The flow in services exports provides to an alternative path to development. However the indication presents a complex picture in the Indian economic scenario. Renowned economists of the world including Raghuram Rajan advocating our governments that service exports only can improve our GDP which is on the raising path since crisis year 2009-10.
All nations noticed our unique success as a services exporter in global markets persistently. The same is evident from the fact India's services export receipts grown from $95.8 billion in post-crisis year 2009-10 to $341.1 billion in 2023-24, literally 3.5 fold increase in a span of one decade plus.
Undoubtedly half of those exports were exports of software services and one fourth is from business services accounting. These sectors, accelerated India's share in global exports of commercial services from 3 per cent in 2010 to 4.8 per cent in 2023. However, as of now, in a country where services contribute more than 50 per cent of GDP, net revenues from services exports amounted to just 3.4 per cent of the same GDP.
Visibly the prospects look brighter with improved performance of various sub-sectors like Tourism, Medical Treatment, Hotel, Hospitality, Construction Services, Real Estate, IT-Business Process Management & E-commerce. Share of manufacturing in India's GDP had been and remained lamentably low is often facing criticism due to alarming growth in youth unemployment. That’s why few left oriented economists are prevailing to continue and even start large scale Public Sector Undertaking’s in Public-Private Partnership mode so as to absorb labour force as the growth drivers.
Moreover, the service sectors that account for the rapid export expansion cannot be labour absorbing. While services account for more than 50 per cent of GDP, they provide around 30 per cent of total jobs in the nation. Mainly those jobs are in the retail and wholesale trade sector and in other unorganised services.
India's overall employment is estimated at 510 million but in services sector it is placed at 160 million persons. This means that the IT-related sectors which are contributing for 7.5 per cent of GDP provide employment to only 1 per cent of total employment and 3.4 per cent of services employment. This implies in turn that the multiplier effects on aggregate income of the services export is not aptly suited for India.
The World Investment Report 2022 of UNCTAD places India as the seventh largest recipient of FDI in the top 20 host countries. In FY 2022, India received the highest-ever FDI inflows of US$ 84.8 billion including US$ 7.1 billion as FDI equity inflows in services sector. To facilitate foreign investment, various measures have been taken by the Government, such as the launch of the National Single-Window system, a one-stop solution for approvals and clearances needed by investors, entrepreneurs, and businesses.
Apparently the real benefit that the services export boom provides is the solid earnings of foreign exchange. Naturally these reduce India's balance of payments vulnerability and increase the policy flexibility that GOI enjoys. Aggregate private transfers, consisting mainly of remittances from Indians working abroad, was at $102 billion, equal to 70 per cent of the earnings from services exports.
That was the other important source of balance of payments resilience. Foreign exchange earned from net services exports amounted to just 2.1 per cent of the current account deficit recorded in 2023. Ironically, more than a third of those earnings in that year was exhausted through net investment income payments to foreign investors as dividends repatriating surpluses.
India is beginning to pay a price for its software success. Attracted by the opportunity of emerging as a software exporter, the government decided to liberalise imports of hardware unlike use of China's selective local make mandatory. This was a departure from the recommendation of the Homi Bhabha committee of 1968 that India must develop the capability to meet the inevitable growth in demand for computers other than mainframes, from domestic production.
The protection afforded to the hardware sector in pursuit of this objective was loosened as part of liberalisation. Hence the result is now visible in the growing dependence on imports of computer hardware. Simultaneously, the increased presence of assemblers of foreign brands of computers in the country. The import of computer hardware has more than doubled from $6.89 billion in financial year 2016-17 to $14.14 billion in 2022-23. Foreign brands like HP accounted for 33.8 per cent of Packing Credit shipments in India, Lenovo for 15.7 per cent, and Dell for 13.9 per cent and Acer for 12.3 per cent in these imports.
Of late the efforts made by Government of India to raise domestic production with subsidies has not largely helped. Among the 27 companies cleared for support under the production-linked incentive scheme are HP, Dell and Lenovo, which are controlling the domestic market. Such foreign players are more likely to depend on imported components and to repatriate profits, which would further add to foreign exchange outflows of investment income.
Finally, India is not an ace producer of software products, with the Indian market being largely serviced by the likes of Microsoft, Acrobat, Oracle and SAP. As computerisation proceeds, these tendencies would intensify, leading to increased foreign exchange leakages through imports, royalty payments and profit repatriation.
Thus, as time passes on, a substantial share of the foreign exchange realised through services exports is likely to leak out, eroding even the benefits in balance of payments the services exports currently deriving. It is high time India uses the benefit of these earnings to diversify activity within and outside of services, including into new export lines to retain the flexibility that foreign exchange access ensures. India must be strong enough to compete in the world market with our standard hardware products as promised by the Prime Minister in his election manifesto.
