India’s Services Sector Trends,

Opportunities and Challenges

By
Dr. VARUN BHUSHAN
 Introduction

• The Indian economy has undergone major macroeconomic and

structural reforms since the balance of payments crisis of 1991. Trade,
FDI, and industrial policies have been liberalized.
• Many restrictions have been completely dismantled. Institutional,
legislative, and regulatory measures have been undertaken to improve
macroeconomic management.
• The liberalization of the economy has helped put India on a higher
growth trajectory, with the compound annual growth rate rising
from 5.7 per cent in the 1990-2004 period to 7.5 per cent in the
2005-16 period. (UN national accounts Statistics)
.• India has in fact, been one of the fastest-growing economies in the past two
decades. The country’s external sector performance has also improved post-
liberalization, with an increase in India’s share in world trade as well as FDI
flows over the past decade.
• The service sector has played an important role in enabling this improved
economic performance during the post-reform period. Services have been
the fastest growing sector of the Indian economy in recent years and have
helped accelerate the overall growth rate of the economy. Services have also
facilitated India’s integration with the world economy through trade and
capital flows.
• The phenomenal growth and export performance witnessed in services
like information technology (IT) and business process outsourcing
(BPO) has placed India on the global map. Services have also helped
improve productivity in other sectors of the economy, thus contributing to
an improvement in the economy’s overall competitiveness.
 Growth Trends in India’s Service Sector
• The service sector has exhibited phenomenal growth rates during the 1990s
and 2000s.
• The sector’s compound annual growth rate (CAGR) has consistently
risen over the decades, from 6.2 per cent during the 1980s to 7.3 per
cent during the 1990s and further to 8.7 per cent during the 2001-16
period, exceeding overall GDP growth throughout.
• In contrast, agriculture and industry have exhibited mixed performance,
with the CAGR in agriculture declining from 3.5 per cent in the 1980s and
stagnating at 2.9 per cent during the 1990s and the 2001-16 period while
industry registered a decline in its CAGR from 7.9 per cent during the
1980s to 6.3 per cent in the 1990s, rising to 7.5 per cent during the 2001-16
period.
The role of services in raising overall economic
growth in India
• In average annual growth terms, however, services growth has
decelerated from a peak of 10.1 per cent in the 2005-09 period to 7.9
percent per year during the 2010-16 period, though still exceeding
overall growth and growth in agriculture and industry.
• Growth performance within the service sector has, however, been
uneven.
• The driving segments have been communication, banking and
insurance, construction, and trade and distribution services, which
grew at over 7 per cent in CAGR terms during the 2000-09 period,
while services such as railways and public administration services
grew at less than 4 per cent.
.
.• The high growth rate of services has contributed to the sector’s rising share
in the overall economy. Between 1980 and 2016, agriculture’s share in GDP
declined by nearly 30 per cent which was mainly offset by an increase of 23
percent in the share of services.
• In 2016, services, including construction constituted 61.4 percent of
GDP, up from 38.3 percent of GDP in 1980 (Economic Survey various
issues and un national accounts Statistics).
• This trend contrasts with what is observed in many other developing
economies, where the decline in the share of agriculture has been followed
by a corresponding rise in the share of industry, in particular manufacturing,
and later in services. The industrial sector has increased its share only
marginally over this period in India.
• Thus, there has been a leapfrogging of the economy from dependence on
the primary sector to the tertiary sector. Within the services sector, trade and
distribution services account for the largest share followed by community,
personal and social services and transport services.
.
.• The service sector’s contribution to overall employment has risen, though
this has not been commensurate to the growth in services output. According
to ILO estimates, services share in employment rose only slightly from 21.6
per cent to 23.8 per cent between 1991 and 2001.
• According to the 2010-11 “Economic Survey, the tertiary sector’s share
of employment increased only modestly by 4.2 per cent between 1993-
94 and 2007-08 while during the same period, its share in GDP
increased by over 10 per cent, implying a low employment elasticity”.
• Although India features among the leading services producer countries, the
share of services in its employment was the lowest at 28.7 per cent in 2014
whereas the share of this sector in other leading service producer countries
was around two-thirds. This share increased by a mere 4.7 per cent between
2001 and 2014 and in 2017 accounted for 33.5 per cent of employment
(World Bank database; Economic Survey 2010-11)
.• Most of this employment has been concentrated in trade and
distribution, construction, hotel and restaurants, and community and
personal services segments.
• The employment trends further reveal that very rapidly growing
service segments such as communication and financial services have
had relatively lower employment elasticity, indicating that their
growth has mainly been based on productivity gains and technological
improvements.
 Trade in India’s Service Sector
• The contribution of services to India’s trade and FDI flows has also
been growing over the past decade, facilitating India’s integration with
the world economy.
• India’s services exports have steadily grown from a mere $2.9 billion
in 1980 to $6.7 bn in 1995, rising to $16.7 billion in 2000 and growing
more than tenfold to $183.9 billion in 2017.
• Services imports have also risen significantly, from $2.9 billion in
1980 to $10.2 billion in 1995, rising to $19.2 billion in 2000 and
further to $154 billion in 2017.
• India has moved to a slight services trade surplus over the years,
which has in part helped offset its otherwise persistent and growing
trade deficit in goods.
India’s growing competitiveness in the world
services market
• India’s services exports grew at an average annual growth rate of 23.5 per
cent during the 1996-2005 period second only to Ireland and compared to
15.3 per cent for China. however, there has been a deceleration over the
2005-17 period, with the average annual growth rate of India’s services
exports declining to 9.9 per cent, reflecting the overall slowdown in the
world economy post the 2008 financial crisis and mirroring growth trends in
other countries such as Ireland and Singapore.
• In CAGR terms, India’s services exports grew the most rapidly among all
countries at 11.1 per cent over the 2005-17 period and exceeded the sector’s
CAGR for output and overall exports during this same period. as a result,
the share of services in India’s total exports has risen from 18.1 per cent in
1995 to over 37.7 per cent in 2017.
• These trends highlight the export-oriented nature of services growth in
the Indian economy as well as India’s growing competitiveness in the
world services market and its liberalization of services imports,
especially in the post 2000 period.
.
.
Superior performance of services exports compared
to merchandise exports
• India’s share in world services exports has risen from less than 1 per
cent in the 1980s and 1990s to 1.9 per cent in 200, 2.9 per cent in 2010
and was 3.44 per cent in 2017.
• Its share in world services imports has similarly increased from 0.7 per
cent in 1990 to 2.3 per cent in 2005 and further to nearly 3 per cent in
2017. India’s services exports have in general grown much more
rapidly than its merchandise exports.
• Further, India’s penetration of the world services markets not only
exceeds that for goods but has also risen more rapidly, particularly in
the latest decade.
.• The evidence clearly indicates India’s competitiveness in services
relative to goods. This is also supported by estimates of India’s
revealed comparative advantage (RCA) in services versus goods,
which show that between 1990 and 2017, the RCA for services
increased by around 50 percent while that for goods declined by
around 17 per cent.
• There has been a shift in the structure of India’s services exports
away from traditional services such as transport and travel
towards other commercial services.
• The contribution of transport and travel services in total services
exports declined from over 50 per cent in 1990 to around 24 per cent
in 2017, while that of other commercial services expanded
significantly over the 1990-2017 period.
 Diversification of India’s services export

