India’s Foreign Trade

Trade in Services
From A. K. Sengupta
Some reading materials on Services

At Your Service - The Case of India’s Services Exports

Services are increasingly becoming important for economic growth in most countries of the world. In fact,

the contribution of the services sector to the GDP of a country is an indicator of the maturity of its economy.

In the US for example, services contribute as much as 72% to the GDP. In Australia, it is 70%. Similar is the

case in most other developed countries of the world.

In India, the services sector, contributes nearly 54% to the GDP which is indicative of a higher level

economy. However, India is considered as a middle rung economy. This dichotomy is due in part to the

splintering of some manufacturing activities in the services sector. Moreover, the contribution of some

sectors of services such as IT and ITES, skews the economy to the higher side.

Services vs Manufacturing

Nevertheless, the services sector is critical to the future growth of our country. Some sections of our society

have been concerned that India is overly emphasising the services sector at the expense of manufacturing.

Their strongest argument in favour of a manufacturing thrust is that since China, Taiwan, or some other S.E.

Asian country has built up its economy on the basis of its strong manufacturing foundation, India should

follow suit. They feel that the high levels of FDI attracted by these countries is due to their thrust on the

manufacturing sector, which has provided them the requisite base of competencies and economic support for
their foray into services. Hence, the logic is that India should first lay a strong foundation in manufacturing

before going into services.

One should remind such protagonists that post-mortems can not serve as a ground for new conceptions. The

historical case of China or any other country does not provide a role model for India in the current scenario,

for the following reasons :

1) Our environment today is very different from that of China when it started its manufacturing blitzkrieg.

For good or bad, India is now part of a global village. It no longer has the luxury – or misfortune, depending

on one’s perspective - of making decisions for its economy in isolation, and irrespective of its role in the

global economy. China is only now trying to establish itself in the WTO bandwagon and was pretty much

isolated from the world earlier, when it allocated its resources to establishing manufacturing capabilities.

2) China started attracting FDI only when it opened out in the late seventies, most of which was from Japan

and Hong Kong which have similar cultural interests and found a captive market for their goods as well as a

cheaper manufacturing base for their products. As China continued its liberalization programme and the size

of its captive domestic market grew, FDI from the West also started flowing in. In contrast, India has neither

the cultural proximity to developed countries which could invest here, nor does it have a huge domestic

market and a substantive culture of consumerism that could support its investment in manufacturing or

attract FDI.

3) Manufacturing today has become highly capital and technology intensive. In order to be globally

competitive, most sectors of manufacturing require significant investment in sophisticated machinery,

automated plants, information technology and advanced techniques and processes. For a country that is

unable to create global brands for want of resources, it is difficult to imagine a sustainable journey in world

class manufacturing. An overzealous manufacturing thrust for India would therefore imply a debilitating

capital investment at the expense of other sectors. It offers little scope of being amortized over the domestic

market and would make exports uncompetitive. Alternatively, India - like China - would also garner a

reputation for poor quality manufacturing using traditional manufacturing technologies and processes.
4) As most products reach the maturity stage of their lifecycle and markets in developed countries are

reaching saturation, growth in manufacturing is being provided by product innovation and transformational

technologies. Manufacturing is now being supported by demand from new product categories while

traditional manufacturing operations are becoming unviable. For example manufacturing plants in sectors

such as automobiles, consumer electronics etc. are being shut down across Europe, and America. Those that

survive, are taking recourse to drastic cost cutting measures, including outsourcing of production. Thus

production of automobile components and non critical parts are being outsourced to cost effective countries.

Consequently growth is coming from outsourcing services and consumer services in these traditional sectors.

5) India’s strength lies in its human resources. An immense reservoir of educated, globally competitive

people resources make it highly suited to providing services in the knowledge economy. An undue

manufacturing focus would create a social divide, even while its expected contribution to the modern

economy remains questionable.

