Services exports hold fort, but will it suffice?
4 min read 20 Apr 2023, 12:06 AM ISTThe sharp rise in services exports is not new but their share in gross domestic product reached a record 9.9% in the December-ended quarter, surpassing the boom during the pandemic-hit years
PremiumA series of mass layoffs by technology firms has led to recession bells ringing around the globe. India wasn’t untouched by the global slowdown, with goods exports taking a hit. Yet, services exports, which are dominated by information technology, showed remarkable resilience. While merchandise exports grew just 6% in 2022-23, services grew 27%.
The sharp rise in services exports is not new but their share in gross domestic product (GDP) reached a record 9.9% in the December-ended quarter, surpassing the boom during the pandemic-hit years. It had remained above the 9% mark in the preceding two quarters as well, a Mint analysis showed.
This has cemented India’s position as a services trade-surplus (exports exceed imports) country, which helps offset some of the high goods trade deficit. From about a third a decade ago, services surplus now offers cushion cover to about 50% of goods trade deficit. A recent decline in this share has been mainly due to a rise in goods trade deficit, not a decline in services surplus. This only underlines the dominance of goods in India’s trade and its exposure to the vagaries of crude oil prices.
India’s strong footing on this front comes against the backdrop of a shift from goods to services globally. According to a 2019 World Bank report, services trade has been growing faster than goods trade, making up around 66% of GDP in developed economies, up from 40% in the 1950s. India rode the wave by becoming one of the quick adopters of IT services in a new liberalized era. But will this be enough?
Travel to Surplus
During the pandemic in 2020-21, India’s services exports contracted as well. But the pace of decline was smaller compared with other lockdown-hit sectors around the world, only to revive quickly at double-digit growth rates in the following two years. One of the biggest drags came from travel services, where exports declined 72% in 2020-21.
While travel services exports recovered somewhat in 2021-22, the weakness resulted in the sector remaining in the deficit zone for 10 straight quarters. Travel services entered surplus only in October-December 2022, becoming the last of the major sectors to shrug off the impact of the pandemic. However, economists see it as a turnaround that will benefit India in the current financial year as well. “It is noteworthy that travel services were back in surplus—thanks to the surge in personal travel, reflecting the uptick in the number of foreigners visiting India," said Crisil in a report earlier this month.
However, there is still a long way to go for travel services. The surplus recorded in the December quarter was less than half of what was recorded in the same quarter three years prior. Economists expect the numbers to improve as tourist arrivals have been increasing in recent months and are expected to remain on the same path.
But in the services exports mix, travel constitutes a small share. At 8% in FY23, it has shrunk from 14% in FY19. Rather, services trade hinges majorly on the telecom, computer and information services segment, which continues to take the lion’s share in overall services exports. Of late, “other business services", which include research and consultancy, have increased their share in the pie but transport and travel services remain small.
The Way Ahead
The government was hopeful that services exports in India would surpass the $300-billion mark in 2022-23, and it did. At $322.7 billion, services exports are estimated to have been the highest ever. However, the reliance on IT services still has some risks as the digital boom wanes off amid a global growth slowdown.
“Services net exports should remain steady in FY24 contingent on the intensity of the global slowdown," said Kotak Institutional Equities in a report this week.
While India’s services exports are less than merchandise in value, they play a bigger role in the global market. They contributed around 4% to the global services trade, while merchandise exports’ share in the world was half of that, at around 2%. Former Reserve Bank of India governor Raghuram Rajan had advocated for services exports-led growth model for India instead of China’s goods-led model that could have had caused climate-related damages.
“But think about India following a different path, a service-led export path...India already exports $250 billion in services, but that could lift India out of low-income status very quickly without the damage to the world economy that would otherwise arise," he had said while delivering the 2022 Per Jacobsson Lecture.
The bigger problem is that despite an encouraging trend, India still has significant barriers to services trade, which put it at 47th rank on the OECD Services Trade Restrictiveness Index in 2022.
While India has progressively introduced reforms, notably between 2018 and 2021, resulting in liberalization in some sectors, there also exist limitations on foreign ownership in sectors like distribution, commercial banking and insurance, the OCED noted. The silver lining offered by the services trade in recent years can be tapped in the coming years if the exports basket can be diversified from just IT services and other business services currently.
pragya.s@livemint.com