• Other commercial services comprise of a wide range of services,

including construction, finance, computer and information, and other
business services, among others.
• The growing importance of this broad segment within total services
exports reflects the significant rise in the contribution of computer and
information services as well as other business services (which include
advertising, exhibitions, engineering, accountancy, and health
services), from negligible levels in 1990 to over 60 per cent of total
services exports in the 2000s.
 Competitiveness is not broad-based in services
• The first is that India’s competitiveness as captured by the RCA indices is
on a decline in the “other” commercial services category. This largely
reflects the steady decline in the RCA index for computer and information
services, indicating that India is losing its competitive edge in the
computer and information services subsector.
• Second, although other business services constitute the largest segment of
India’s “other” commercial services, its RCA values in that subsector were
mostly below 1 during the 2000-17 period.
• The third issue highlighted by these RCA trends is that although the
“other” services segment has grown more rapidly than traditional
segments such as transport and travel services and now constitute more
than three fourths of India’s commercial services export basket, it
remains heavily concentrated in just two subsectors which have been the
key drivers of India’s services exports and its integration with the world
economy.
 Modalities and Restrictions
• India’s comparative advantage in skilled and labor-intensive services,
where both cross-border labour mobility and offshoring have enabled
India’s successful export performance in other business services and
computer and information services.
• India’s exports of computer-related services through the temporary mobility
of its software professionals under the H1B and L1 visas, as the bulk of
H1B visas in the US are granted to professionals in IT services.
• Even as far back as 2001 and 2002, Indian computer professionals
accounted for 68 per cent and 63 per cent, respectively, of all specialty
occupation visas granted in the United States in the computer services
category (Batalova, 2010, and Department of Homeland Security).
• Indian companies such as Infosys Limited, Cognizant Technology
Solutions, Tata Consultancy Services, Wipro Limited, and IBM India have
been granted the vast majority of H-1 B visas, while Tata and Cognizant
have also been the biggest users of the L-1 program in the recent past.
 Labour mobility

