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I B E Fndia rand quity oundationwww.ibef.org

INDIAFASTEST GROWING

FREE MARKET DEMOCRACY

Why service exports could overtakemerchandise trade by 2007

SERVICES

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Why service exports could overtake merchandise trade by 2007

Indias service sector accounts for 52 per cent of GDP, making it the mostformidable component of the countrys economy. Now, there are visiblesigns that even internationally, the service sector could soon emerge as thecountrys beacon.

The service sectors recent contribution to Indias international trade effortis evident from the fact that the ratio of external trade in goods and servicesto GDP has climbed to 41.5% in 2004-05 from 31.3% in 2003-04. Anextrapolation of Reserve Bank data by India Brand Equity Foundation in factshows that service exports could topple merchandise exports in themedium term.

The projectionThe projectionThe projectionThe projectionThe projection

Heres how. Indias service sector exports in 2004-05 (April-March)amounted to US $ 51.33 billion. Merchandise exports stood at $ 80.83billion. In contrast, three years ago, in 2001-02, merchandise exports wereat US $44.70 billion and service exports, at US $ 17.14 billiona mere thirdof the present sum. This translates to a growth of 81% for Indiasmerchandise exports over the last three years, and 200% for its serviceexports. Clearly service exports have galloped while merchandise exportshave merely grown, albeit at a robust pace.

Now consider the scenario in the medium term. IBEF has estimated that ifthe average annual growth rates of the last three years 56.3% for serviceexports and 21.8% for manufacturing exports were projected into thefuture, by the beginning of 2007, services could topple merchandise goodsat the pole position in exports.

If the current pace of growth is sustained, services could bring in US $ 124billion in foreign exchange revenue in 2006-07 while merchandise wouldcollect only about 117 billion. The story that unfolds is this: in less than twoyears, Indias exports would be led by services not just in growth rates butalso in absolute numbers.

This is in line with Indias broader growth pattern and its transformationfrom a developing country into a major economic powerhouse. In alldeveloped economies, services sector dominates others.

Now this trend has started taking shape in India. According to a 2003 IMFstudy, if the current pace of growth is maintained, then by 2010, the shareof services would increase to 58 percent. This would bring the size of theIndias services sector, relative to GDP, closer to that of an upper middleincome country.

In fact, the average growth rate in services exports in the recent past would

have been even higher but for the US economys slowdown effect felt byexporters, in the aftermath of the 9/11 tragedy. If the future projectionwere to ignore this dip, the growth rate of services sector would be even

The service sectorsrecent contributionto Indias interna-tional trade effort isevident from the factthat the ratio ofexternal trade ingoods and services toGDP has climbed to41.5% in 2004-05from 31.3% in 2003-04.

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higher. In fact, service sector exports could vastly improve if India managesto capture substantial share in the two large economies besides the US Japan and Germany where growth rates have been firming up.

KEY SERVICE SECTOR DRIVERSKEY SERVICE SECTOR DRIVERSKEY SERVICE SECTOR DRIVERSKEY SERVICE SECTOR DRIVERSKEY SERVICE SECTOR DRIVERS

Software and ITESSoftware and ITESSoftware and ITESSoftware and ITESSoftware and ITES

Software and ITES segments constitute the key drivers of the services sectorgrowth. IT-ITES businesses recorded a 34.5% growth in exports, clockingrevenues of $ 17.3 billion in 2004-05, as compared with export revenues ofUSD 12.8 billion in the previous year. Even within these sectors, there has

been a churning. While continuing to lead in traditional segments, Indianvendors are gaining ground in newer services such as packaged softwareimplementation, systems integration, network infrastructure managementand IT consulting. ITES segment, in particular, retains a huge untappedpotential and given its small base, the segment will post even higher growthrates in the future. Apex industry body NASSCOM expects that by 2008-09,Indias IT and ITES exports will have crossed $ 50 billion.

Beyond software and ITES, three other sectors are likely to fuel the boom inservices exports Entertainment, Education and Travel & Tourism.

EntertainmentEntertainmentEntertainmentEntertainmentEntertainmentThe entertainment industry is basically an intellectual property-driven sectorwith small to large players spread across the country. It covers film, music,broadcast, television and live entertainment. The segment, with exportearnings of about $ 230 million annually, is expected to grow by 70 to 80%over the next 5 to 10 years, a 2004 survey by industry body FICCI.

