Integrating India’s Service Sector with the Global Economy-An Overview of the Services Sector

National ConsultationServices Trade and Domestic Regulation in India

New Delhi, Thursday, November 29, 2007

Dipankar Sengupta

University of Jammu

Debashis Chakraborty

Indian Institute of Foreign Trade

Pritam Banerjee

George Mason University

Overview and Recent Developments

India seen in last 10 odd years as the emerging professional services hub of the world India’s competitive edge in professional

services is compared with China’s prowess as a low cost global manufacturing hub

the services sector scenario in India is complex characterized by uneven development in

different types of services and across regions

Overview and Recent Developments

Viewed from a global perspective- growing importance of the services sector within the Indian economy is not exceptional India is a large emerging economy - extremely

heterogeneous - possesses an advanced industrial and human capital base relative to other developing countries

A comparison of services/gdp shares

0

10

20

30

40

50

60

70

80

Se r vice s as s h ar e o f GDP in 2005

A comparison of services/gdp shares..

The share of services for GDP in India is similar to Russia, Mexico and Brazil economies with levels of per capita income similar to India

tend to have a lower share for services in their economies India’s structural distribution between agriculture, services

and manufacturing is similar to middle-income economies (such as Brazil and Russia)-not surprising per se.

India has a very large and diverse economy - technologically advanced relative to other developing countries with similar per capita incomes- sheer size of the Indian economy and its relative sophistication demands a greater amount of transactions that require support services such as finance, transport and professional services

Services as a share of GDP over time

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

India

30

35

40

45

50

55

60

65

70

75

80

Se r vice s as % o f GDP

The Evolution of the Sectors Compared..

Percent GDPAgriculture Industry Services

1960 58 15 281980 38 24 381990 33 27 412000 24 27 49

Services: Before and after Liberalization Before liberalization Services was the residual sector drawing

refugees from agriculture Between 1996 and 2005- the triple impact of India’s external

liberalization, domestic economic reforms and the rise of a global market for skilled services facilitated by information technology makes itself felt, share of services in India’s GDP grew from just over 40% to about 54%.

Rapid growth of services in the economy, esp. in the external sector- also facilitated by the fact services enterprises required lesser capital for start-up - less dependent on the India’s relatively poor infrastructure than manufacturing. China, which has a far higher proportion of its economy in

manufacturing, and has emerged as the global hub for labor intensive manufacturing, has much better infrastructure than India. China’s better infrastructure facilitated entrepreneurship in the manufacturing sector.

Employment Share of Services

% Share of NationalEmploymment in Services

1965 18.11980 18.91990 24.42000 23.5

Growth of Services

An important feature of India’s growth - skewed towards services -described as jobless growth

Share of agriculture in the Indian economy declined rapidly

Share of employment in agriculture has remained the same- increasing share of services in the GDP has not been accompanied by services claiming a larger share of employment in the decade of the 1990’s

Growth in Services

growth in output in services in India in recent times has mostly come from the rapid development of skill intensive services in the IT and professional services segments- oriented towards the external market large proportion of services in India are a part of the informal

economy and the official employment figures might understate the actual size of the services workforce

there is a lot of cross-over between services and agriculture sector laborers, i.e. many workers spend part of the year as agricultural workers and the rest of the year working in some service job such as informal retail and construction work

There has been some debate on the repercussions of this skill biased development of service sector jobs

Regional Dimension

% Share of National GDP % share Agriculture % share Manufacturing % Share Services % Profess ional ServicesMaharashtra 13.80% 7.53% 15.89% 15.65% 14.55%Andhra Pradesh 9.59% 11.04% 8.45% 9.35% 11.71%Uttar P radesh 9.63% 14.57% 7.44% 8.33% 8.67%Tamil Nadu 7.85% 4.29% 8.27% 9.12% 8.60%W est Bengal 8.15% 9.48% 6.29% 8.17% 7.10%Karnataka 5.55% 4.60% 6.09% 5.77% 6.91%Gujarat 6.69% 6.12% 11.83% 5.43% 5.66%Rajasthan 4.47% 5.12% 4.27% 4.28% 5.39%Kerala 4.20% 3.00% 2.58% 5.14% 4.38%Delhi 3.62% 0.16% 1.92% 5.47% 4.29%Madhya Pradesh 4.46% 5.85% 4.59% 3.88% 3.64%Bihar 2.63% 4.17% 0.37% 2.69% 3.60%Orissa 2.35% 3.64% 1.96% 1.95% 2.31%Punjab 3.71% 5.99% 3.30% 2.93% 2.31%Assam 1.96% 2.72% 1.92% 1.68% 2.23%

Trends and Composition

Service Sector Output in 2006 (billions of Rupees)Total National Output (GDP) 26045E lectric ity ,Gas and W ater Supply 574Construc tion 1775Trade (W holesale and Retail)* 3698Hotels and Resturants* 350Transport (other than Railways) 1398Storage 17.7Communication 1030Bank ing and Insurance 1594

Trends and Composition

Growth in Services Uneven Star performer has been professional services that

include IT and IT enabled services (ITES) Services that serve as crucial inputs to workings of the

national economy (as support for agriculture and industry) have not developed as fast as hoped

Trends and Composition

Communication, construction and trade (wholesale and retail) showed some of the fastest growth rates in this period- average growth of IT and ITES sector in the same period was around 25%, comparable to the high rates logged by communication services.