• Apart from the software services sector, India has also been among the
top five source countries for temporary skilled workers admitted into
the US across other professional services, including healthcare,
architecture, engineering, and education services (Batalova, 2010, and
department of Homeland Security).
• In other host countries such as the UK, Australia, and Singapore,
India has been an important source country for professional
service providers.
• Labour mobility is also important for India’s low and semi-skilled
services exports, especially to markets such as the Gulf countries in
activities such as construction, transport operations, domestic help,
nursing, and paramedical services.
• A large part of India’s services exports also takes place through mode
1, as. various services which are offshored to Indian companies as well
as MNC subsidiaries based in India are supplied to clients overseas
through data, information, and voice flows over the internet and
phone.
• These include the provision of outsourced business and knowledge
processes, professional activities, and routine tasks across various
industry verticals such as financial, accounting, legal, health, logistics,
consulting, design, and architecture services, to name some.
• The offshore-onsite mix is around 25:75, i.e., 25 per cent of the work
is done globally and 75 per cent is done in India, though this model is
likely to change in future with growing focus on robotics and
automation which might lead to more work being done from India
itself and only high value IT employees going to the client site.
.• Modes 2 and 3 are also important for India’s services exports. India is
well known for medical tourism exports, given its world-class
hospitals, which can provide specialized tertiary care at a fraction of
the cost in developed countries, and the availability of traditional and
alternative treatments and therapies. It also exports other services such
as tourism and education services through mode 2.
• Mode 3 is also becoming an increasingly important mode for India’s
services exports, with Indian companies setting up overseas
subsidiaries and investment ventures in areas such as healthcare,
education, IT, hotels, and restaurants. and financial services.
 Domestic and External barriers

