Global Services Exports
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Reason for Discussion
India’s services sector is making significant gains. A recent report by the World Trade Organisation (WTO) supports this statement, stating that India’s share in global services exports is set to double, with service exports growing to 11.4% in 2023.
Key Points
- India’s services exports to hit $800 billion by 2030
Goldman Sachs, a leading credit rating agency, has projected a significant increase in India’s services exports, which are expected to reach $800 billion by 2030 from $340 billion last year. This growth is set to enhance the resilience of the country’s external sector and stabilize the rupee.
- Impact on current account deficit
The current account deficit is projected to average 1.1% of GDP between 2024 and 2030. Despite potential gains from rising service exports, estimates for 2024 remain unchanged at 1.3% of GDP due to ongoing geopolitical tensions in West Asia and reduced agricultural exports to Iran.
- India's rising global service export share
India's share of global service exports has more than doubled over the past 18 years. It is projected to grow from 2% in 2005 to 4.6% in 2023, even faster than the growth rate of goods exports. This is in contrast to a 10.1% decline in China's service exports during the same period.
Services sector
The services sector comprises industries that provide intangible services rather than physical goods. It includes a number of sectors such as finance, banking, insurance, real estate, telecommunications, healthcare, education, tourism, hospitality, information technology (IT) and business process outsourcing (BPO).
Contribution to GDP and GVA
India is the fifth largest services exporter in the world, with the services sector contributing 54% to the total gross value added (GVA) in FY21. Additionally, the services sector has been the primary recipient of foreign direct investment, accounting for 53% of the total inflows from 2000 to 2021.
Importance of Services Sector for India
- Growth Potential
With the government’s new focus and strategic interventions, India’s services trade surplus, which stood at around $89 billion in FY21, is expected to grow further, indicating positive economic prospects for the country.
- Transformation to a Knowledge-Based Economy
The services sector plays a key role in India’s transformation from an ‘assembly economy’ to a ‘knowledge-based economy’. By emphasizing on sectors such as IT, finance and education, India is evolving as an economy focused on innovation and high-value services.
- Services sector as an economic growth driver
The services sector plays a key role in India's economic growth, providing employment to around 26 million people and contributing about 40% of the country's total global exports. The expansion of this sector has been crucial to economic growth and export performance.
- Global reputation boosts exports and foreign exchange
India's reputation for providing high-quality and cost-effective services has attracted businesses from around the world. This global recognition has led to increased exports and increased foreign exchange earnings, strengthening the country's economic position.
Steps taken by the government to boost service exports
Skill India Initiative
The Skill India program aims to provide market-relevant training to over 400 million youth by 2022. It aims to prepare them with the skills required for employment in various sectors, including services.
Purchasing Managers' Index (PMI)
The PMI serves as a measure of business activity in both manufacturing and services sectors. It provides critical information about the health and performance of these sectors, thereby aiding decision-making and policy development.
Free-trade agreements (FTAs)
The government is actively negotiating free-trade agreements (FTAs) with major economies such as the UK, EU, Australia and the UAE to improve market access for Indian service providers.
These agreements are designed to establish favorable trade conditions and promote competitiveness in the global market.
Challenges faced by the services sector in India
Global competition
Intense global competition is impacting India's IT and BPO sectors. Indian IT companies are facing stiff competition from emerging technology hubs such as China and Eastern Europe, which require them to maintain continuous innovation and cost-effectiveness to remain competitive.
Skills mismatch
Despite efforts such as the Skill India initiative, there remains a significant gap between the skills available in the workforce and those demanded by the services industry. In the IT sector, the need for specialized skills such as artificial intelligence and data analytics often exceeds the available talent pool.
Lack of infrastructure and the digital divide
Lack of infrastructure, especially in healthcare and tourism, is hindering regional development. For example, inadequate healthcare facilities in rural areas lead to inequalities in access and affect service quality and health outcomes.
Next steps
Imperative investment
India must prioritize the development of the services industry, recognise its potential and the need for sustained, substantial investment in it.
Improving domestic regulations
Domestic regulations are needed to promote both improved domestic products and services.
Increasing employment opportunities
Efforts to improve employment opportunities in the services sector should focus on both unskilled/semi-skilled and skilled positions, and on ensuring quality.
