Explaining the resilience of India’s services sector

Nice paper from Abhijit Das, Rashmi Banga, and Dinesh Kumar. Though it is focused on services sector in 2008-09 crisis period, it has broader lessons for India’s thriving services sector.

The paper points to two broad lessons:

• India’s income elasticity of services exports is high (around 3, for software it is 6 ). Meaning if foreign incomes go down by 1 unit, our services exports go down by 3 units and vice versa. The price elasticity of services exports is low (inelastic). This means if prices of services exports decline, it does not lead to any major rise in serv exports.   Hence there is not much which can be done via the pricing route

• More importantly, India’s services are mainly consumed by domestic sources. In services, exports formed around 6% of services till 2000-01 and has increased to 15% by 2008-09. Though it has risen, but still low. Services exports form around 10% of India’s GDP. So services growth might decline post a global shock but still much of the growth remains thanks to reliance on domestic demand.

Although India’s services sector has grown in a sustained fashion since 2003–04 and recorded a growth rate above 5%, it is important to examine to what extent this growth has been driven by external demand and the export of services. In less than two decades, India has become one of the top five exporters of services amongst the developing countries, and it has surpassed some of the other Asian countries that dominated the services trade in the 1990s. India has been deemed a major exporter of services in the world with a market share of 2.6% in 2007 as opposed to 0.6% in 1995. India’s services sector has matured considerably in the last few years and has been globally recognized for its high growth (NASSCOM 2009).

Indian services export grew at a compounded annual growth rate of 17% in 1993–00 and at a much faster pace of about 24% in 2001–08. The export of services grew from US$20.8 billion in 2002 to US$90.1 billion in 2007–08 and then further to US$101 billion in 2008–09. India’s services sector’s growth has mainly been attributed to its exports. It is interesting to note, however, that although there has been rapid growth in the export of services from 2002 onwards, the export of services still remains around 15.1% of the total services output and around 9.4% of the total GDP of the economy (Table 3).

What is also noteworthy is that a decomposition of services export growth (Figure 4) clearly shows that it is not growth in exports of services that is driving growth in the services sector, but it is instead the growth in domestic demand that is the main driver. The contribution of the growth of the export of services to the growth of the overall services sector was only 22%, i.e., out of the 17.5% growth of the service, the contribution of the growth of the services sector was a mere 3.93 percentage points. However, we do find that over the years the contribution of the growth of exports of services to total services growth has increased. This indicates that although the export of services is becoming important for India’s services sector, it is not the main driver of its growth.

Hmmm.. Read paper for loads of stats and graphs on services sector in India,

What is the way ahead? It looks at productivity levels in three sectors: retail/wholesale trade, software services, and banking. It says there is a  scope of improvement in all three and govt. should make its policies boosting these three. This is pretty common advice by most reports on services.

Overall, a good paper on India’s services sector.

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