• Several domestic and external barriers constrain India’s services

exports. The main domestic barriers are infrastructural, financial,
regulatory, technical, and standard-related constraints.
• The main external barriers are in the form of immigration and labor
market regulations, which take the form of quantitative caps on
visas, discretionary hikes in visa fees, restrictive requirements on
entry and operations, labor market and economic needs tests, lack
of recognition of qualifications, and opposition from regulatory
bodies and associations overseas, among others, which affect India’s
mode 4 based services exports.
.• Recently, India’s software services exports have faced increased
restrictions on mobility with H-1B visas becoming more difficult
and costlier to obtain following a spike in “requests for evidence”
from applicants, a decline in the approval rate for H1B
applications, hikes in visa fees and legislation which has increased the
minimum wage for H1B visa eligibility.
• Such restrictions are adversely affecting Indian IT companies
which rely heavily on sending software professionals to the US and
have caused them to reduce their H1B visa filings.
• With such growing threats to India’s main services exports arising
from protectionist, technological and competitive challenges, it is
increasingly being felt that India needs to refocus its services exports
beyond modes 1 and 4 and beyond the IT-BPO segments. Mode 2 and
segments such as health, tourism, and education are seen as
promising areas.
 IT-BPO services
• The computer and information services segment has played a critical role in
India’s integration with the world economy and in placing India on the
global services map.
• It has also been the growth driver in India’s service sector. Turnover in
the IT-BPO services industry has increased from $70bn or 6 per cent of
GDP in 2009 to $152.6 bn in 2016-17 or close to 8 per cent of GDP.
• The industry association, NaSSCOM, has targeted revenue of $350 bn by
2025. In line with the growth in IT-BPO revenues, there has also been
considerable employment growth in the IT-BPO sector. Today, it is the
largest private sector employer, providing 3.7 million jobs and a larger
number of indirect jobs.
• The BPO segment alone accounted for 1.15 million jobs in 2017. Between
2001 and 2017, the IT-BPO industry has created 3.7 million jobs and in the
2014-16 period, it has created an additional 600,000 jobs
.
.• IT and BPO services exports have risen from a mere $754 million in
1995/96 to $9.6 billion in 2002-03, to $47.5 billion in 2009, and
reached $117 billion in 2016-17, of which IT services accounted for
$66 bn, business process services for $22 bn and software products
and engineering services for $25 bn.
• India’s share in the global IT services market was 52 per cent and
its share in the global BPO sourcing market was 38 per cent in
2016-17.
• The US has been the most important market for India’s IT-BPO
exports, with a projected share of 62 per cent in 2016-17, followed by
the UK and Continental Europe with shares of 17 and 11 per cent,
respectively. Other regions, such as Asia-Pacific and the Middle East,
are growing as markets for Indian IT-BPO exports.
.• India’s IT-BPO exports are in a variety of verticals, including the banking
and financial services industry (BFSI), telecom, manufacturing, retail,
healthcare, and travel and tourism.
• According to the AT Kearney Offshore Location attractiveness Index, India has
consistently ranked highest among offshoring destinations, due to the
combination of its skill availability, favourable business environment, and low
cost. The 2017 Index places India as the leading offshoring destination, much
ahead of China, which is placed second.
• Today, India accounts for 55 per cent of the offshore IT-BPO market. Twenty-four
percent of the 271 new global delivery centres that were set up worldwide by US-
based firms in 2017 were in India (NaSSCOM, 2018).
• The country is expected to remain an important part of the global
outsourcing market in future, notwithstanding emerging competition from
other developing countries and regions and challenges posed by automation.
Foreign Direct Investment (FDI) in India’s Service
Sector
• There has also been a structural shift in foreign direct investment
flows into India towards the service sector. The average share of
services in FDI rose from 10.5 percent for the 1990-94 period to 28.3
percent during the 1995-99 period and registered a CAGR of 36
percent between 1992/93 and 2001/02 and of 36.7 percent between
2006 and 2009 (Indiastat).
• In 2016-17, services accounted for nearly 62 percent of FDI
inflows at $22 billion compared to manufacturing FDI of $11.9
billion.
• The provisional estimates for 2017-18 put this share at 75 per cent or
$28 billion. Cumulative FDI inflows into services for the January
2000-March 2018 period stood at $222.9 billion or roughly 60 per cent
of total cumulative FDI inflows for this entire period.
.• Service sector FDI has grown more rapidly than manufacturing FDI,
with a CAGR of 28.4 per cent between 2013/14 and 2017/18 compared
to a mere 2.1 per cent CAGR for manufacturing FDI over this same
period (DIPP, 2018 and RBI handbook of Statistics).
• Within the services sector, FDI has flown into a variety of segments, the
main ones being communication, business, and financial services.
• The range of service subsectors attracting FDI has expanded over time,
as reflected in the growing share of segments such as financial,
business, and communication services in recent years. These trends
reflect India’s internal growth and liberalization dynamics, which have
driven the expansion of certain services.
• Some significant FDI approvals in recent years include Japan’s entry
into the Indian market for the construction of India’s first bullet train,
Amazon India’s expansion in the logistics space, and Google’s
investment plans in the area of broadband services.
.
.• Within the service sector, the most outward FDI approvals were in IT-
IT enabled services during the 2000-14 period, while in approved
equity terms, communication and construction services were the most
important (Chaudhry et. Al, 2018).
• In several segments, such as IT, restaurants and hotels, and
construction, Indian firms have increasingly emerged as exporters
of capital.
• In IT services, overseas investments have taken the form of greenfield
ventures, such as the setting up of R&D centres for work on new
technologies like blockchain applications and artificial intelligence, or
the form of acquisitions of overseas firms in areas like cloud services,
analytics, and business process outsourcing.
 India’s service FDI

