An alternative export strategy 

News: In a recent interview Raghuram Rajan, the former governor of the Reserve Bank of India, has suggested that India should focus primarily on exports of information technology-enabled services (ITeS) along with professional services such as consultancy, legal, medicine, accounting, etc. 

What are the problems associated with making service export as the mainstay of India’s export strategy? 

Unemployment- Professional services involve skill-intensive jobs, and thus they may not provide a solution to the difficulty of rising levels of unemployment and underemployment among low-skilled workers. 

Unequal Growth-  An expansion of high-skill professional activities will only lead to a relatively greater demand for the more qualified consultants and professionals, further aggravating the unequal, K-shaped recovery pattern that has been evident during the pandemic. 

Data Privacy- The necessary regulatory policies for liberalisation of the services include various issues. For instance: issues of data privacy, storage and localisation

Movement of Professionals- India’s predominant comparative advantage in the services sector has been its human capital. Thus this has been the single most important factor for India’s prolonged and often stalled services sector negotiations in preferential trade agreements as well as at the WTO Doha Development Agenda.  

What is a better alternative? 

India may actually consider focusing on services that are an integral part of manufacturing sector exports, and hence adopt an integrated approach to its services sector exports. This will include putting emphasis on employment-intensive services supporting manufacturing activity. 

This approach has been in use globally and is widely referred as “servicification” and/ or “servitisation” of manufacturing where services are increasingly exported as “embodied” and “embedded” in manufactured goods and processes. The United Nations Conference on Trade and Development or UNCTAD observes that for a select set of economies when services within manufacturing are considered, the services sector value addition to overall exports is close to two-thirds. 

Recent literature on the subject provides evidence of such services contributing to higher manufacturing sector productivity, export capabilities and employment.  

What will be the factors that can hinder such a policy’s smooth implementation? 

Rail freight and distribution services are among the most employment intensive sectors, but remain relatively more restricted in India. Undue restrictions in services supply and discriminatory regulations on foreign entry have been found to limit the positive economic gains from these services. 

Reforms and further liberalisation towards creating a facilitative regulatory framework for private/ foreign ownership and participation in these sectors will lead to not just enhanced services, but also to manufacturing productivity. 

What is the way forward? 

So, it is essential that India’s export strategy views services as an integral part of manufacturing. This will provide multiple benefits like enhanced productivity, manufacturing competitiveness, export and employment. 

Source: This post is based on the article “An alternative export strategy” published in Business Standard on 10th March 2022.