EducationEducationEducationEducationEducation

Education has been a steady foreign exchange earner with NRIs and foreignstudents enrolling in medical and engineering colleges in India. But the realopportunity for India has only just emerged: Education Process Outsourcing

(EPO). Imparting education, training and coaching through Internet areexpected grow by over 100% in the next five years, according to FICCI.

The US is expected to be the biggest consumer of EPO. One of the mainelection planks of US President, George Bush was the No-Child-Left-Behindplan. The US Administration has started outsourcing of education services toprivate entities within the US. As these US entities are hard pressed togenerate resources, there could be a massive drift to outsourcing outsidethe US, over the next 12-18 months purely on the grounds of lower costs.After all, the billing rate for a US education service provider (ESP) is about$25 an hour, while in India it is $12.

Travel & TourismTravel & TourismTravel & TourismTravel & TourismTravel & Tourism

Another sector that is creating critical momentum to service exportsgrowth is travel & tourism. In 2002-03, foreign tourism into India grew by a

Software and ITESsegments constitutethe key drivers of theservices sector growth,recording a 34.5%growth in exports,clocking revenues of $17.3 billion in 2004-05,

as compared withexport revenues ofUSD 12.8 billion in theprevious year.


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India is projected tohave the secondfastest growing tour-ism sector of anycountry in the worldover the next 10years, said Rodrigode Rato, managingdirector of the IMF

during a speech inMarch this year.

mere 5.6%. However, in the subsequent two years, the segments revenueinflow moved up steeply by 25% and 22%.

During 2004, India breached the three million mark and the number offoreign visitors who came to this country was pegged at 3.37 million, anincrease of 23.5 per cent over 2003. This growth rate has been sustained inthe first seven months of 2005 as well, with foreign exchange earningspegged at US $ 3.2 billion.

But for unforeseen global disasters that dampen travel trade worldwide, it islikely that this segment will post 20% plus growth rates in the coming years,

riding on a combination of more incoming flights, new tourisminfrastructure, and sectoral incentives like special visas for medical tourists.

India is projected to have the second fastest growing tourism sector of anycountry in the world over the next 10 years, said Rodrigo de Rato,managing director of the IMF during a speech in March this year.

Service export boom: the macro trendService export boom: the macro trendService export boom: the macro trendService export boom: the macro trendService export boom: the macro trend

One reason why merchandise exports are taking a backseat is the pricepressures building up in global markets, thanks to China. Consider exportsof gold jewellery. They have increased significantly in recent years, but in

value terms, the export business has been constrained by price pressures.China has only about 0.02 million people working in the industry, comparedto India's well over a million. Indias exports aggregated to US $11.2 billion in2004-05, as compared with around only US $1 billion by China. But Chinawith its modern and automatic factories is in a position to manufacturejewellery at highly competitive prices, and this has begun impacting pricing ofIndias jewellery exports.

On the other hand, the service sector has suffered from no such handicap sofar.

The convergence factorThe convergence factorThe convergence factorThe convergence factorThe convergence factor

Meanwhile, segmentation between manufacturing and services is becomingless rigid. There is a growing synergy between the two segments, makingIndia specialise in skill intensive products instead of mass produced.According to one recent estimate, 50-60% of all industrial output was basedon the use of information, a key reason for the growing competitiveness ofindustries like pharmaceuticals and engineering products like auto parts.

There is a great advantage in exports being led by services. While integrationwith the global supply chain through the manufacturing exports routesubjects a country to high risk for even mild cyclical fluctuations, servicessector could more easily withstand shocks and target other exportdestination bases in Asian, European and Middle East markets.


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The

the Ministry ofCommerce, Government of India and

the Confederation of Indian Industry.

India Brand Equity Foundation is a public - private partnership

between

The Foundation's primary objective

is to build positive economic perceptions of India globally.

I B E Fndia rand quity oundation

c/o Confederation of Indian Industry249-F Sector 18Udyog Vihar Phase IVGurgaon 122015 Haryana

INDIA

Tel +91 124 501 4087 Fax +91 124 501 3873E-mail [email protected] www.ibef.org

A U G U S T 2 0 0 5

The

the Ministry ofCommerce, Government of India and

the Confederation of Indian Industry.

India Brand Equity Foundation is a public - private partnership

between

The Foundation's primary objective

is to build positive economic perceptions of India globally.

I B E Fndia rand quity oundation

c/o Confederation of Indian Industry249-F Sector 18Udyog Vihar Phase IVGurgaon 122015 Haryana

INDIA

Tel +91 124 501 4087 Fax +91 124 501 3873E-mail [email protected] www.ibef.org

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