Trade in Services in India:

Implications for Poverty

and Inequality
Ajitava Raychaudhury
Jadavpur University, Kolkata &
Prabir De
RIS, New Delhi
UNESCAP Research Workshop
10-12 December 2007; Macao 1
26/12/2007
Outline

„ Overview of services trade in India

„ Composition of India’s services trade
… Export competitiveness
„ Services trade and pro-poor growth
… India’s exports of software and IT-BPO
„ Conclusions

26/12/2007 2
 Rising importance of service sector
„ Services sector accounts over half of domestic production (about
54% in 2007-08)
„ Services sector provides about 2/3rd of employment in the
organised sector.
„ Services trade shares about 9% of GDP.
„ Services export growing much faster than world services exports;
In 2000-2006- India: 38.22%, World: 12.84%.
„ Services trade contributes about 2.64% of world services trade
(gone up from US$ 21 billion in 2000-01 to US$ 110 billion in
2007-08).
„ A low tradability of a host of services in India, and a large
potential of India’s services trade.
„ An efficient services sector is crucial for the growth of the Indian
economy and reducing poverty.
„ We know little about empirical relationship between services
trade, poverty and inequality in India.
26/12/2007 3
 Performance so far impressive
Export Import
Services Trade
Share in Value Share in Value Share in Balance of
GDP World World Trade
(%) (US$ billion) (%) (US$ billion) (%) (US$ billion)
1990-91 3.381 4.551 0.557 3.571 0.708 0.98
1995-96 4.799 7.344 0.547 7.544 0.827 -0.20
2000-2001 7.843 16.268 1.092 14.576 1.265 1.69
2001-2002 7.859 17.140 1.128 13.816 1.316 3.32
2002-2003 7.962 20.763 1.195 17.120 1.299 3.64
2003-2004 8.176 26.868 1.256 16.724 1.393 10.14
2004-2005 8.460 46.031 1.230 31.832 1.332 14.20
2005-2006 8.894 60.610 1.281 38.345 1.355 22.27
Annual Growth Rate (%)
27.746 20.402
1990-1991 to 1999-2000 (8.272) (7.315)
17.332 13.861
2000-2001 to 2005-2006 (11.813) (11.596)
38.223 28.896
1990-1991 to 2005-2006 (12.842) (11.899)
Notes: 1. Taken at current price. 2. Numbers in parenthesis are world growth rate in corresponding period.
Source: Calculated based on RBI (2007)
26/12/2007 4
 Composition of services export

Value Share* Value Share*

„ Emerging
2001 2001 2005 2005
services sectors:
Major components US$ million (%) US$ million (%)
financial, Transport services 2050.05 11.82 6291.00 10.25
information and Travel and tourism services 3198.07 18.45 7853.00 12.79
communication Communication services 1103.90 6.37 2182.00 3.55
technology, a.o Construction services 65.05 0.38 403.00 0.66
Insurance services 281.99 1.63 1050.00 1.71
Financial services 306.10 1.77 1704.00 2.78
Computer and information
services, of which 7407.38 42.73 23980.00 38.81
Software services 6341.00 36.26 23600.00 36.45
Miscellaneous services 2924.06 16.87 18321.00 29.84
Services export 17336.60 100.00 61404.00 100.00

Note: *Share in total services exports.

Sources: Calculated based on RBI (2007) and IMF (2006)

26/12/2007 5
Composition of services import
Value Share* Value Share*
„ Import of financial 2001 2001 2005 2005
services decreased. Major components US$ million (%) US$ million (%)
„ Services import for Transport services 8498.08 42.28 7841.00 20.90

rest components Travel and tourism services 3005.90 14.96 6464.00 17.23
Communication services 266.78 1.33 808.00 2.15
gone up with wide
Construction services 470.25 2.34 1756.00 4.68
differences in share.
Insurance services 810.85 4.03 1028.00 2.74
Financial services 1780.06 8.86 1308.00 3.49
Computer and information
services, of which 910.90 4.53 1454.00 3.89
Software services 476.00 2.37 1338.00 3.57
Miscellaneous services 4356.48 21.67 16980.00 45.25
Services import 20099.30 100.00 37523.00 100.00

Note: *Share in total services exports.

