INDIA

FASTEST GROWING
FREE MARKET DEMOCRACY

SERVICES

Why service exports could overtake

merchandise trade by 2007

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Why service exports could overtake merchandise trade by 2007

India’s service sector accounts for 52 per cent of GDP, making it the most
formidable component of the country’s economy. Now, there are visible
signs that even internationally, the service sector could soon emerge as the
country’s beacon.
The service sector’s recent contribution to India’s international trade effort
is evident from the fact that the ratio of external trade in goods and services
to GDP has climbed to 41.5% in 2004-05 from 31.3% in 2003-04. An
extrapolation of Reserve Bank data by India Brand Equity Foundation in fact
shows that service exports could topple merchandise exports in the
medium term.
The service sector’s The projection
recent contribution Here’s how. India’s service sector exports in 2004-05 (April-March)
to India’s interna- amounted to US $ 51.33 billion. Merchandise exports stood at $ 80.83
tional trade effort is billion. In contrast, three years ago, in 2001-02, merchandise exports were
evident from the fact at US $44.70 billion and service exports, at US $ 17.14 billion—a mere third
that the ratio of of the present sum. This translates to a growth of 81% for India’s
external trade in merchandise exports over the last three years, and 200% for its service
exports. Clearly service exports have galloped while merchandise exports
goods and services to have merely grown, albeit at a robust pace.
GDP has climbed to
41.5% in 2004-05 Now consider the scenario in the medium term. IBEF has estimated that if
the average annual growth rates of the last three years – 56.3% for service
from 31.3% in 2003-
exports and 21.8% for manufacturing exports – were projected into the
04. future, by the beginning of 2007, services could topple merchandise goods
at the pole position in exports.
If the current pace of growth is sustained, services could bring in US $ 124
billion in foreign exchange revenue in 2006-07 while merchandise would
collect only about 117 billion. The story that unfolds is this: in less than two
years, India’s exports would be led by services not just in growth rates but
also in absolute numbers.
This is in line with India’s broader growth pattern and its transformation
from a developing country into a major economic powerhouse. In all
developed economies, services sector dominates others.
Now this trend has started taking shape in India. According to a 2003 IMF
study, if the current pace of growth is maintained, then by 2010, the share
of services would increase to 58 percent. This would bring the size of the
India’s services sector, relative to GDP, closer to that of an upper middle
income country.
In fact, the average growth rate in services exports in the recent past would
have been even higher but for the US economy’s slowdown effect felt by
exporters, in the aftermath of the 9/11 tragedy. If the future projection
were to ignore this dip, the growth rate of services sector would be even

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Why service exports could overtake merchandise trade by 2007

higher. In fact, service sector exports could vastly improve if India manages
to capture substantial share in the two large economies besides the US –
Japan and Germany – where growth rates have been firming up.
KEY SERVICE SECTOR DRIVERS
Software and ITES
Software and ITES segments constitute the key drivers of the services sector
growth. IT-ITES businesses recorded a 34.5% growth in exports, clocking
revenues of $ 17.3 billion in 2004-05, as compared with export revenues of
USD 12.8 billion in the previous year. Even within these sectors, there has
Software and ITES been a churning. While continuing to lead in traditional segments, Indian
vendors are gaining ground in newer services such as packaged software
segments constitute implementation, systems integration, network infrastructure management
the key drivers of the and IT consulting. ITES segment, in particular, retains a huge untapped
services sector growth, potential and given its small base, the segment will post even higher growth
recording a 34.5% rates in the future. Apex industry body NASSCOM expects that by 2008-09,
growth in exports, India’s IT and ITES exports will have crossed $ 50 billion.
clocking revenues of $ Beyond software and ITES, three other sectors are likely to fuel the boom in
17.3 billion in 2004-05, services exports – Entertainment, Education and Travel & Tourism.
as compared with Entertainment
export revenues of The entertainment industry is basically an intellectual property-driven sector
USD 12.8 billion in the with small to large players spread across the country. It covers film, music,
previous year. broadcast, television and live entertainment. The segment, with export
earnings of about $ 230 million annually, is expected to grow by 70 to 80%
over the next 5 to 10 years, a 2004 survey by industry body FICCI.
Education
Education has been a steady foreign exchange earner with NRIs and foreign
students enrolling in medical and engineering colleges in India. But the real
opportunity for India has only just emerged: Education Process Outsourcing
(EPO). Imparting education, training and coaching through Internet are
expected grow by over 100% in the next five years, according to FICCI.
The US is expected to be the biggest consumer of EPO. One of the main
election planks of US President, George Bush was the No-Child-Left-Behind
plan. The US Administration has started outsourcing of education services to
private entities within the US. As these US entities are hard pressed to
generate resources, there could be a massive drift to outsourcing outside
the US, over the next 12-18 months purely on the grounds of lower costs.
After all, the billing rate for a US education service provider (ESP) is about
$25 an hour, while in India it is $12.
Travel & Tourism
Another sector that is creating critical momentum to service exports
growth is travel & tourism. In 2002-03, foreign tourism into India grew by a

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Why service exports could overtake merchandise trade by 2007

mere 5.6%. However, in the subsequent two years, the segment’s revenue
inflow moved up steeply by 25% and 22%.
During 2004, India breached the three million mark and the number of
foreign visitors who came to this country was pegged at 3.37 million, an
increase of 23.5 per cent over 2003. This growth rate has been sustained in
the first seven months of 2005 as well, with foreign exchange earnings
pegged at US $ 3.2 billion.
But for unforeseen global disasters that dampen travel trade worldwide, it is
likely that this segment will post 20% plus growth rates in the coming years,
riding on a combination of more incoming flights, new tourism
“India is projected to infrastructure, and sectoral incentives like special visas for medical tourists.
have the second
fastest growing tour- “India is projected to have the second fastest growing tourism sector of any
country in the world over the next 10 years,’’ said Rodrigo de Rato,
ism sector of any managing director of the IMF during a speech in March this year.
country in the world
over the next 10 Service export boom: the macro trend
years,’’ said Rodrigo One reason why merchandise exports are taking a backseat is the price
de Rato, managing pressures building up in global markets, thanks to China. Consider exports
director of the IMF of gold jewellery. They have increased significantly in recent years, but in
during a speech in value terms, the export business has been constrained by price pressures.
China has only about 0.02 million people working in the industry, compared
March this year. to India's well over a million. India’s exports aggregated to US $11.2 billion in
2004-05, as compared with around only US $1 billion by China. But China
with its modern and automatic factories is in a position to manufacture
jewellery at highly competitive prices, and this has begun impacting pricing of
India’s jewellery exports.
On the other hand, the service sector has suffered from no such handicap so
far.
The convergence factor
Meanwhile, segmentation between manufacturing and services is becoming
less rigid. There is a growing synergy between the two segments, making
India specialise in skill intensive products instead of mass produced.
According to one recent estimate, 50-60% of all industrial output was based
on the use of information, a key reason for the growing competitiveness of
industries like pharmaceuticals and engineering products like auto parts.
There is a great advantage in exports being led by services. While integration
with the global supply chain through the manufacturing exports route
subjects a country to high risk for even mild cyclical fluctuations, services
sector could more easily withstand shocks and target other export
destination bases in Asian, European and Middle East markets.

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between the Ministry of Commerce, Government of India and
the Confederation of Indian Industry. The Foundation's primary objective
is to build positive economic perceptions of India globally.

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