In a surprising turn of events, India’s thriving service export sector has experienced a temporary setback after a year of remarkable growth. The growth rate of service exports surged by an impressive 26.7% in FY 2022-23, a feat that was once considered unimaginable. Even in the last four months of the fiscal year, this sector continued to expand. However, the recent data for August shows a 0.4% contraction in service sector exports, reducing the total to $26.39 billion.
While merchandise exports (the export of goods) have faced a seven-month decline, the high performance of service exports, though smaller in terms of value, has been contributing significantly to bridging the trade deficit. Un-fortunately, in August, there were concerns about the potential widening of the current account deficit for the second quarter (July-September).
Nevertheless, there is still hope on the horizon for exports. The decline in outbound shipments of goods has moderated to 6.86%, a substantial improvement from the double-digit contractions observed in previous months. In August, exports reached a three-month high of $34.5 billion, while imports of goods declined by 5.23% year-on-year to $58.64 billion. Although this figure was 10.85% higher than July’s imports, the trade deficit for August, at $24.16 billion, remained only 2.8% lower than August 2022 levels (source: The Hindu, 16th September). Adity Nayar, Chief Economist and Head of Research at ICRA, pointed out that the sharp increase in imports in August had led to the trade deficit reaching a 10-month high. Consequently, India’s current account deficit was expected to widen in the second quarter, moving beyond the $10-12 billion range initially anticipated for the first quarter.
A Key Factor Behind Low Goods Exports:
One significant factor contributing to the slowdown in goods exports has been the decline in petroleum prices. It is worth noting that despite a 27% decrease in prices compared to the previous year, the actual volume of petroleum product exports increased by 6% during April to July of FY 24 (source: The Hindu, 16th September). Additionally, 13 commodities, comprising approximately 23% of India’s exports during this period, witnessed an increase in volumes despite a decline in the value of shipments. This suggests that demand for exports has not waned significantly.
Why India’s Service Sector Exports Offer Promise:
Many experts believe that the growth of the service sector in India may continue to hover around 25% in the coming years. This optimism is rooted in the abundance of young, tech-savvy talent in the country. India boasts a growing number of qualified software specialists and engineers with high-quality computer skills. The widespread availability of internet access has enabled substantial digital job opportunities in India. The potential for small services, including digital marketing, web development, and SaaS products, holds the promise of driving high growth in service exports.
Srivatsan Sridhar, the Founder and CEO of Skydo, a cross-border payments platform, highlighted the expansion of the IT services category, which con-tributes 45% of total services exports. He also emphasized the role of business services, such as accounting, auditing, quality assurance, research and development, management consulting, and the development of digital and artificial intelligence capabilities, which account for 25% of services sector exports. Sridhar noted that business services
were bolstered by Global Capacity Centres (GCC) or captive technology facilities of major global corporations, primarily situated in India. India currently hosts around 1,500 GCCs employing 1.3 million workers, with approximately 45% of all GCCs worldwide located in India. This sector has been growing at nearly twice the pace of software services, owing to the abundant pool of skilled workers in India available at a lower cost.
The Crucial Factor Behind India’s Service Export Success:
One of the most crucial structural factors behind India’s success in service exports has been the disaggregation of service value chains. Neelkanth Mishra, Chief Economist at Axis Bank, pointed out that services, like goods, are increasingly being broken down into multiple parts that can be delivered by different individuals or firms from different locations. This trend mirrors what has been observed in the value chains of goods over the past few decades. Furthermore, Mishra highlighted that many services, including high-end strategy consulting, can now be carried out remotely from virtually anywhere in the world, making India an attractive destination. He stressed that this shift in job dynamics is no longer solely about India’s lower costs but increasingly about skill arbitrage. As an example, Mishra cited the need for more designers and engineers in the electric vehicle sector, a demand that India is well-equipped to fulfill.
In conclusion, while India’s service exports may have faced a temporary decline, the overall outlook remains positive. The resilience of the service sector, driven by factors such as a tech-savvy workforce, widespread internet access, and a growing demand for digital services, is expected to continue driving growth. The structural shift in service value chains and India’s competitive advantage in skills and cost position it as a promising player in the global service export market. With these factors in play, it is likely that service exports will rebound and become a cornerstone of India’s export economy once certain obstacles are addressed.