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    A case for boosting services sector over manufacturing

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    A case for boosting services sector over manufacturing

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    13 views6 pages

    At Your Service-JIMS

    Uploaded by

    Rajesh Narula
    A case for boosting services sector over manufacturing

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 6
    AT YOUR SERVICE - THE CASE OF INDIA’S SERVICES EXPORTS * Rajesh Narula economic growth in most countries of the world. In faci, the contribution of the services sector to the GDP of a country is an indicator of the maturity of its economy. In the US for example, services contribute as ‘uch a8 72% to the GDP. In Australia, its 70%, Similar is the case in most other developed countries ofthe world. S ervices are increasingly becoming important for In India, the servi€es sector, contributes neatly 54% to the GDP which is indicative ofa higher level economy. However, India is considered as a middle rung economy. This, dichotomy is due in part fo the splintering of some ‘manufacturing activities in the services sector. Moreover, the contribution of some sectors of services such as IT and ITES, skews the economy to the higher side. Services vs Manufacturing Nevertheless, the services sector is critical to’the future growth of our country. Some sections of our society have been concerned that india is overly emphasising the services sector at the expense of manufacturing, Their strongest argument in favour ofa manufacturing thrust is that since China, Taiwan, or some other $.B. Asian country has built up its economy on the basis of its strong manufacturing foundation, India should follow suit, They feel that the high levels of FDI attracted by these countries is due to their, thrust on the manufacturing sector, which has provided them the requisite base of competencies and economic support for their foray into services. Hence, the logic is that India should first lay a strong foundation in manufacturing before going into servi One should remind such protagonists that post-mortems can not serve as @ ground for new conceptions. The historical case of China or any other country does not provide a role model for India in the current scenario, for the following reasons 1) Our environment today is very different from that of China when it started its manufacturing blitzkrieg, For good ‘or bad, India is now part of a global village. It no longer has the luxury - or misfortune, depending on one’s perspective - of making decisions for its economy in isolation, and irrespective ofits role in the global economy. China is only now trying to establish itself in the WTO bandwagon and was pretty much isolated from the world earlier, when it allocated its resources to establishing, manufacturing capabilites. 2) China started attracting FDI only when it opened out in the late seventies, most of which was from Japan and Hong, Kong which have similar cultural interests and found @ captive market for their goods as well as a cheaper manufacturing base for their products. As China continued its liberalization programme and the size of its captive domestic market grew, FDI from the West also started flowing in, In contrast, India has neither the cultural proximity to developed countries which could invest here, nor does it have a huge domestic market and a substantive culture of consumerism that could support its investment in manulacturing or attract FDI. 3) Manufacturing today hes become highly capital and technology intensive. In order to be globally competitive, ost sectors of manufacturing require significant wvestment in sophisticated machinery, automated plants, information technology and advanced techniques and processes. For a country that is unable to ereate global brands for want of resources, it is difficult to imagine a sustainable journey in world class manufacturing. An + Rajesh Narula, Chief Value Creator of Micro-Marketers, a pioneering venture established by him in the field of outsourced marketing services, JIMS 8M, January - March, 2006 421 overzealous manufacturing thrust for India would therefore imply a debilitating capital investment at the expense of other sectors. It offers little scape of being amortized over the domestic market and would make exports uncompetitive. Altematively, India - like China - would also gamer a reputation for poor quality manufacturing using traditional manufacturing technologies and processes. 4) As most products reach the maturity stage of their lifecycle and markets in developed countries are reaching saturation, growth in manufacturing is being provided by product innovation and transformational technologies. Manufacturing is now being supported by demand from new product categories while traditional manufacturing, operations are becoming unviable. For example manufacturing plants in sectors such as automobiles, consumer electronics etc. arc being shut down across Europe, and America. Those that survive, are taking recourse to drastic cost cutting measures, including outsourcing of produetion. Thus production of automobite ‘components and non critical parts are being outsourced to cost effective countries. Consequently growth is coming from outsourcing services and consumer services in these traditional sectors '5) India’s strength lies in its human resources, An immense reservoir of educated, globally competitive people resources make it highly suited to providing services in he knowledge Share of S 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% > x w ices Value Added economy. An undue manufacturing focus would ereate a social divide, even while fis expected contribution to the ‘modem economy remains questionable. 6) India’s inherent characteristic make it ideally suited for a services thrust. An abundance of low cost labour, art English speaking population, an education system that is globally competitive and a time zone that is customized for the comfort of the Westem world, cteate an easy lure for “Served from India” hospitality. 