• The main outward destinations for India’s services FDI include

the UAE, Singapore, Mauritius, and, to a more limited extent, the
US and the UK.
• It is worth noting that the service sector accounts for a significant
share of India’s growing outward FDI in Africa, with financial,
insurance and business services and transport, storage and
communication services constituting the main destination
segments.
• Overall, India’s services FDI overseas has been facilitated by the
government’s relaxation of guidelines for foreign investments abroad
and a higher annual overseas investment ceiling for domestic
companies.
Services Linkages and Value-Added Contribution to
the Economy
• For services to be sustainable, the sector needs to be well integrated
with other parts of the economy, in particular the manufacturing sector.
• This linkage is important today as services are increasingly
constituting an integral part of the production and delivery process in
manufacturing, from research and development and product design in
the initial stages to transport and distribution following production to
retailing, repair and maintenance in the final stages while services
such as telecommunications and finance are required at every stage.
• Individual manufacturers typically require a full spectrum of services.
 Linkage between Services and Manufacturing
• For India, the link between services and the rest of the economy is
important given the recent thrust on manufacturing for ensuring sustainable
growth and employment creation in India.
• Initiatives such as Make in India and Skill India and the vision of
raising the contribution of manufacturing to 25 per cent of GDP and to
create a 100 million additional manufacturing jobs by 2022, highlight
this focus on manufacturing.
• The government also aims to increase domestic value addition and
technological depth in manufacturing as well as to increase the global
competitiveness of Indian manufacturing (Make in India portal).
• Services can contribute towards these objectives by adding value to India’s
manufacturing output and exports. Hence, the manufacturing sector’s
success in India is likely to be shaped by the service sector’s growth and
competitiveness as well as the latter’s regulatory and business environment.
Servicification trends in Indian manufacturing

• According to the WTO, services value-added accounts for about

one third of manufacturing exports in developed countries and for
26 percent in developing countries.
• India shows higher services value-added content in its overall as well
as manufacturing exports compared to other developing countries,
with most of this content being of domestic origin.
• The value-added contribution of services in exports also exceeds that
of manufacturing.
 Role of services in India’s overall exports

• The share of services value-added contribution in India’s gross

exports across all sectors was over 50 percent in 2015, significantly
greater than the BOP-based share of services exports in total exports
and greater than the contribution of manufacturing and other sectors of
the economy to overall exports.
• This is also much greater than in other emerging countries and is
comparable to the value-added share for service sector-oriented
economies such as Singapore and Hong Kong, as well as developed
countries such as the UK and the US.
• Hence, clearly, services play an important embedded role in India’s
exports.
.• Over the 2005-2015 period, modern services have come to contribute
more than traditional segments such as transport and distribution
services in India’s gross exports. This is consistent with the shift in the
pattern of India’s services exports towards modern segments
• It is IT and information services which is the main contributing
segment, and which has become as important as traditional segments
such as trade and distribution services over time.
• The value-added contribution of IT and information services in
total exports is much less than its share in services exports,
indicating that these services are mostly directly exported as
opposed to being embedded in exports of other parts of the
economy.
 Services versus manufacturing value added
contribution in India’s manufacturing exports
• The individual value-added contribution of selected manufacturing
industries, such as transport equipment and electronics, in India’s gross
manufacturing exports is quite low, indicating that they rely heavily on
imported parts and intermediates. Thus, domestically generated
manufacturing content in India’s manufacturing exports is low.
• If we examine the contribution of the service sector to overall
manufacturing exports, we find that it is concentrated in traditional services
such as trade and distribution services and to a lesser extent in transport and
storage services. however, competitive segments such as IT and information
services or other business services (which include
• R&D services and other business support activities) and which can
potentially create more value, increase business sophistication and raise
