The importance of services exports

Business Standard, 3 April 2023

Exports dynamism 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.

The facts

Q3 / 2012Q3 / 2022Compound growth rateTime to double
(Bln. real USD)(Bln. real USD)Per centYears
Total exports 109 189 2.9 23
  Goods 72 105 1.2 56
  Services 37 83 5.7 12
  Telecom and IT 17 39 5.8 12
  Other business services 7 21 8.7 8
Table: Components of Indian exports, 2012 vs. 2022
All dollar values in 2012 US prices.

Consumption, investment and government spending are all facing a difficult environment in India. The dynamic sector, the source of hope, is services exports. The table above looks at exports growth, in quarterly data, across a decade: from the quarter ended December 2012 to the quarter ended December 2022. We in India are used to expressing exports in USD so as to avoid the non-comparability introduced into nominal INR data owing to high and variable inflation in India. But inflation in the US has also misbehaved in recent years. Hence, the values are adjusted using the US CPI and expressed in 2012 prices.

Overall exports grew at a compound rate of 2.9% (in inflation-adjusted USD), which is a time to doubling of 23 years. Goods exports grew at a compound rate of 1.2%, which is a time to doubling of 56 years.

Services is where the dynamism lies. Overall services exports grew at a compound rate of 5.7% which is a doubling every 12 years. Of particular importance was `Other business services' which grew at a compound growth rate of 8.7% which is a doubling in each 8 years.

Harness this megatrend

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 SEEPZ in the mid 1980s and the Infosys IPO 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 industry and high exports growth continues. The most important economic idea in India is that of finding the labour arbitrage between producing using the upper tail of human capital in India, and selling into OECD countries.

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 is additional exports of about $300 billion dollars 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 this 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, spanning technical/business knowledge and cultural connections into the first world. Individuals, services employers, and knowledge organisations need to push on obtaining and diffusing knowledge, so that a significant chunk of persons in India can become peers to the advanced economy workforce.

How can government assist the process of an upper tail of Indian human capital, that is well integrated into advanced economies? What is required of government in this area is competitive research funding into a set of autonomous or private knowledge organisations, without management control, centralisation or regulation.

How can goods exports get back to growth?

The poor performance of goods exports raises conceptual questions about the things that policy makers have tried for the last 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 cesses, and getting to a frictionless GST on imports + zero rating of exports. The patchwork tapestry of 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 for firms and individuals to operate overseas, foreign workers, the burden of FATF/PMLA, the burden of the Companies Act, labour law, regulators, etc.

Linkages to development strategy

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 infrastructure. The choke points now lie in the working of the Indian state, and not in moving goods and people.

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. A useful insight is to see that growth came about in the parts of the economy that have a low engagement with the state. In China, this was in SEZs, where the Chinese 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.

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