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India’s Export Dynamics: Shift from Goods to Services
Context:
In July and August 2024, India’s goods exports declined compared to the previous year, with only a marginal growth of 1.1% in the first five months of FY24, while services exports surged by 7% in August, reaching $30.7 billion, and grew around 11% in the same period.
More on News:
- Possible Surpassing of Goods Exports: Services exports may temporarily surpass goods exports ($34.7 billion in August 2024), marking a two-decade shift in India’s export basket.
- Growth Trends in Services Exports: Services exports grew at an average of 14% annually since 1993, compared to 10.7% for goods exports. Services now account for 47% of India’s total exports, up from a third a decade ago.
Global Standing of India’s Exports:
- Services Export Ranking: India is now the 7th largest services exporter in the world, up from 24th in 2001.
- Goods Export Share: India’s share in global goods exports rose marginally from 1% in 2005 to less than 2% in 2023. In contrast, its share in global services exports grew from 1.9% to 4.6% during the same period.
- Future Projections: Goldman Sachs projects India’s services exports to reach $800 billion by 2030, amounting to 11% of GDP.
Structural Factors in Services Exports:
- Current Account Surplus in Services: India runs a services trade surplus of $13-14 billion monthly, helping balance the current account deficit caused by a higher goods import rate.
- Dependency on Imports: Despite domestic manufacturing incentives like the PLI scheme, India continues to rely heavily on imported inputs, keeping its goods trade deficit substantial.
Income Elasticity in Services Exports:
- Sensitivity to Global Economy: Overall Indian exports are highly responsive to global GDP changes, with a 1% rise in global GDP resulting in a 4.92% rise in demand for India’s exports.
- Lower Sensitivity in Services: Services exports are less responsive, with a 1% rise in global GDP causing only a 2.5% rise in services demand. This makes services exports more stable during global economic downturns.
Impact of Digital Delivery in Services:
- Resilience During Crises: Services exports, especially those delivered digitally, are less vulnerable to global disruptions. During the COVID-19 pandemic, goods exports plummeted, but services exports experienced only a modest decline.
- Low Dependency on Imports: Services, particularly modern digital services, use fewer imported inputs, have lower fixed costs, and can respond flexibly to price reductions.
Evolution of Services Exports:
- From Offshoring to Global Capability Centres (GCCs): Initially driven by offshoring back-office operations, India’s services exports now encompass specialised GCCs, employing 1.7 million people and generating $46 billion in revenue by 2023.
- IT and Consulting Services Growth: IT services dominate, accounting for 47% of total services exports, while professional consulting services grew from 7% in 2005 to 18.3% in 2023.
Domestic Economic Impact of Services Exports:
- Urban Concentration of Jobs: Services export jobs are concentrated in major cities like Bengaluru, Hyderabad, and Gurugram, though this is slowly changing as more companies hire from smaller towns.
- Skill-Intensive Nature: Services sectors, especially IT and consulting, require a highly skilled workforce, often concentrated in large urban areas, which limits their impact on broader job creation.
- Capital-Intensive Sectors: The services and manufacturing sectors contributing to exports are both capital-intensive, limiting large-scale employment opportunities.
Challenges and Future Outlook:
- Employment Impact: Despite the growth in services exports, employment generation remains a challenge. The share of export-driven employment dropped from 19% in 2012 to 13% in 2020.
- Future Growth Limitations: As services already account for 67% of global GDP, future growth in services exports is likely to align with global GDP trends, rather than significantly exceed them.
- Limited Transformation of the Economy: While services exports have positively impacted India’s economy, they are unlikely to achieve the same transformative effect that manufacturing exports had in East Asia.
Conclusion:
- Services Sector Success: India’s services sector has shown robust growth, becoming a key component of its export basket and supporting the economy through its surplus trade balance.
Future Prospects: Continued growth in services exports will drive skilled employment and economic stability but may not fully address broader job creation and income inequality challenges.