Sources: Calculated based on RBI (2007) and IMF (2006)

26/12/2007 6
 India is losing comparative advantage
in traditional sectors
„ According to Rakshit (2007), India’s
Estimated RCA Scores of Services Export from India
comparative (revealed) advantage in
services exports was higher than Sector 1991 2001 2005
industry and agriculture and also
merchandise exports during 1991 to Transport services 0.78 0.58 0.59
2005. Travel services 1.24 0.69 0.92
„ Comparative advantages (revealed) Communications services 0.37 0.39
is rising in financial and computer Construction services 0.56 0.57
and information services:
Computer and information
technology-intensive + skill-intensive services* 28.19 29.89
„ Comparative advantage is falling in Financial services 0.79 1.01 1.09
traditional sectors like transport and
travel services (which together Services export 1.14 1.44 1.97
provide livelihood in both organised
and unorganised sectors): labour-
intensive
„ Intra-industry trade in services is fast
emerging in knowledge intensive
services (e.g. software services).
26/12/2007 7
Factors influenced the shift in
comparative advantage
„ The reform process, adopted in 1991, moved the country from an
import-substituting industrial economy to higher-skilled and
technologically intensive services economy
… Production and trade became services driven.
„ Liberalisation of services sectors has facilitated efficiency - and export
- encouraging economic restructuring driven mostly by the private
sector.
„ Trade, FDI, and industrial policies liberalised, and many restrictions
completely dismantled.
„ Reformed institutional, legislative, and regulatory measures helped the
services sectors to grow much faster than the pre-liberalisation period
(Chanda, 2007; Rakshit, 2007).
„ India’s domestic service sector, such as software, financial, health
services, etc. have become stronger and vibrant.
„ Improved external sector has fuelled the growth of the skill - and
knowledge- intensive services sectors (e.g. software).
„ Mode 1 (cross-border trade) and Mode 2 (movement of natural person)
became key modes of services delivery.
26/12/2007 8
 Services trade and pro-poor growth:
Relationship between PCI and PCISE
„ India is relatively successful in
delivering pro-poor growth in last few
decades (but widely debated). 9.00

„ India witnessed continuous rise in per 8.00

capita income (PCI), US$ 1228.50 in 7.00
1981 to US$ 3054.67 in 2005.

Ln PCI (1975 - 2005)

6.00
„ This rise in PCI also linked with rise in Ln PCI = 0.6489 Ln PCISE + 5.9382
per capita income from services export 5.00 (67.458) (15.247)
Adj. R Sq. 0.885
(PCISE), which increased from 4.00
US$ 3.93 in 1981 to US$ 55.89 in 2005 3.00
„ The relationship between PCI and 2.00
PCISE is thus quite interesting: 1
1.00
percent rise in per capita income from
services export is associated with about 0.00
0.00 1.00 2.00 3.00 4.00 5.00
7 percent rise in per capita income Ln PCISE (1975 to 2005)
… Income elasticity of 0.6489 with robust t
Notes: 1. Data in parentheses are t-values. 2. PCI is taken in
value of 67.458 and adjusted R sq. of PPP terms, at current price in US$. 3. PCISE is taken in current
0.885). price in US$.
Data sources: World Bank (2007) for PCI and RBI (2007) for
PCISE.

26/12/2007 9
Social report card: Falling poverty,
rising urban inequality & unemployment
Poverty Inequality Unemployment
Rate (%) Rate (%) Rate (%)
PCI PCISE
Year (US$) (US$) Rural Urban Rural Urban Rural Urban

1981 1228.5 3.93 45.31 35.65 30.10 34.08 1.75 6.40

1991 1686.5 5.8 37.42 33.23 29.91 37.98 3.15 7.30

37.27 32.36
1993 1791.4 5.85 28.60 34.30 1.70 6.85

1994 1888.5 6.70 43.47 33.73 29.88 35.51 1.73 6.89

27.09 23.62
1999 2362.1 15.72 26.30 34.70 1.80 5.95
21.70 26.20 34.94
2004 2885.3 40.06 21.80 2.60 6.75

