Integrating India’s 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
Pritam Banerjee Debashis Chakraborty Dipankar Sengupta
George Mason University Indian Institute of University of Jammu
Foreign Trade
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
S e r v ic e s a s s h a r e o f G D P in 2 0 0 5

80

70

60

50

40

30

20

10

0
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
S e r v ic e s a s % o f G D P

80

75

70

65

60

55

50

45

40

35

30
1996 1997 1998 1999
2000
2001 2002 In d ia
2003
2004
2005
The Evolution of the Sectors
Compared..

P e rc e n t G D P
A g ric u lt u re In d u s t r y S e rvic e s
1960 58 15 28
1980 38 24 38
1990 33 27 41
2000 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

% S h a re o f N a t io n a l
E m p lo y m m e n t in S e rvic e s
1965 1 8 .1
1980 1 8 .9
1990 2 4 .4
2000 2 3 .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
% S h a r e o f N a t io n a l G D P % s h a r e A g r i c u l t u r e % s h a r e M a n u fa c t u r in g % S h a r e S e r v ic e s % P r o fe s s i o n a l S e r v ic e s
M a h a ra s h tra 1 3 .8 0 % 7 .5 3 % 1 5 .8 9 % 1 5 .6 5 % 1 4 .5 5 %
A n d h ra P ra d e s h 9 .5 9 % 1 1 .0 4 % 8 .4 5 % 9 .3 5 % 1 1 .7 1 %
U tta r P ra d e s h 9 .6 3 % 1 4 .5 7 % 7 .4 4 % 8 .3 3 % 8 .6 7 %
T a m il N a d u 7 .8 5 % 4 .2 9 % 8 .2 7 % 9 .1 2 % 8 .6 0 %
W est B engal 8 .1 5 % 9 .4 8 % 6 .2 9 % 8 .1 7 % 7 .1 0 %
K a rn a ta k a 5 .5 5 % 4 .6 0 % 6 .0 9 % 5 .7 7 % 6 .9 1 %
G u ja ra t 6 .6 9 % 6 .1 2 % 1 1 .8 3 % 5 .4 3 % 5 .6 6 %
R a ja s t h a n 4 .4 7 % 5 .1 2 % 4 .2 7 % 4 .2 8 % 5 .3 9 %
K e r a la 4 .2 0 % 3 .0 0 % 2 .5 8 % 5 .1 4 % 4 .3 8 %
D e lh i 3 .6 2 % 0 .1 6 % 1 .9 2 % 5 .4 7 % 4 .2 9 %
M a d h y a P ra d e s h 4 .4 6 % 5 .8 5 % 4 .5 9 % 3 .8 8 % 3 .6 4 %
B ih a r 2 .6 3 % 4 .1 7 % 0 .3 7 % 2 .6 9 % 3 .6 0 %
O r is s a 2 .3 5 % 3 .6 4 % 1 .9 6 % 1 .9 5 % 2 .3 1 %
P u n ja b 3 .7 1 % 5 .9 9 % 3 .3 0 % 2 .9 3 % 2 .3 1 %
A ssam 1 .9 6 % 2 .7 2 % 1 .9 2 % 1 .6 8 % 2 .2 3 %
Trends and Composition

S e rvic e S e c t o r O u t p u t in 2 0 0 6 (b illio n s o f R u p e e s )
T o t a l N a t io n a l O u t p u t (G D P ) 26045
E le c t ric it y , G a s a n d W a t e r S u p p ly 574
C o n s t ru c t io n 1775
T ra d e (W h o le s a le a n d R e t a il)* 3698
H o t e ls a n d R e s t u ra n t s * 350
T ra n s p o rt (o t h e r t h a n R a ilw a y s ) 1398
S to ra g e 1 7 .7
C o m m u n ic a t io n 1030
B a n k in g a n d In s u r a n c e 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
S e c t o r a l G r o w t h in S e r v ic e s in In d ia

2 5 .0 0 %

2 0 .0 0 %

1 5 .0 0 %

1 0 .0 0 %

5 .0 0 %

0 .0 0 %
2001 2002 2003 2004 2005 2006
- 5 .0 0 %

- 1 0 .0 0 %

E le c t r ic it y , G a s a n d W a t e r S u p p ly C o n s t r u c t io n T r a d e ( W h o le s a le a n d R e t a il) *
H o t e ls a n d R e s t u r a n t s * T r a n s p o r t ( o t h e r t h a n R a ilw a y s ) S to r a g e
C o m m u n ic a t io n B a n k in g a n d In s u r a n c e
Sector-shares -2000-2006
S e r v ic e S e c to r s h a r e in G D P : 2 0 0 0 a n d 2 0 0 6

