, as well as low and predictable tariff regimes to allow participation in global value chains. Services exports, meanwhile, require regulatory clarity and harmonisation with major markets. Data localisation and incompatible regulations are unlikely to help in this effort. One such example of required regulatory change is the new privacy law. The government has worked to update data protection legislation in India. But it is vital that new regulatory regimes slot easily into the requirements of major Indian markets such as the European Union. This will allow for greater competitiveness for Indian services exports in such markets. A misguided desire to protect the Indian market through tariffs, restrictions, and regulations has hurt merchandise exports. It should not be allowed to slow services exports as well.