Despite India’s significant 20 per cent share in global IT exports, its share in other crucial services sectors is limited. This article explores the lesser-known aspects of India’s services exports, underscoring the untapped potential outside the IT industry.

Unlike goods that are shipped or flown, services can be delivered in four distinct ways, referred to as modes. Mode I involves services being transmitted from one country to another through the internet or phone calls, without requiring either the consumer or provider to travel. Mode II occurs when consumers or firms from one country use a service located in another country. In Mode III, a service provider sets up a business in a foreign country to offer services locally. Lastly, Mode IV covers situations where professionals travel from their home country to another country to provide their services. An estimated 70 per cent of Indian services exports are digitally delivered over internet as Mode I services.

Rise of India’s services trade: India’s services exports have grown significantly since 1991, when they were just $5 billion. This growth was initially sparked by the recognition of Indian IT expertise during the Y2K crisis, where thousands of Indian engineers used COBOL to address issues for global firms. Following the advent of the Internet and digitisation, India’s IT sector surged, with exports reaching $52 billion in 2005 and $117 billion in 2010 — the first year India’s services exports surpassed its imports. By 2023, India became the 7th largest global services exporter, capturing a 4.4 per cent market share with exports worth $344 billion against imports of $247 billion.

Over 80 per cent of India’s IT services are delivered digitally, which aligns well with the global trend, where digitally delivered services are the fastest-growing category. These now represent $4.25 trillion, or 60 per cent of all services delivered through cross-border supplies.

Sectorial performance: To assess the performance of India’s services sector, we need to compare India’s share in global services trade by sector. The Table provides these details.

The software and IT services sector (Category name: ‘Telecommunications, computer, and information services’) contributes $150 billion, making up half of the country’s total services exports. About 80 per cent of these exports are delivered digitally via the Internet. Fields like generative AI, machine learning, big data, and the Internet of Things expand opportunities for Indian software exports.

The next significant category is ‘Other Business Services’, which includes business and management consultancy, engineering services, and R&D, among other technical services. This sector contributes $80 billion, or about a quarter of India’s services exports, and holds a 4.2 per cent share in global exports in this category. The growth in this sector is mainly driven by the rise of Global Capability Centres (GCCs) in India.

India is home to about 1,500 GCCs, primarily in major cities such as Bengaluru, Hyderabad, Pune, Chennai, Mumbai, Gurgaon, and NOIDA. Major companies like Microsoft, Google, IBM, GE, Walmart, JP Morgan, Goldman Sachs, HSBC, Siemens, and Intel have established GCCs in India, focusing on IT, finance, R&D, and business process management. GCCs are evidence of India’s growing share in high-skill services exports.

Low participation in the significant revenue-earner sectors: This is the crucial reason for India’s below potential export performance in the services sector. To explain this, we can divide the world services exports into two categories:

Category A includes Software ITeS and other business services, where India has a high 9 per cent global share. This category accounts for 36 per cent of global services exports and 73 per cent of India’s services exports.

Category B includes all other services not covered in Category A. India’s global share in these services is only 1.9 per cent, even though they represent 64 per cent of world services exports. Their share is a low 27 per cent in India’s services exports.

Major Category B sectors with high world trade but low India’s share include Transport and Travel (2.4 per cent), Maintenance and Repair Services (0.24 per cent), Insurance and Pension Services (1.38 per cent), Financial Services (1.30 per cent), and Charges for the Use of Intellectual Property (0.23 per cent). The figures in brackets indicate India’s global share in each respective category.

Five needed actions

Address limitations of IT exports. Despite its strengths, India’s IT sector faces several challenges. It earns over 70 per cent of its revenue from the US, making it susceptible to protectionism and stringent data security regulations. Automation and AI also pose a risk to 40 per cent of IT jobs. Moreover, competition from countries like the Philippines is impacting the ITeS sector’s revenue. There is an urgent need for upskilling within the sector to adapt to AI-led developments.

Focus on Category B services such as Tourism and Hospitality, Medical Value Travel, Transport and Logistics, Accounting and Finance, Audio Visual, Construction and Engineering, Environmental Services, Financial Services, and Education Services.

Establish regulations for digital businesses to manage the dominance of US firms like Google, Facebook, Amazon, and OpenAI and to create opportunities for local companies to expand.

Promote the growth of the manufacturing sector. This will increase demand for engineering, design, AI, IoT, and robotics services.

A significant challenge in the sector is the need for more detailed data. The RBI publishes total services earnings under various headings. However, the RBI does not release detailed bilateral or mode-specific transaction data. It’s puzzling how the RBI can publish comprehensive services data without robust bilateral data. The Goods and Services Tax Network (GSTN) holds detailed information, yet this data still needs to be made available to the public. Without data, all we get are starry-eyed reports sans rigorous analysis.

India must work on above strategy to realise the true potential of its services exports, which extend well beyond its established IT sector.

The writer is founder of Global Trade Research Initiative