6) India’s inherent characteristic make it ideally suited for a services thrust. An abundance of low cost

labour, an English speaking population, an education system that is globally competitive and a time zone

that is customized for the comfort of the Western world, create an easy lure for “Served from India”

hospitality.

7) Finally, it must be kept in mind that India has already missed the industrial revolution and the agricultural

revolution. Let us not miss the knowledge revolution now out of an egoistic attachment to manufacturing.

Contribution to The Economy

Services on an average contribute 2/3rd to the global economy. In India, services contribute 54% to India’s

GDP, and 25% to India’s total exports.

 Share of Services Value Added in GDP (2000)

100% World Service Exports

90%
80%
and India’s Share
70%
60% (Source WTO)
50% Year Total world India's India's
40%
30% service exports service share in
20%
10% in $bn exports world
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in $ bn services

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1990 807.01 4.60 0.57

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1992 960.79 4.90 0.51

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1993 943.40 5.00 0.53

Services Agriculture 1994 Industry6.00
1052.63 0.57
1995 1192.99 6.80 0.57
1996 1250.00 7.00 0.56
1997 1313.43 8.80 0.67
1998 1321.43 11.10 0.84
1999 1333.33 13.20 0.99
2000 1435.00 17.60 1.20
In fact, the emergence of India as one of the fastest growing 2001 1460.00 20.40 1.40
2002 1540.00 20.70 1.30
economies in the world is due significantly to the rapid growth of its

services sector. If India’s overall GDP growth rate is taken at 6.5% then Services are growing at 7.5% while

both Agriculture and Industry are growing below the GDP growth rate, at 5.5% and 4.5% respectively. The

comparable global average growth rate of services is 5.6%.

Where India Stands in Services Trade

Between 1996 to 2000 the revealed comparative advantage (RCA) index for services increased by 74

percent while that of goods declined by 15 per cent. The increase in services was primarily on account of

software exports (IT and BPO sector), financial, management, consultancy and telecommunication sectors

amongst others. With the longevity of the contribution from financial and telecom sectors in question, the

onus is clearly on services exports to sustain the growth.

Worldwide, services contribute 20% to the world trade accounting for USD 1.8 trillion. Of this The US, EU

and Japan control a 2/3rd share of the market. India has a share of 1.4% of the world trade in services, which
is higher than its share of 0.8% in the world trade in goods. India's earning through services exports are

estimated at $51 billion in 2004-05 which is a quantum leap from $25 billion in 2003-04, and $ 5 billion in

1993. India is ranked as the 21st largest exporter of services by WTO, and is the world’s fastest growing

services exporter. The country’s services exports has been growing at a CAGR of 17%, beating China’s

growth rate of 15%.

Skewed Composition
Annual growth in services
The composition of India’s services vs goods exports is closer to that of
exports across economies
the developed countries like USA and UK rather than developing and
(1993-2003)
middle income countries. Services account for 30% and 32% of the Country Services Exports
total exports of USA and UK respectively and are from sectors such as
(Growth (%))
Business Services, Entertainment, Software etc.. On the other hand, Brazil* 10.5
China’s $46 billion of services exports – comprise 10% of its total
China 15.0
exports and are primarily from tourism. France 2.9
Germany 7.0
The major component of India’s services export is however Software
India 17.3
Exports, which now contributes 50 % to India’s services exports, from Italy 3.5
Japan 3.1
a 19% share in 1995. On the other hand, the share of travel and Russia** 7.3
UK 8.0
transportation has declined to 14% and 10% respectively. Yet, travel
USA 5.4
and transportation constitute 30% each of the services imports in US, Source: WTO

EU and Japan.
• annual growth rate is
In terms of destinations, India’s services exports are primarily limited
from 1993-2001
to the English speaking countries, with a particular emphasis on the US
• ** annual growth rate is
and UK. The markets of Latin America, Brazil, SE Asia, and Latin
from 1994-2003 .
Europe have barely been scratched at the surface. As a measure of

comparison, France remained the world’s number one tourist

destination despite its language barriers, and even China’s gains from tourism are enviable while India, with

its rich culture, and an English speaking population has barely attracted tourists.