7) Finally, it must be kept in mind that India has already missed the industrial revolution and the agricultural revolution, Let us not miss the knowledge revolution now: out of an egoistic attachment fo manufacturing. Contribution to The Economy Services on an average contribute 2/3rd to the global economy. In India, services contribute 54% to India’s GDP, and 25% to India’s total export. Share of Services Value Added in GDP (2000) World Service Exports and India’s Share (Source WTO) In fact, the emergence of India as one of the fastest growing economies in the world is due significantly to the rapid growth ofits services sector. If India’s overall GDP growth rate is taken at 6.5% then Services are growing at 7.5% while both Agriculture and Industry are growing below the s GDP. (2000) © B Services CO Agriculture Industry 122 JIMS 8M, January - March, 2006 GDP growth rate, at 5.5% and 4.5% respectively. The comparable global average growth rate of services is 5.6%, Where India Stands in Services Trade ‘Between 1996 to 2000 the revealed comparative advantage (RCA) index for services increased by 74 percent while that of goods declined by 15 per cent. ‘The increase in services was primarily on account of software exports (IT. and BPO sector), financial, management, consultancy and telecommunication sectors amongst others. With the longevity of the contribution from financial and telecom sectors in question, the onus is clearly on services exports to sustain the growth, Year | Toialworid | India’s | India's service exports | service | share in in Sbn exports | world in$ bu | services exports 1990 | 807.01 460 | 057 1901 | sages’ 490 | 0.58 1992 | 960.79 490 | 051 1993 | 943.40 soo | 0.3 1994 | 1082.63 600 | 087 1995 | 1192.99 630 | 037 1996 | 1250.00 700 | 0.56 1997 | 1313.43 880 | 067 ov | 1321.43 iio | 0.84 1999 | 1333.33 1320 | 099 2000 | 1435.00 v60 | 1.20 2001 | 1460.00 2040 | 1.40 2002 | 1540.00 20.70 | 1.30 Worldwide, services contribute 20% to the world trade accounting for USD 1.8 trillion. OF this The US, EU and Japan control a 2/3rd share of the market, India has a share of 1.4% of the world trade in services, which is higher than its share of 0.8% in the world trade in goods. India’s earning through services exports are estimated at $51 billion in 2004-05 which is a quantum leap from $25 Dillion in 2003-04, and $ 5 billion in 1993, India is ranked as the 2st largest exporter of services by WTO, and is ‘the world’s fastest growing services exporter, The country’s services exports has been growing at a CAGR of 17%, beating China's growth rate of 15%. ‘Ania growth in services exports cross economies (1993-2003) Country Services Exports (Growth (%) Brazil* 10.5 China 5.0 France 29 Germany 70 India 173 aly 35 Japan 3 Russia 13 uk 80 USA 54 Source: WO * annual growth rate is from 1993-2001 + #5 annual growih rate is from 1994-2003 . Skewed Composition ‘The composition of India’s services vs goods exports is closer to that of the developed countries like USA and UK, rather than developing and middle income countries. Services account for 30% and 32% of the total exports of USA and UK respectively and are from sectors such as Business Services, Entertainment, Software etc... On the other hand, China’s $46 billion of services exports - comprise 10% of its total exports and are primarily from tourism. “The major component of India’s services export is however Software Exports, which now contributes 50% to India’s services exports, from a 19% share in 1995. On the other hand, the share of travel and transportation has declined to 14% and 10% respectively. Yet, travel and transportation constitute 30% each of the services imports in US, EU and Japan. In terms of destinations, India’s services exports are primarily limited to the English speaking countries, with a particular emphasis on the US and UK. The markets of Latin America, Brazil, SEAsia, and Latin Europe have barely been scratched at the surface. Asa measure of comparison, France remained the world’s number one tourist destination “despite its language barriers, and even China’s gains from JIMS 8M, January - March, 2006 123 tourism are enviable while India, with its rich culture, and an English speaking population has barely attracted tourists. Among the four Modes of trade recognized by GATS, India’s ‘overwhelming preference is for two modes. Mode 1, and patticularly Mode 4. While half of India’s services exports are destined for the USA, nearly half of the services exported to the US are from Mode 4. ‘These comprise, movernent of nurses, engineers, doctors, scientists and software engineers. The skew extends further to the distribution of service exporters, India’s service exports appeat to follow the Pareto principle, with a majority of the revenues being generated by the top ten software companies. GATS - The Great Leveler With a level playing fiekd offered by GATS, India’s strengths, and weaknesses stand out distinctly. In areas such as Professional Services -which are among the fastest growing service sectors achieving double digit growth in economies, globally - Indian service exporters lose out on the sheer size and scale of operations. Some sectors such as legal have only recently been liberalized, and service providers, lack the experience to compete with global firms. Mode 1 and Mode 4 of services exports are of obvious interest to the government. According to UNCTAD estimates, a mere 3% increase in the quota of temporary workers by OECD countries could benefit India by an additional $ 50 billion annually under Mode 4 (movement of natural persons). Similarly it estimates that India stands fo gain $ 40 - 60 billion annually from the BPO boom under Mode 1 (eros border supply). Much needs to be done under Mode 2 (eg. health, tourism 1nd educational services) and Mode 3 (eg IT and banking, related activities) of GATS however, or India will lose out on the opportunities that unfold. Speed Breakers Aplenty Cumbersome regalations, multiple approvals, high tariff, and the absence of specific Export Promotion Councils for different sectors of services, create a rough launching pad for domestic service exporters, Regulatory frameworks have to be put in place and restrictions removed, The difficulty which premier management schools such as the IIMs experienced in getting approval under Mode 3 is a cease in point, Additionally, non-tariff barriers in foreign matkets pose special challenges for Indie’ service exports. While Mode Land Mode 4 are of special interest to India, these are also the means where other counties are most reluctant to permit trade. The considerable opposition to outsourcing of services to India, in certain sections of America and Britain, ‘vas sustained only due t0 local political considerations, despite the forceful economic rationale behind outsourcing. Similarly, the reluctance of developed countries to issue visas to Indian professionals, creates an uneven playing field despite the commitments under GATS, Prowling Predators Perhaps the biggest threat comes from the stealthily approaching competitors in Asia and Eastem Europe. China ‘evidently tops thelist. After its leadership in manufacturing, it is naw neck fo neck with India in services. It already Jeads India in Tourism services. It is now on hyperactive

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