Will a services exports-driven economic growth strategy work for India?

Context: India’s service exports have lagged the outbound shipment of manufactured items, though the gap between the two was narrowing immediately before Covid-19 struck.

Why should India adopt a service exports-led growth strategy for India instead of China’s model of manufacturing exports-led growth?

According to the data provided by the World Trade Organization (WTO), India’s share in global services exports is more than its global merchandise exports. Service exports stood at 4.12% in 2020 compared to share of 1.57% in global merchandise exports in 2020.

Share of manufacturing in India’s GVA is low. It is in the range of 15-17% since 2014-15.

It is difficult to adopt the China’s strategy in a democratic India: Due to difference in economic environment and the nature of polity in India and China, experts have argued against China’s model. It is because China did so by suppressing wages, consumption, keeping borrowing costs low by lowering interest paid to households etc.

Broadened scope of services-export: Pandemic has broadened the scope for India in the export of services. For example, IT-related services can be advanced to other areas such as education, health, legal services (for instance, the Indian law firms can start setting up international offices and advise on the Indian laws sitting in other countries) etc.

Merchandise exports remain susceptible to cyclicality in commodity prices. Therefore, services exports can reduce the pressure on merchandise exports of India to provide jobs as well as foreign exchange inflows.

What are the challenges in service exports?

Job Creation: It is doubtful whether a service export-led growth model would add millions of jobs needed by the economy. Even in the developed countries, the bulk of jobs are not created in service sector like doctors, etc. These are created in restaurants, etc.

Widening of the services export: Until the Indian regulator allows foreign firms to set up in India, it is difficult to boost the Indian export of legal services.

the regulatory regime for legal services requires a number of fundamental changes. For this, the suggestion of legal fraternity can be taken.

Way Ahead

Both, the services and the geographies which require them need to be identified, and the two should be mapped.

India can focus on various services export like legal services, financial advisory, education and telemedicine that can be exported using technologies and where India also has intellectual capabilities.

The making inroads into financial services can also help in the internationalisation of the rupee.

The Indian government need to bring measures to protect privacy of data, reforms its education system etc.

Source: The post is based on an article “Will a services exports-driven economic growth strategy work for India” published in the business standard on 14^th march 2022