technological depth in production-some of the stated goals of the Make in
India program-show very low levels of contribution to manufacturing
exports.
 Some insights and inferences
• Globally competitive segments like IT services are not contributing in
any significant way to India’s manufacturing exports, and further that
India’s IT services exports are largely directly exported (given the high
share of within-segment exports).
• This raises questions about the extent to which IT services are being
leveraged in India to improve manufacturing processes and raise efficiency.
• This might be indicative of problems in Indian manufacturing with regard to
scale, fragmentation, infrastructure and regulations, resulting in low
absorption of IT in manufacturing exports, or might reflect the nature of
India’s manufacturing export basket and constraints to integrating IT
services in these exports.
• It may also reflect the nature of India’s IT services segment and its
orientation, which limits such integration in manufacturing.
.• Second, the very low contribution of R&D and business services in
India’s manufacturing exports might reflect the less business services-
intensive nature of India’s manufacturing exports.
• The numbers also suggest the relatively low R&D services intensity in
India’s manufacturing exports, raising questions about the role of
innovation in India’s manufacturing sector and the unrealized potential
to move up the value chain into more R&D-intensive manufacturing.
• Third, the declining contribution of domestic transport and storage
services value added in manufacturing exports suggests a weakening
link between the two.
• This may be due to high costs of domestic services, inefficiencies,
regulatory barriers, and changes in the structure and dispersion of
production that reduce dependence on transport and storage services.
Weak link between services and key manufacturing
industries
• The services value-added trends highlighted earlier raise concerns
about whether manufacturing in India is sufficiently integrating
successful services such as IT, whether the manufacturing sector is
focusing enough on innovation and value creation, and whether it is
being hindered by high logistics costs.
• Although there is an upward trend in the contribution of services
as a whole and of specific services such as distribution, transport,
business and IT services to exports of manufacturing industries
such as transport equipment, electrical equipment and textile and
textile products (three important Make in India industries), these
shares remain very small indicating that the link between services
and key manufacturing industries remains weak.
 Challenges affecting the service sector
• The poor services-manufacturing link may also reflect challenges
affecting the service sector as a whole and individual services,
including challenges related to capacity, quality, regulation, the degree
of liberalization and modernisation in services.
• While it is difficult to pinpoint specific challenges in services, existing
evidence and literature suggest that the regulatory environment in
services, the degree of contestability in services markets, and
policies which facilitate improvements in quality, productivity,
efficiency and capacity in services can benefit manufacturing and
the economy as a whole
.• India ranks poorly on transport and communications infrastructure
under the “Enabling Trade Index” (by WEF) and on the logistics
performance index (by WB).
• On the innovation and sophistication sub-index, which reflects a
country’s capacity and quality in R&D services, it shows a declining
performance (“Global Competitiveness Report” by WEF).
• Indices which capture the incidence of regulatory barriers
highlight the fact that services FDI in India remains more
restricted than manufacturing FDI and that the overall protection
level in services remains high compared to that in other countries.
• Hence, policy-induced barriers appear to be constraining the
contribution of services to India’s manufacturing sector,
notwithstanding significant liberalization of services since the 1990s.
 Liberalization of Services in India
• Many services, including construction, housing and townships, hospitals
and diagnostics, wholesale cash and carry trade, and computer-related
services, for instance, have been put on the automatic approval route
for FDI and have been fully liberalized (albeit subject to certain
conditions and regulatory requirements).
• The most significant feature of service sector liberalization in India has
been the elimination of government monopoly and the establishment of
independent regulators in critical services.
• In telecommunication services, for example, 100 percent ownership is now
allowed for foreign firms, with entry under the automatic route for up to 49
percent and subject to government approval beyond 49 percent.
• Government monopoly in long-distance telephony and the internet has been
eliminated. An independent regulator, the Telecom Regulatory Authority of
India (TRAI) has been established.
 Insurance service sector

