If every cloud has a silver lining, the glow around India’s data that shows November’s trade deficit at a record high of $37.9 billion is the remarkable performance of service exports. According to provisional numbers released by the government, service exports are projected to overtake merchandise exports in November 2024.
This is in line with the trend of relative growth over the past few years. In a scenario where US President-elect Donald Trump has threatened to slap “reciprocal” tariffs on India (“If they tax us, we tax them the same amount,” he said on Tuesday), this strong showing of service exports and declining reliance on the export of goods is a matter of comfort.
Unlike goods trade, which is easily hit by protectionist barriers going up in big markets and is also exposed to geopolitical disruptions, as in West Asia and Ukraine, service exports are largely free of such constraints.
Luckily for us, even as the heydays of infotech and IT-enabled exports appear to be behind us (though software accounted for a sizeable chunk of exports last year), and AI has newly cast a long shadow on a big slice of this business, global capability centres or GCCs have emerged as the new golden geese.
They deliver more high-end work than many run-of-the-mill software companies, and value realizations are also higher. Unlike China, which became the factory to the world, India seems set to become the world’s provider of tradable services.
But with a difference: While China is known for making low-cost goods for mass markets, India’s service providers have moved up the value chain. Having risen from elementary work and digital patch-ups (like Y2K) to customized software and now GCCs set up by multinationals to serve their global needs at a competitive cost, India’s talent pool can enlarge its overseas earnings dramatically.
According to the latest Economic Survey, India ranks fifth in service exports globally. Although our annual export target is $2 trillion by 2030, with services and goods contributing equally, we seem headed for a services skew on current trends. This would be a win-win for India and its trade partners.
Except that an export boom in services is likely to create fewer jobs than one in manufacturing. Plus, the sector demands higher levels of education and skill than factory roles do. Fresh-off-the-farm workers are easily absorbed by factories with a little training.
Not so in the services sector. Meanwhile, higher wages in services than in manufacturing suggests that income inequality will widen. Indeed, when it comes to a structural transformation of the economy, we have charted a course of our own.
Development economics talks of a shift from an agrarian to a manufacturing-driven and then to a services-led economy. But India seems to have leap-frogged factories, skipping the middle phase to transit directly to services.
This is evident in the large and growing share of services in our GDP (from 37% in 1980 to 55% now) and the long stagnant share of manufacturing (17%).
All this, while India remains a low-middle income economy and the proportion of our labour force dependent on agriculture and industry (69%) remains much higher than on services (31%). The net result is a growing disconnect between the numbers employed in each sector and its output.
This uneven growth must be addressed before it spills over into social discontent, endangering the remarkable progress we have made as a nation. So, even as we celebrate our emergence as a services-led economy, we must look beyond the numbers.