Among the four Modes of trade recognized by GATS, India’s overwhelming preference is for two modes.

Mode 1, and particularly Mode 4. While half of India’s services exports are destined for the USA, nearly

half of the services exported to the US are from Mode 4. These comprise, movement of nurses, engineers,

doctors, scientists and software engineers.

The skew extends further to the distribution of service exporters. India’s service exports appear to follow the

Pareto principle, with a majority of the revenues being generated by the top ten software companies.

GATS - The Great Leveler

With a level playing field offered by GATS, India’s strengths and weaknesses stand out distinctly. In areas

such as Professional Services -which are among the fastest growing service sectors achieving double digit

growth in economies globally - Indian service exporters lose out on the sheer size and scale of operations.

Some sectors such as legal have only recently been liberalized, and service providers lack the experience to

compete with global firms. Mode 1 and Mode 4 of services exports are of obvious interest to the

government. According to UNCTAD estimates, a mere 3% increase in the quota of temporary workers by

OECD countries could benefit India by an additional $ 50 billion annually under Mode 4 (movement of

natural persons). Similarly, it estimates that India stands to gain $ 40 – 60 billion annually from the BPO

boom under Mode 1 (cross border supply).

Much needs to be done under Mode 2 ( eg. health, tourism and educational services) and Mode 3 (eg IT and

banking related activities ) of GATS however, or India will lose out on the opportunities that unfold.

Speed Breakers Aplenty

Cumbersome regulations, multiple approvals, high tariffs, and the absence of specific Export Promotion

Councils for different sectors of services, create a rough launching pad for domestic service exporters.

Regulatory frameworks have to be put in place and restrictions removed. The difficulty which premier

management schools such as the IIMs experienced in getting approval under Mode 3 is a case in point.
Additionally, non-tariff barriers in foreign markets pose special challenges for India’s service exports. While

Mode 1 and Mode 4 are of special interest to India, these are also the means where other countries are most

reluctant to permit trade. The considerable opposition to outsourcing of services to India, in certain sections

of America and Britain, was sustained only due to local political considerations, despite the forceful

economic rationale behind outsourcing. Similarly, the reluctance of developed countries to issue visas to

Indian professionals, creates an uneven playing field despite the commitments under GATS.

Prowling Predators

Perhaps the biggest threat comes from the stealthily approaching competitors in Asia and Eastern Europe.

China evidently tops the list. After its leadership in manufacturing, it is now neck to neck with India in

services. It already leads India in Tourism services. It is now on hyperactive drive mode to teach English and

is happily inviting leading IT companies from India to set up development centres in the country. The day is

not far off when China would do to India in IT services what Japan did to the US in automobiles. Learn the

ropes and beat them at their own game.

Other countries from Eastern Europe and S.E Asia are also galloping towards a service oriented economy.

Russia, erstwhile USSR countries, Poland, Belgium, and Ireland are all offering alternatives in IT and ITES

space to European customers due to their proximity and cultural similarity. Phillipines and Malaysia are also

gearing up to profit from the outsourcing boom.

Opportunities

Opportunities for Indian Service exports originate from several quarters. Demographic changes in Europe

America and Japan offer to create opportunities for Mode 4 exports. An ageing population in Europe and

Japan, a changing work ethic that has moved from 3000 hours per annum during the industrial revolution to

less than 1800 hours per annum in most developed countries, and the rising costs of essential services such as

healthcare and education, unleash substantial prospects for services exports from India.

Healthcare service exports in particular, have seen a sudden spurt in recent years as health tourists arrive to

take advantage of India’s world class medical facilities at a tenth of the cost in the USA. For example, a
bone marrow transplant that costs $ 250,000 in the US or a cardiac operation that costs $60,000 can be done

for $ 26,000 and $6000 respectively in India, with equal expertise.