• The insurance services sector has been liberalized by allowing foreign

entry of up to 49 per cent on an automatic route basis. An independent
regulator, the Insurance Regulatory Development Authority (IRDA),
has been set up.
• Banking services have been liberalized with foreign equity
participation (including by Foreign Institutional Investors)
permitted up to 74 per cent in private banks and up to 20 per cent
in public sector banks, under the automatic route for the first 49
per cent and under the government route for additional
investment.
.• Alongside the liberalization of capital markets and the banking system,
the role of financial sector regulators has been enhanced to ensure
prudential management and ensure macroeconomic stability.
• Other important steps to liberalize FDI in services in recent years
include the amendment of the FDI policy in areas such as
construction development, real estate, civil aviation, single and
multi-brand retail, e-commerce, and news broadcasting.
• These amendments have largely taken the form of more liberal
minimum capitalization and exit conditions, relaxed norms for Non-
Resident Indians, relaxed FDI entry caps, and inclusion of more
sectors under the automatic approval route.
.• One such segment is retail, which to date remains only partially
open to FDI in the multi-brand segment, owing to strong
opposition from traders and concerns about the displacement of
small retailers by multinational retail chains.
• Likewise, legal services remain closed to foreign firms and service
providers due to resistance from the concerned regulatory body.
another service sector where there has been much debate recently is
higher education.
• Legislation has been proposed to permit Foreign Education providers
to set up campuses and grant degrees in India, subject to certain
conditions. This bill has raised concerns over issues of standards,
equivalence, consumer protection, regulation of foreign players, and
likely impact on public sector institutions.
India’s Multilateral and Regional Engagements in
Services
• In 2004, India made a joint submission along with several other
developing countries for a Service provider Visa under the GATS
(General Agreement on Trade in Services), with the aim of expanding
and ensuring more predictable and transparent market access for intra-
company transferees, contractual service suppliers, and independent
professionals.
• India received requests from several developed countries to
multilaterally bind in the liberalization it has undertaken
autonomously in sectors such as banking, insurance, and
telecommunications, where India’s commitments fall short of the
existing levels of liberalization.
.• India also received requests to open other services such as retail, higher
education, legal and accountancy services to foreign commercial presence.
• India has largely taken a quid pro quo approach to the services negotiations,
i.e., offering to exchange commitments on foreign commercial presence in
return for market access in modes 1 and 4. In its august 2005 revised
services offer, it significantly improved upon the earlier commitments on
commercial presence, aligning its offer more closely with autonomous
liberalization initiatives in services.
• However, with the stalling of the Doha Round negotiations these offers
have not been converted into legally binding commitments. Other
important multilateral developments involving services include the
Trade in Services agreement (TISA), a plurilateral agreement among 23
like-minded countries, which account for more than 70 per cent of
global services trade, in which India did not agree to participate
(European Commission portal).
.• Although India has always been a supporter of multilateralism, with the
slowdown in multilateral negotiations, India has increasingly turned
towards signing bilateral and regional trade agreements.
• In recent years, it has entered into broad-ranging trade negotiations which
go beyond goods to cover services, investment, labour mobility, and other
issues which have a bearing on services trade.
• This trend commenced in 2005 with the entry into force of the India-
Singapore CECA followed by several comprehensive bilateral agreements
in succession with Korea in 2010, with Japan and Malaysia in 2011, and the
expansion of the existing ASEAN-India FTA to include services and
investment in 2015. Several agreements are at different stages of
negotiation, including with the EU and Australia.
• India was also engaged in negotiations with the Regional
Comprehensive Economic partnership (RCEP) grouping , which
consists of ASEAN, Japan, Korea, Australia, New Zealand and China),
until it decided to pull out of this agreement in 2019.
.• India’s aim is to facilitate investments in various services from its
partner countries in return for securing its interests in sectors such as
IT-BPO and various other professional services, mainly through easier
access for Indian service suppliers to these markets.
• The prevailing view is that India’s main interest and competitive
advantage lies in services and that concessions it makes on goods
can be traded off against concessions it can secure from partner
countries in services.
• It is increasingly being felt that India’s services agreement may not
yield major market access gains in services for India unless India can
negotiate for greater transparency and easing of regulatory barriers
while continuing with steps to boost its own competitiveness.
 COVID-19 and India’s Services Sector

• A major development that has shaken the world is the ongoing

Covid-19 pandemic. due to severe disruption in economic activity
and collapse in demand around the world, the global economy is
expected to witness a deep recession.
• The Indian economy is projected to undergo a large contraction,
coming on the back of an already weak economy.
• According to the World Bank’s Global Economic prospects report,
India’s GDP will contract by 3.2 per cent in 2020-21 followed by a
moderate recovery in 2021-22.
 Impact on India’s services sector