2005 3054.7 55.89

Notes: 1. Poverty, inequality and unemployment rates correspond to financial year except 1983. 2. PCI stands for Per
Capita Income in PPP terms, taken at constant 2000 US$. 3. PCISE stands for Per Capita Income from Services
Export. 4. Poverty is represented by Head-Count Ratio (HCR). Poverty rate for the year 2004-05 is taken at Mixed
Recall Period (MRP) basis. 4. Inequality is represented by estimated Gini coefficient. 4. Unemployment taken average
in terms of country’s labour force.
Sources: 1. PCI was collected from World Bank (2007). 2. PCSE was estimated based on services exports, collected
from RBI (2007). 3. Poverty rate (HCR) collected from National Sample Survey (NSS), various rounds. 4. Inequality
rate (Gini) collected from Bhalla (2003), based on NSS. 5. Unemployment rate was collected from NSS (2006).
26/12/2007 10
 Relationship between services export
& poverty and inequality

Services Export and National Inequality: Services Export and National Poverty:
1951-52 – 2005-06 1951-52 – 2005-06
0.200 0.250
y = -0.0165x - 0.0006 y = -0.0653x - 0.0081

Annual chnage in log poverty (%)

0.150 R2 = 0.0039 0.200 R2 = 0.029
Annual change in log Gini (%)

0.100 0.150

0.050 0.100

0.000
0.050
-0.400 -0.200 0.000 0.200 0.400 0.600 0.800 0.000
-0.050
-0.400 -0.200 0.000 0.200 0.400 0.600
-0.050
-0.100
-0.100
-0.150
-0.150
-0.200
Annual chnage in log PCISE (%) Annual change in log PCSE (%)

Notes: 1. PCISE stands for Per Capita Income from Services Exports (in
US$), taken at current price. 2. Inequality ratio is represented by Gini
coefficient. 3. Both inequality and PCISE are taken for the period (1951-
52 to 1999-2000.
Sources: PCISE series was calculated by the authors, based on RBI
(2007), while inequality time series was collected from WIDER-UNU
(2007), and Bhalla (2003).
Notes: 1. PCISE stands for Per Capita Income from Services Exports
(in US$), taken at current price. 2. Poverty is represented by Head -
Count Ratio. 3. Both poverty and PCISE are taken for the period
1951-52 to 2005-06.
Sources: PCISE series was calculated by the authors, based on RBI
(2007), while poverty time series was collected from Bhalla (2003).