Education services is another emerging area that needs to be exploited properly. A shortage of primary and

secondary school teachers in UK and USA has created opportunities for India’s teachers, along the path

shown by nurses and software engineers. India’s Universities have for long been attracting students from

other developing countries. With the growing awareness of our management, medical and engineering

institutions in the West, prospects arise for attracting a larger number of students from the developed

countries.

The entertainment industry, particularly films and TV, happens to be among the fastest growing in the

world. Indian films are popular across West Asia, Afghanistan, Central Asia, the USSR and in South East

Asia. They are now penetrating the Western world, thanks both to the uniqueness of the entertainment

offered by them which transcends cultural barriers, and also the Indian global diaspora.

Consultancy exports is another promising area from the country, with over 4000 organizations in this field

having a turnover of 1000 crores p.a. including exports. These are supported by a thousand institutions

providing them scientific and R&D services. The major areas of exports in this sector are projects in

infrastructure, water resources management, environment, rural development, social development and

industrial projects such as Hydrocarbons, cement, fertilizer and pharmaceuticals. The main destinations at

present for these exports are the less developed countries of Africa and the Indian sub continent.

There is still immense scope for India to undertake project and management consultancy, repair and

maintenance work (on ships, power installations, transport equipment, medical equipment etc.) pre-

publishing services, and R&D in various disciplines etc.

Professional services such as advertising, food and restaurant, training etc, are newer emerging areas that

promise to rewrite the services scenario in the country. By virtue of having the second largest scientific and

technical manpower in the world, India has tremendous potential in such specialized services.

By far the most significant services export potential lies in India’s capabilities in tourism. Tourism is the

world's largest export industry today. International tourism is the largest single item in the world's foreign
trade and for many places, it is the predominant export and foreign exchange earner. The impact of tourism

on national economies is recognized as such by the World Bank and the World Tourism Organization, and

27th September has been earmarked as World Tourism Day. Worldwide, tourism contributes 8% of world

exports and 30% of the world trade in services and employs 10.7% of the global workforce.

Worldwide tourist traffic reached a record 763 million tourists and $ 623 billion in revenues in 2004, an

increase of 11% or 73 million tourists ( equivalent to a destination the size of France) or $ 100 billion over

2003. 52% of the traffic comprised leisure and recreation tourists and only 16% were business tourists.

International tourist traffic is expected to increase to 1602 million by 2020 at a growth rate of 4.3 %.

India has substantial strengths that if properly leveraged, could make tourism a goldmine of an opportunity.

Some of these are :

• Friendly, hospitable, and open culture

• English speaking population

• Cultural and geographical diversity

• Diversity of cuisine

• Rich Historical heritage

• Religious heritage (eg for Japanese Buddhists )

• Unique attractions in Ayurveda, Yoga, and Meditation

• Low cost of living

• World class facilites

• Plethora of recreational options ranging from adventure sports, through nature tourism, health spas

etc

Yet despite these God given opportunities, India has been unable to realize its true potential in the sector.

While it is easy to put the blame on infrastructure, and government agencies, the fact remains that there is an

absence of a marketing thrust. Other countries such as Brazil, Thailand, Indonesia etc, with similar problems
of poverty, corruption, infrastructure, or tropical climate hazards, and with substantially less advantages,

have managed to gain higher visibility and attract more tourists.

A Roadmap

Evidently, there is no concerted marketing strategy, nor a nodal agency to implement it. The concept of India

Inc remains in abeyance as the different organizations dance to their own tune. One might even conjencture

that whatever success India has seen in the services sector is more due to chance than any premeditated

strategy. The low cost of living, the English language proliferation, the western education system, and the

time zone advantage are either a legacy of the past or an inherent nature’s gift. The mark of dedicated

planning is clearly missing. There is little effort to enhance the required skills in the work force by teaching

them European languages and culture, the way China is doing with the English language and IT skills. There

is an absence of nodal promotional councils in specific service sector areas and a dearth of information at all

levels.