1 6 .0 0 %

1 4 .0 0 %

1 2 .0 0 %

1 0 .0 0 %

8 .0 0 %

6 .0 0 %

4 .0 0 %

2 .0 0 %

0 .0 0 %
El C Tr H Tr St C Ba
ec on ad ot an or om nk
tri st e el sp ag m
ci ru (W s e un in
ty ct an or g
,G io ho d t( ic an
as n le R ot at d
sa es he io In
an tu rt n su
d le ra h ra
W an nt an nc
at d s* R e
er R ai
et lw
Su ai ay
pp l) *
s)
ly

2000 2006
IT and ITES Sector

40

35

30

25

20

15

10

0
2000 2001 2002 2003 2004 2005 2006

T o ta l IT a n d IT E S O u tp u t IT a n d IT E S E x p o r 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

U S A (a n d th e A m e r ic a s ) E ur ope a n U nion A s ia a n d P a c if ic G ulf Sta te s

7.4 2

22.6

68
IT and ITES Export Trends
R B I(B oP ) W T O / W o r ld B a n k

80

70

60

50

40

30

20

10

0
19 9 1 19 9 2 19 9 3 19 9 4 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006
Service Export Cross-Country
Comparions
A ve r age Annual Gr ow th in Se r vic e s E xpor ts : 1991-2006

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-1 0 .0 %

W o rld C h in a In d ia U n it e d S t a t e s
 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
S h a r e o f G lo b a l S e r v ic e s E x p o r t s

3 .5 0 0 %

3 .0 0 0 %

2 .5 0 0 %

2 .0 0 0 %

1.5 0 0 %

1.0 0 0 %

0 .5 0 0 %

0 .0 0 0 %
19 9 0 19 9 1 19 9 2 19 9 3 19 9 4 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006

B r a z il C h in a In d i a M e x ic o R u s s ia n F e d e r a t io n
 S h a r e o f W o r ld S e r v ic e s E x p o r t s N e t o f T r a v e l a n d T r a n s p o r t a t io n

4 .5 0 %

4 .0 0 %

3 .5 0 %

3 .0 0 %

2 .5 0 %

2 .0 0 %

1.5 0 %

1.0 0 %

0 .5 0 %

0 .0 0 %
19 9 0 19 9 1 19 9 2 19 9 3 19 9 4 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006

B r a z il C h in a In d i a M e x ic o R u s s ia
Service Imports
S e r v i c e s Im p o r t s

80

70

60

50

40

30

20

10

0
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
S h a r e o f W o r ld Im p o r t s N e t o f T r a n s p o r t a n d T r a v e l: 1 9 9 0 - 2 0 0 6

3 .5 0 %

3 .0 0 %

2 .5 0 %

2 .0 0 %

1.5 0 %

1.0 0 %

0 .5 0 %

0 .0 0 %
19 9 0 19 9 1 19 9 2 19 9 3 19 9 4 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006

B r a z il C h in a In d ia M e x ic o R u s s ia
Revealed Comparative Advantage

R e ve a le d C o m p a ra t ive A d va n t a g e o f C o m m e rc ia l S e rvic e s E x p o rt s * : 2 0 0 6
In d ia 1 .5 9
U n it e d K in g d o m 1 .4 2
B ra z il 1 .1 4
U n it e d S t a t e s 1 .0 9
R u s s ia 0 .7 8
C h in a 0 .7 4
M e x ic o 0 .2 7
* N e t o f G o ve rn m e n t S e rvic e s , T ra n s p o rt a n d T ra ve l
Position and Trajectory of India's
Service Exports
If 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
R e v e a le d C o m p a r a t iv e A d v a n t a g e in C o m m e r c ia l S e r v ic e s ( N e t T r a n s p o r t a n d
T r a v e l) : 1 9 9 0 - 2 0 0 6

1.8 0

1.6 0

1.4 0

1.2 0

1.0 0

0 .8 0

0 .6 0

0 .4 0

0 .2 0

0 .0 0
19 9 0 19 9 1 19 9 2 19 9 3 19 9 4 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 2000 2001 2002 2003 2004 2005 2006

B r a z il C h in a In d i a M e x ic o R u s s ia
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..