26/12/2007 11
Urban India holds the key to reduce
inequality
„ Changes in national poverty and per capita income growth from
services export (differences in logs) has been positive.
… Rising services export is associated with falling poverty.
„ Changes in national inequality and per capita income growth from
services export is just opposite.
… Plausible explanation: Majority of suppliers of services (of export) are
concentrated in urban India, where inequality is appeared to have
increased over time.
„ According to Dev and Ravi (2007), the decline in urban poverty was
adversely affected by change in income distribution in states like
Karnataka, Tamil Nadu, Andhra Pradesh and West Bengal. These are
the very states which have attracted significant investment in IT sector.
„ It is not entirely wrong to suggest that high urban inequality is
exacerbated by the IT concentration in capital (and metro cities) of
theses states like Bangalore (Karnataka), Hyderabad (Andhra
Pradesh) Kolkata (West Bengal) and Chennai (Tamil Nadu) (usual
caveat: one cannot prove such strong causality without proper
statistical tests.)
26/12/2007 12
Urban inequality increased at state-
level
States 1983-84 1993-94 1999-2000 2004-05
Andhra Pradesh PR-36.3; PL-106.43, PR-38.33; PL-278.14, PR-26.63; PL- PR-20.7; PL-542.89,
Gini- 33.25 Gini-32.31 457.4 Gini-37.43
Karnataka PR-42.82, PL- 120.19, PR-40.14, PL- 302.89, PR- 25.25, PL- PR- 27.2; PL-599.16;
Gini- 34.46 Gini- 31.84 511.44 Gini- 36.83
Haryana PR- 14.15; PL- 103.48, PR- 16.38, PL- 258.23, PR- 9.98, PL- PR-11.3, PL-504.49,
Gini- 35.4 Gini- 28.32 420.20, Gini-36.37
Gujarat PR-39.14; PL-123.22, PR-27.89; PL-297.22, PR-15.59; PL- PR-10.1; PL-541.16,
Gini-28.58 Gini- 29.08 474.41, Gini- 30.98
Maharashtra PR-40.26; PL-126.47, PR-35.15; PL-328.56, PR-26.81; PL- PR-29.0; PL-665.90,
Gini- 34.86 Gini- 35.69 539.71 Gini- 37.77
Punjab PR-23.79; PL-101.03, PR-11.35; PL-253.61, PR-5.75; PL- PR-3.80; PL-466.16,
Gini- 34.53 Gini- 28.02 388.15 Gini- 40.17
Tamil Nadu PR-46.96; PL-120.3, PR-39.77; PL-296.63, PR-22.11; PL- PR-18.80; PL-547.42,
Gini- 35.32 Gini- 34.74 475.6 Gini- 35.84
West Bengal PR-32.32; PL-105.91, PR-22.41; PL-247.53, PR-14.86; PL- PR-11.20; PL-449.32,
Gini- 33.78 Gini- 33.77 409.22 Gini- 38.33
All India PR-40.79; PL-115.65, PR-32.36; PL-281.35, PR-23.62; PL- PR-21.70; PL-538.60,
Gini- 34.06 Gini- 34.31 454.11 Gini- 37.51
Notes: Poverty Line (PL) is calculated on a consumption basket in 1973-74 prices, upgraded according to current prices. Poverty Ratio considers
head-count value. Data for 2004-05 is based on Mixed Recall Period (MRP) basis which implies households recounted their expenditure for 30
and 7 days for food while 365 days for clothing, footwear, medical, education and other durable goods.
Sources: Sharma (2004) and Press Information Bureau (PIB) Note, May 2007 for 2004-05, and Dev and Ravi (2007)
26/12/2007 13
State-wise software exports
City State 1997-98 2000-2001 2004-05
Export# HQ* Export# HQ* Export# HQ*

(%) (Nos.) (%) (Nos.) (%) (Nos.)

Bangalore Karnataka 22.20 84 26.64 160 28.45 172

Delhi NCR** Delhi + Haryana + 19.61 95 18.31 106 20.13 119
Uttar Pradesh
Chennai Tamil Nadu 9.98 34 10.32 72 11.5 83
Hyderabad Andhra Pradesh 4.25 21 6.91 61 7.49 75
Mumbai Maharashtra 7.04 86 5.68 148 6.81 158
Pune 3.36 21 3.39 48 4.02 51
Kolkata (Calcutta) West Bengal 1.08 26 1.31 32 4.38 42
Ahmedabad Gujarat 0.21 13 0.33 10 0.89 14
Thiruvananthapuram Kerala 0.09 7 0.23 14 1.03 20
Chandigarh Punjab 0.01 3 0.01 7 0.03 11
Others 32.18 20 26.87 42 15.27 43

*Headquarters of NASSCOM members. **Considers Delhi National Capital Region (NCR) comprising Gurgaon (Haryana), Delhi, Noida (Uttar
Pradesh). # Shares in country’s total export of software and IT-BPO.
Source: NASSCOM, Indian IT and Software Services Directory, Various issues

26/12/2007 14
Urban employment rate in service
sector has fallen
„ Service sector provides bulk of the
employment in urban India
(manufacturing sector was the
major source of employment a Employment Rate in Service Sector
(%)
decade earlier).
Rural Urban
„ Service sector in India presently Year Male Female Male Female
contributes about 69 percent of
1977-78 12.40 5.70 61.00 38.00
country’s employment, gone up
from 64 percent in 1981. 1983 14.60 5.50 61.20 40.90
1987-88 17.30 7.90 63.40 42.40
„ There is a distinct fall in service
sector employment in cases of both 1993-94 18.20 6.50 66.10 50.70
males and females in urban India in 1999-2000 20.80 6.90 70.30 57.90
2004-05, compared to 1999-2000. 2004-05 25.00 8.10 69.50 53.50

„ Rural India witnessed a steep rise Source: Calculated based on NSSO (2006)

in employment rate in service

sector in 2004-05, compared to
1999-2000.