It is essential to identify the potential areas of opportunity from all possible angles, and understand the

behaviour of the market. For example, while opportunity lies in 37 countries identified by the FIEO with

imports of over $1 billion or an import growth rate of 12%, one must also understand the structure and

motivations of the societies.

Thus, in demographic terms, where the population in the developed countries is ageing, they should be

tapped to explore the aspects of medical tourism and old age care centres. Similarly the younger population

of Europe and America should be actively pursued for gaining education in India. Many such courses in arts,

culture, fashion, languages, engineering, medicine, information technology and alternative systems of

medicine, could be marketed successfully. In addition to direct revenue benefits, this will also enhance the

competitiveness of Indian students who will gain an understanding of diverse cultures and practices.

Moreover, the positive experiences that the foreign students take back with them will lead to a significant

impact on tourism inflows as they will act as ambassadors of the country. In time, it will create a second

layer of decision makers in differing sectors of the world economy, who are more receptive to doing business

with India. In the case of tourism, western tourists tend to sign package deals before they leave from home,
and all aspects of their itinerary are fixed in detail. Yet the individual organizations in our hospitality sector

do not work in tandem to attract a tourist to explore other value added services beyond the golden triangle of

Delhi Agra Jaipur or some other popular zone. Travel agents in Europe, airlines, hotels and transport services

etc should collaborate and present a single interface.

To achieve the above objectives, a systematic, consistent and continuous series of communication

programmes should be implemented. Through scholarships, exchange programmes, cultural, and sports

activities, and leveraging key brand ambassadors, a consistent, clear and attractive picture of India should be

presented. The 2010 Commonwealth games present a wonderful opportunity, and in the run up to the games

as well as post event, a systematically directed series of communication programmes could lead to long term

benefits.

At the macro level, in addition to continuous needs for expansion of infrastructure and institutional support,

and relaxation of controls, the following measures may also be considered :

1) Tariffs and restrictions on the domestic market should be relaxed in the interest of long term

competitiveness. For example, the government of Denmark provides depreciation and tax benefits to

consumers in Denmark on the purchase of computers. This in turn has led to proliferation of e-

commerce in which Denmark is now the leading country. A similar boost to India’s e-commerce

could eventually lead to an entirely new sector of services exports and attractive FDI growth by

MNCs vying to get a piece of the cake.

2) Negotiations under GATS should be done strategically. Some of EU’s biggest service providers are

in the fields of Water Resources, Environment, Infrastructure, Waste management, Energy supply and

Retail. Evidently, a keen interest from EU in these sectors is to be expected. Strategic negotiations by

India could lead to long term benefits for our service exporters.

3) Licences to multinationals entering India as also the permits to Indian companies going out of India

should be correlated with investments to brand India Inc. as part of their Corporate Social

responsibility.
 4) The domestic market should be sensitized and a service orientation should be inculcated, particularly

among small entrepreneurs through campaigns, trainings, certifications, and incentive programmes.

5) Minimum standards of service delivery should be enforced by apex bodies in respective service

sectors. A watch should be kept over fly by night operators and others who provide deficient service

that impacts the equity of India Inc. and they should be barred from continuing the business without

instituting the desired controls and processes. A channel for international consumer grievances in this

regard should be established through the EPCs, under the control of regulatory bodies such as RBI or

DGFT.

6) A national information databank should be maintained with market data submitted regularly by

service providers and periodically by consumers.

With such proactive measures, India’s service exports are bound to consolidate their position in the global

services economy. Otherwise, academic journals will continue to attract articles like this while neighbouring

countries will continue to attract investment.

( Rajesh Narula is Chief Value Creator of Micro-Marketers, a pioneering venture established by him in the

field of outsourced marketing services. He may be reached at rajesh@micromarketers.net )