Integrating Indias Service Sector with the Global Economy -An Overview of the Services Sector National Consultation Services 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 Indias competitive edge in professional services is compared with Chinas 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

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 Indias 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

The Evolution of the Sectors Compared..

Services: Before and after Liberalization Before liberalization Services was the residual sector drawing refugees from agriculture Between 1996 and the triple impact of Indias 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 Indias 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 Indias 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. Chinas better infrastructure facilitated entrepreneurship in the manufacturing sector.

Employment Share of Services

Growth of Services An important feature of Indias 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 1990s

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

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

Sector-shares

IT and ITES Sector

Importance of this Sector Indias 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

IT and ITES Export Trends

Service Export Cross-Country Comparions

India's IT and ITES Exports Indias services export boom took off around 1997 has continued to grow despite the Asian currency crisis that affected the other major service exporters. Indias 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. Indias 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. Indias share of the worlds export market for services has also increased rapidly in the recent years

Cross-country Comparisons

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 worlds imports of services net of travel and transportation, more than any other emerging economy.

Share of Imports nte of Transport and Travel

Revealed Comparative Advantage

Position and Trajectory of India's Service Exports If one traces Indias 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 90s.

Trajectory of Competitiveness

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..