26/12/2007 15
Urban India witnesses fall in gender
inequality in service sector
„ Despite a rise in income Male – Female Ratio in Service Sector
inequality in urban India, Employment

acceleration of growth in 25
22
per capita income and 20 21 21
23

No of Females per 100 Males

19
services export have, 20 17 18
19
20 21
22

perhaps, reduced gender 15 17

18

bias in employment in 13

service sector in urban 10

India. 5

1981
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Notes: Data relates to employment in organised sector only.
Source: Calculated based on IAMR (2006)

26/12/2007 16
 Wage inequality increased in urban India
„ There is an increase in Supply of Skills and Salary (Wage) Earnings (per Day) in
inequality among wage- Services Sector Employment in India
earners of different skills in 1993-1994 1999-2000 2004-05
services sector employment (Rs.) (Rs.) (Rs.)
in the age group of 15-59 in Rural India
urban India. Not literate 21.56 84.53 66.05
„ Rural India witnesses fall in Literate and upto middle class 48.66 142.40 117.51
wage inequality (compared to Secondary & higher secondary 77.39 158.37 179.66
1993-94) Graduate & above 100.40 206.70 251.83
„ The change in skill Standard Deviation (SD) 29.69 43.62 69.46
composition and the rising Coefficient of Variation (CV) 0.48 0.29 0.45
wage inequality in service Urban India
sector employment offers a
Not literate 35.22 91.57 75.45
plausible explanation of the
Literate and upto middle class 54.00 120.19 132.61
rise of income inequality in
urban India, where majority, Secondary & higher secondary 85.72 182.99 198.48
if not 100 percent, of India’s Graduate & above 132.39 302.26 394.15
software and IT-BPO Standard Deviation (SD) 36.81 80.96 120.15
services export is Coefficient of Variation (CV) 0.48 0.46 0.60
concentrated. Notes: 1. Consider regular wage / salaried employees of age 15-59 years. 2.
Rs. stands for Indian rupees.
26/12/2007
Source: NSSO, Employment and Unemployment Situation in India, Various 17
rounds
What emerges from India’s services-
led growth
„ Urban inequality has gone up.
„ Urban employment rate has fallen.
„ Gender inequality in services sector employment has fallen.
„ Rising urban wage inequality.
„ The pattern of IT growth could also be producing urban inequality.
… IT and IT-related services sector tends to increase urban inequality as
well as inequality between urban and rural India.
„ While some Indian states were able to take advantage of the
reforms to speed up growth and poverty reduction, others
increasingly lagged behind, due to poor governance, infrastructure,
lack of human development, lack of fiscal adjustment, and
compression of development spending.
„ The higher growth has certainly brought down poverty reduction in
some states which are increasingly having higher IT exports, but the
poorer states in particular need to undertake reforms that would lead
to faster growth and poverty reduction.

26/12/2007 18
Some policy implications
„ Services trade can work for the poor and reduce inequality in
the short run if it raises the demand for unskilled workers.
However, wage inequality is inevitable in the short term since
the demand for skilled labour increases much faster than for
unskilled labour in case of services exports.
„ Opportunities are likely to increase for unskilled labour in the
long run due to higher growth of the economy.
„ The government’s role should be to remove impediments to
upward mobility of unskilled labour. These policies might also
improve the country’s overall services quality in the long run.
„ Education, training, skill development programmes, among
others, can prepare individuals better for upward income
mobility.
„ In essence, the government has to keep investing in human
capital in order to sustain the services-led growth in long run.

26/12/2007 19
Future research agenda
„ Future research exploring causality and linkage between
IT-led (and ICT export) service sector growth and
poverty reduction need field surveys on urban-based IT
sector growth.
„ On the basis of primary surveys, one can look into the
composition, workforce and its dimensions, output and
its sales markets, wage structure, etc. of some important
IT and IT-BPO companies in India.
„ Combining the findings of this survey with secondary
data, one can then lend support to the hypotheses we
have framed in this paper on IT sector’s growth and
poverty alleviation.

26/12/2007 20