N. Ramakrishnan

Chennai, March 5

ONE reason for the growth in the services sector in India is the liberalisation in the regulatory framework that gave rise to innovation and higher exports from the services sector. Ultimately, improvements in the services sector will drive changes in the manufacturing sector, feels Mr Geza Feketekuty, an American economist.

However, he says, the governments - both the Union and States - should do a better job of communicating the benefits that growth in the services sector have brought to the economy.

In an interaction here on Friday, Mr Feketekuty, President of the Arlington, Virginia-based Institute for Trade and Commercial Diplomacy, emphasised that governments in States such as Tamil Nadu, which have seen tremendous boom in the services sector, should spread the word in the countryside. A criticism of the services sector growth that it was confined to the low skill jobs was not true, he said and pointed out that high skilled jobs such as high-end business process outsourcing, research and development laboratories and software development were happening. Of course, initially, such high skilled jobs would be found only in the cities whereas low skilled jobs like data entry operations would be available in the rural areas. However, a number of manufacturing facilities had come up in the rural areas, which generated jobs, he said.

Asserting that liberalisation in regulations governing the manufacturing sector, like those relating to labour laws, was necessary for driving growth in the sector, Mr Feketekuty said the relaxation in labour laws had to be followed up with assistance to those workers who lose jobs to either get other jobs or training in skills that will help them find employment elsewhere.

He said a better job needed to be done in collecting real examples of growth so that the rest of the country could understand that the growth in services could spread to other parts of the economy. A problem with the manufacturing sector was that in many areas there was no framework where manufacturers could innovate and take risks. A World Bank study, he said, had shown that it took twice as many days in India to start a business compared to China - 88 days to China's 44. Also, the cost of starting a business as a percentage of per capita national income was 50 in India and 14 in China. This meant that it was much cheaper to start a business in China than in India.

What drives changes in manufacturing are the technology inputs and design changes that come out of research and development laboratories that made this process attractive. Another key change was that because of the move towards automation, there was need for fewer unskilled workers and more skilled workers, which called for more training programme. "That is why I say services will drive manufacturing," said Mr Feketekuty, who is also a professor at the Monterey Institute of International Studies.

Mr Feketekuty, who served for more than two decades in the Office of the US Trade Representative, said the regulatory framework in India had gone further in services than in manufacturing. The process of opening up competition in manufacturing had been slower and manufacturing had lagged because of the slower reform process.

He advocated a shorter lead time for companies to start a business and a reduction in the cost and time that companies need to spend on filling up forms. "It does mean you do not regulate, but you need different kind of regulation," he said.

He said there would continue to be protests against outsourcing, but at the end what mattered was what happened on the ground and not what was said. Manufacturing outsourcing would also increase. It might not necessarily mean loss of jobs in the US, but transfer of jobs from Japan and China to India. However, this would also result in more pressure on India to open up its markets to American products and services.

On the World Trade Organisation and increasing number of regional trade agreements, Mr Feketekuty said regional trade blocs created agreements of the kind that could be taken to a global level and also help overcome some of the political pressures at the regional level. They would also result in pressure for further change at the global level.

All this would take time, he said and pointed out that successive multilateral rounds of negotiations took a longer time than the preceding one. For instance, he said, the Uruguay round started in 1986 and ended in 1995. "We are now only in Year five of the Doha round."

There had been valuable progress made with regard to the Doha round on agriculture and not much on manufacturing and services. However, the participants would realise that only this much could not be done on agriculture after which focus would shift to manufacturing and services.

(This article was published in the Business Line print edition dated March 6, 2005)
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