Banking and insurance, electricity, gas and water supply and storage have shown relatively slower growth trajectories Deregulation and domestic reforms in certain

sectors have been more dynamic than others-communication and transport have seen greater degree of positive reforms than banking and insurance, electricity supply etc.

Trends and Composition

Se cto r al Gr o w th in Se r vice s in In d ia

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2001 2002 2003 2004 2005 2006

Elec tr ic ity ,Gas and Water Supply Cons truc tion Trade (Wholesale and Retail)*

Hotels and Res turants * Transport (other than Railw ays ) Storage

Communication Banking and Insurance

Sector-shares -2000-2006

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Electricity,Gas and Water Supp ly

Construction

Trade (Wholesa le and Retail)*

Hotels and Resturants*

Transport (other than Railways)

Storage

Comm

unication

Banking and Insurance

Service Sector share in GDP: 2000 and 2006

2000 2006

IT and ITES Sector

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006

T otal IT and IT E S Output IT and IT E S E xpor ts

Importance of this Sector

India’s boom in services export-almost entirely attributable to the IT and ITES sectors India has emerged as a prolific exporter of IT

and ITES services in recent years IT and ITES exports grew by 485% between

2000 and 2006-output of IT and ITES grew by 339% in the same period

Destination is US folLowed by EU

Direction of IT & ITES Exports

% of E xpor ts

68

22.6

7.4 2

USA (and the Amer icas) E ur opean Union Asia and P acifi c Gulf States

IT and ITES Export Trends

0

10

20

30

40

50

60

70

80

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

RBI (BoP ) WTO/World Bank

Service Export Cross-Country Comparions

Average Annual Growth in Services Expor ts: 1991-2006

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

W orld China India United S tates

India's IT and ITES Exports

India’s services export boom took off around 1997 has continued to grow despite the Asian currency

crisis that affected the other major service exporters. India’s services destination was primarily the US and it was geared towards the Y2K related IT work, the demand for which remained independent of the Asian crisis.

India’s growth dipped after 2000 as the demand for IT work post Y2K slowed down and the internet based IT bubble burst in the US-took off again around 2002 as the ITES sector matured Indian companies stated becoming trusted partners

of major US and EU based IT sector companies

By 2004 India was displaying far higher growth rates in terms of services exports compared to the world average and that of China. India’s share of the world’s export market for

services has also increased rapidly in the recent years

Cross-country Comparisons

Sh ar e o f Glo b al Se r vice s Exp o r ts

0.000%

0.500%

1.000%

1.500%

2.000%

2.500%

3.000%

3.500%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Brazil China India Mexico Russian Federation

Sh ar e o f W o r ld Se r vice s Exp o r ts Ne t o f T r ave l an d T r an s p o r tat io n

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

B razil C hina India M exico R ussia

Service Imports

Services Imports

0

10

20

30

40

50

60

70

80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Service Imports

Over the last 15 odd years India has become an increasingly important importer of services, above and beyond the import of services related to transport and travel that every economy has to import

India now imports a large variety of services such as banking, education, technical consulting etc.

India accounted for less than 0.3% of the world share of services imports in 1990 In 2006 India accounts for more than 3% of the

world’s imports of services net of travel and transportation, more than any other emerging economy.

Share of Imports nte of Transport and Travel

Sh ar e o f W o r ld Im p o r ts Ne t o f T r an s p o r t an d T r ave l: 1990-2006

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Brazil China India Mexico Russia

Revealed Comparative Advantage

Revealed Comparative Advantage of Commerc ial Services Exports*: 2006India 1.59United K ingdom 1.42Braz il 1.14United S tates 1.09Russ ia 0.78China 0.74Mexico 0.27*Net of Government Services, Transport and Travel

Position and Trajectory of India's Service ExportsIf one traces India’s increasing RCA over the last 17 years studies reveal that India overtook all the major emerging market economies in terms of RCA in services right from the mid to late 90’s.

Trajectory of Competitiveness

Re ve ale d C o m p ar at ive A d van tag e in C o m m e r cial Se r vice s (Ne t T r an s p o r t an d T r ave l) : 1990-2006

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Brazil China India Mexico Russia

Has the Services Sector Started to Influence the Rest of the Economy?

Should it? Glasmeier and Howlands (1994)- services as inputs to industry

enhance their productivity and leads to competitiveness Conjectures (subsequently corroborated) about services have

been prescient and comprehensive and have pointed out the organizational and institutional dimensions of certain services that enhance the ability of firms to adjust to fluid conditions (Marshall et al 1987).

Banga and Goldar-importance of services as an input to manufacturing has increased rapidly in the 1990s as compared to the 1980s- partly due to trade liberalization policies that were undertaken in the early 1990s onwards which in turn led to increased competition- the exciting possibility that instead of the services boom being undermined by demand not keeping pace, the industrial sector becomes increasingly service-intensive which in turns ensures that the upswing in the services sector continues

Summing Up..

The Transition in Services..