• In April 2020, the IHS Markit India Services purchasing Managers’ Index
(PMI) crashed to an all-time low of 5.4 from 49.3 in March, and recovered
only slightly to 12.6, in May 2020.12 an index measuring foreign demand
for services fell to an unprecedented level of 0. These developments in
recent months reflect a drastic reduction in services activity due to the
closure of businesses and collapse in both domestic and overseas demand.
• They capture the immediate brunt borne by services such as aviation,
tourism, and hospitality due to the pandemic, followed by subsequent
effects on services such as logistics, retail trade, and construction which
have been hurt by strict lockdown measures.
• With further contraction at home and abroad, other services, including IT,
BPO, business support, and marketing, are also expected to be hit hard with
slowdown in economic activity and reduced discretionary spending by
consumers and companies.
.• Estimated losses in revenues and jobs highlight the severity of the impact
on certain services. For instance, initial estimates suggest that the aviation
sector is expected to lose $3.6 billion in the first quarter of 2020-21,
restaurants are likely to see a 40-50 per cent drop in revenues and the travel
and hospitality industry could experience revenue looses of `5 trillion this
fiscal year.
• The associated job losses in the service sector will also be significant.
according to Care Ratings Ltd., the travel and hospitality industry
could witness 35-40 million in job cuts.
• The pandemic also poses challenges for India’s leading IT companies which
provide services to global banks and retailers and are projected to
experience declines in their profits. Given the significance of the services
sector as a growth driver and shock absorber for the Indian economy, these
trends have serious implications for India’s growth, jobs, poverty
alleviation, and macroeconomic stability in the near future.
 New Opportunities and Issues in Services
• In the case of the IT industry, experts have noted that Covid-19 may become
a ‘black swan’ moment as it will usher in major changes in contract
specifications and delivery models, and will also speed up the adoption of
new technologies.
• Outsourcing deals are likely to shift more rapidly towards digital services.
The pressure to digitally transform combined with increased financial
constraints on the part of companies around the world, will result in more
outsourcing, which would benefit Indian service providers.
• The shift towards hybrid models of work where remote working
constitutes a larger part of the delivery model in future and work from
home is embedded in services contracts, may in turn help the IT
industry expand its talent pool and lower costs. The shift towards
remote working is also likely to change the offshore-onsite delivery mix
and capabilities of IT players, with offshoring becoming even more
prevalent.
.• Given the structure of India’s services exports, which is dominated by IT
and BPO services and the offshore delivery mode, India is well placed to
leverage some of these changes in work paradigms.
• The reduced need for setting up overseas commercial establishments or for
cross-border movement of service providers could also potentially benefit
MSMEs and start-ups, by lowering costs and regulatory compliance burden.
however, these changes will also require Indian services companies to
address certain challenges such as data protection which will affect cross-
border data flows and related services delivery.
• The latter will in turn require supporting domestic legislation, such as
enactment of and appropriate modifications to the pending personal data
protection Bill. There may also be increased application of new
technologies such as AI, blockchain, and automation which will reduce
the dependence on human labour. Thus, services companies in India
will need to resilient and flexible to these changing requirements.
 Healthcare sector
• Segments such as clinical trials research and testing, diagnostics, and health
related data analytics could see a spurt in demand in the coming years.
COVID-19 has highlighted the importance of collaborative research and
cross-border engagement in R&D and clinical trials.
• India can leverage its existing strengths in the pharmaceutical industry
and its scientific and technical manpower to tap into these
opportunities. With greater focus on health sector preparedness and
capacity, there will be increased overseas demand for doctors, nurses
and paramedical staff, creating opportunities for mode 4 (temporary
movement of service providers) based services exports from India in
the health sector.
• India’s ability to realize these opportunities will depend on its ability to
augment capacity and quality as well as proactive steps such as bilateral
government-to-government and institutional arrangements to facilitate the
mobility of health workers without undermining domestic availability.
 Conclusion
• The service sector has not only outperformed other sectors of the
Indian economy but has also played an important role in India’s
integration with world trade and capital markets.
• IT-IT enabled services and business services have been the most
important segments in driving India’s presence in the global services
market.
• The sector has also witnessed significant liberalization and regulatory
reforms, though this process has been fraught with political economy
challenges and debates in several subsectors.
.• The growing significance of services for the Indian economy has led to an
increased focus on this sector in multilateral, bilateral, and regional trade
negotiations.
• India has been a key proponent of the GATS negotiations and has been
pushing the agenda on cross border mobility of service providers and
unrestricted data flows between countries. however, as services are
subject to many domestic regulations, there has been limited progress
under the WTO.
• These challenges persist even in its comprehensive bilateral and regional
agreements covering services, although the commitments made and
received by India improve upon the GATS commitments in terms of both
scope and depth. however, review of the post-FTA evidence suggests that
India has not been able to secure greater market access in services from its
FTA partners.
• Hence, as India reviews its services agreements, it will need to strategically
pursue its interests in the service sector and also focus on upgrading
domestic standards and improving the business environment to better
leverage these agreements through exports and investments.
Nature and Orientation of India’s services growth
• The Service sector has not created a commensurate amount of
employment and depends largely on exports of skill-based
services. hence, its ability to draw surplus labour from agriculture
remains limited unless it becomes more broad-based.
• The sector also exhibits weak value-added linkages with other
sectors of the economy such as manufacturing. Services which
relate to the adoption of new technologies, business practices and
innovation play a small role in India’s manufacturing exports.
• The intra-services as opposed to services-manufacturing linkage and
the traditional services-manufacturing linkage are much stronger,
though this link is likely to strengthen in the future with the emergence
of industries like automotive and electronics, where there is more
scope for the integration of modern services.