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Services exports have been the darling of the Indian economy, while the manufacturing sector for all rightful reasons remains the fall guy due to its perennial lacklustre performance.
The Y2K at the turn of the century brought about a phenomenal boom in India’s services sector. Around the same time internet communications became ubiquitous, and India leapfrogged successfully to services, skipping the prescribed and idyllic transition through product manufacturing to services. In the interim, India’s rank in global services exports increased from 22 in 2000 to 7 in 2017, largely at the behest of cost arbitrage.
However, there is more to this than meets the eye. India’s global services exports which have grown at a compounded annual growth rate of 6 per cent during the 10-year period 2008 and 2017, are increasingly facing competition from economies like Ireland which is home to many of the social media giants, and Thailand which thrives on tourism and IT based services.
While Ireland grew at more than 8 per cent, Thailand grew at 10 per cent during these 10 years. Interestingly, all three, India, Ireland, and Thailand are amongst the top 20 service exporters globally having increased their share in the last 10 years – the current share is 3.4 per cent, 3.3 per cent, and 1.4 per cent respectively for these economies in overall services exports.
IT domination
The point of concern is that India’s services export rests on the shoulder of the IT sector contributing around 40 per cent. Data shows that though India remains amongst the top five IT exporters in the world, its share globally has shown a decline which is worrying.
According to WTO, while India’s share in information and communication, technology (ICT) services exports globally weakened from 47 per cent in 2008 to 42 per cent in 2017, Israel which was behind India have overtaken and have become the world’s largest export source for ICT services. In fact, Israel’s share globally has increased by a whopping 16 per cent in the last 10 years, and today houses R&D centres of all major ICT companies.
A more surprising development in this space is the appearance of countries like Malawi and Ukraine in the top 10 ICT exporters globally in a matter of 10 years. Malawi’s and Ukraine’s share in global ICT exports has increased by a phenomenal 24 per cent and 17 per cent in these few years, and currently holds a share of 29 per cent and 19 per cent respectively in global ICT service exports.
These new developments in the global IT space is definitely a cause of alarm for India which has been the torch-bearer for so long, and would definitely look to retain it.
The apprehension is that over the years India has been providing maintenance services and coding at offshore and onshore locations. However things are changing and artificial intelligence, cloud computing, digital platforms, and mobile applications, are making inroads to customer needs. The Indian ICT firms have to become innovative to its global clients and find new solutions that will enable them to continue being an overall services export power.
The segment also faces market concentration risk primarily in the US and the UK, and any slowdown in these economies, impacts their revenues immediately. Slowdown in the US and Europe, escalation of trade tensions, and the recent US-India tiff off, could be a dampener for the software services exports for India.
In services cost is the pivot — unfortunately the domestic market is witnessing a cost escalation as wages are increasing, and in the overseas due to Trump’s visa policies the software companies have to hire locally which is costing 20-30 per cent more than hiring Indians — both these are eating into the margins. Diversifying operations to tier 1 and 2 cities would allow saving costs both in domestic and overseas centres. Besides, the appreciation in the exchange rate along with rising costs dampens attractiveness for Indian ICT service companies.
Being ahead of the curve and appreciating these latent changes would check India from losing competitiveness in global services export, particularly in ICT. The Budget’s focus on start-up culture and promoting R&D is perhaps one of the steps in the correct direction.
The writer is an Economist with EXIM Bank, India. Views expressed are personal
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