In post-Covid world, services will recover fast

Sonia Pant | Updated on November 05, 2020

Surge in | Remote work must be tapped   -  Getty Images/iStockphoto

A V-shaped come-back is possible, especially in IT and ITeS services, if supported by certain regulatory reforms

Rise in the Purchasing Managers Index (PMI) for both the manufacturing and services sectors has brought good news in the festival season, indicating greenshoots of economic recovery after the pandemic-induced lockdown. Recovery paths, though, are not even. Data show that the PMI for manufacturing rose to 58.9 in October, the highest since January 2012, whereas the PMI for services rose to 54.1, first time above 50 (no change mark) this year. Private sector employment, however, continued to decline in both sectors. This signifies faster normalisation of activities in manufacturing than services sector.

Business analysts have predicted a V-, U-, W- and even an R-shaped recovery curve for the manufacturing sector. Some observers have said that the services sector is likely to see an L-shaped recovery, that is, a long period of low/stagnant growth before services activities come back to pre-Covid levels.

Several services such as travel and tourism, hotel and hospitality, aviation and transport, and personal services that require face-to-face interaction among producers and consumers are unlikely to recover in the near future due to the pandemic-induced shock. The projected slowdown in domestic and global demand will further impede the L-shaped evolution of demand for these non-storable yet tradeable services.

Unlike goods which are relatively homogeneous, services are heterogeneous in nature. The diverse group of activities which constitute services include high-technology, knowledge-intensive sub-sectors such as ICT, financial, telecommunication and business services as well as labour-intensive, low-skill areas such as personal services (hair cutting), services related to travel and tourism, rental, entertainment (cinemas, theatres) and fitness.

Physical proximity

The key feature of labour-intensive services is that these require physical proximity to be produced and consumed and cannot be stored. Such services will bear the brunt of the demand slowdown as we rebuild our economic interactions in the post- Covid world of physical distancing.

Nevertheless, Covid may actually throw open an opportunity for high-technology, knowledge-intensive services. The demand and supply shock due to Covid has encouraged and will continue to encourage remote and tele-intermediated interpersonal interactions. These interactions are the bedrock of such services. And given India’s comparative and competitive advantage in IT and ITeS services, Covid may well end up increasing our share of trade in services.

Globally, the manufacturing sector is moving closer to the home market. This re-shoring of production is likely to get stronger due to the pandemic. Consequently, the future of globalisation is expected to be determined less by goods and more by services. According to the WTO, exports of services amount to about a fifth of all trade. This figure increases to about half if we consider value-added data. The WTO’s TISMOS database shows that global trade in commercial services was $13.3 trillion in 2017 and trade in services expanded by 5.4 per cent every year on average since 2005, faster than the 4.6 per cent yearly expansion of trade in goods.

In the aftermath of the pandemic, trade in digital services may expand even further due to spurt in investment in remote working. Firms have now realised the potential of remote-work. Prof. Baldwin of Graduate Institute in Geneva points that in the post Covid employment landscape, firms will use remote intelligence like telemigrants and artificial intelligence like white-collar robots to reduce expenses.

India can take advantage of this opportunity by offering low-cost and competent tele-migrants to replace a large portion of middle-level skill jobs globally. India’s IT sector is often cited as one of the most successful example of remotely provided services. However, to leapfrog to the next level, the sector needs certain regulatory reforms. The Personal Data Protection Bill, 2019 is one such step in the right direction. This Bill seeks to provide protection of personal data of individuals, and establishes a Data Protection Authority for the same.

The Bill is presently with the Parliamentary Standing Committee and the report of the Committee is awaited. We may also need to take a fresh look at our competition law framework. Globally, the competition regulators are rising up to the challenge of adverse impact of big data oligopolies that want to determine consumer behaviour at all levels.

The 500/600-million Indian consumers constitute a large and lucrative market for the international data giants and our consumers need to be protected against the possibility of abuse of dominance in the data and digital space. This becomes especially important when these international oligopolies start to collude with domestic giants. Alongside, we also need to promote and develop home-grown champions in the IT and ITeS sector to tap the opportunity arising out of the surge in remote work. We also need to proactively think about bringing in much-needed reforms in other services such as education, health and professional services as well, if we want to quickly capture the opportunity in the services domain.

While domestically we need to augment our regulatory and production capacity in the IT sector, we need to be cautious in participating in international rule-making at the WTO until we have fully populated our regulatory space and levelled the playing field for domestic incumbents.

Clearly, the increased digitisation brought about by Covid will only help services trade. But the extent of that help depends on the response of the regulators, government and industry. This, in turn, will also determine whether the services sector will experience a L-shaped recovery or a V-shaped one.

The writer is from the Indian Economic Service. Views are personal

Published on November 05, 2020

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