Services Exports Take Off

India’s booming services exports could come to the country’s rescue even as merchandise exports slump in the face of the grinding war in Ukraine. In January 2023, the value of services exports for the first time caught up with merchandise exports, shaving the nett monthly trade deficit to near-zero. Total services exports in January hit a record high of $32.24 billion (Rs 2.68 lakh crore). Merchandise exports ended only a fraction higher at $32.91 billion.

Taken together, the overall trade deficit in January 2023 was minuscule. If this trend continues, the current account deficit (CAD) in 2022-23 will be lower than expected. In the ten months from April 2022 to January 2023, the merchandise trade deficit was a humongous $233 billion, largely due to high crude oil and commodities prices. In sharp contrast, services exports during April-January recorded a trade surplus of $121 billion. This trimmed the overall trade deficit in goods and services to a manageable $112 billion.

With the monthly trade deficit down to near-zero in January, FY23 could end with an overall trade deficit of around $120 billion. Nett remittances are meanwhile likely to top $100 billion in 2022-23, leaving India with a healthier CAD than estimated. Add nett foreign direct investment (FDI) of well over $50 billion and the balance of payments (BoP) could end up in positive territory. Even three months ago, that seemed a bridge too far.

While information technology services account for 50 per cent of India’s services exports, finance, healthcare consultancy, education, hospitality, travel and tourism are showing a sharp uptick. An estimated $160 billion worth of global IT deals are up for renewal in the next quarter. With international firms cutting costs and laying off staff, Indian IT companies like TCS, Infosys, HCL and Wipro with lower costs than foreign-based competitors are expected to win a large share of renewed and new contracts.

Tourism too is likely to be boosted by India’s high-profile G20 presidency. Large foreign delegations have already visited India as part of nearly 200 domain-specific forums. The aviation industry is gearing up to cater to a surge in inbound and outbound travel in business, leisure and adventure. Air India’s order of 470 Boeing and Airbus aircraft will take the total number of passenger planes in India to 1,200 – still lower than China’s 4,000 commercial passenger aircraft. India’s largest airline, Indigo, is expected to take delivery of over 200 previously ordered aircraft in the next two years. Air India too has options for 400 more aircraft as it proceeds with its merger with Vistara in partnership with Singapore Airlines.

To boost tourism revenue, airport infrastructure needs to keep pace with the surge in aircraft deliveries. The new greenfield airports at Noida and Navi Mumbai along with several others around the country could substantially raise inbound leisure and business traffic.

In a recent article, former RBI governor Raghuram Rajan and Pennsylvania State University economist Rohit Lamba argued that India should not follow China’s manufacturing-led export policy but instead focus on a services export-led strategy. This is what they wrote: “The government has been trying to promote manufacturing, partly through better logistics but primarily through higher tariffs and production subsidies. India tried this before and failed, for straightforward reasons. A tariff on inputs is a tax on exports. Any manufacturing exports-led growth strategy today faces protectionism from developed countries, reluctant to accept another China storming its way into their domestic markets and decimating the small-town manufacturers that still survive.

“There is an alternative path, building on the old vision of increasing openness and liberalisation. It draws on India’s people, their minds, and their creativity. To follow this path, we should certainly continue to build out infrastructure and encourage our manufacturers to seek out new global markets. But we should particularly increase our presence in global services by strengthening our human capital. Two recent developments give India an opening. First, the pandemic has made it easy to provide high value added services at a distance. If a consultant can work from home in Chicago to service clients in Austin, can’t she do the same from Hyderabad? The markets for services like consulting, legal and financial advisory, education and telemedicine are ripe for globalisation. And services delivered online, unlike goods, do not cross a physical border where they can be stopped.

“Second, a key element in providing these services is shared values and trust, especially around the data harvested. This automatically puts a number of authoritarian countries like China and Russia at a disadvantage. No customer cares where they are buying a vacuum cleaner from, so long as it works well. But if they are asked to share their medical or financial data, or their firm’s strategy, they care very much. Will the provider protect their data? It helps if the provider comes from a transparent and tolerant democracy that is driven by the rule of law.”

India’s manufacturing impetus is aimed not only at boosting exports of goods but at cutting imports of manufactured merchandise that can be made in India. Much of this involves a beneficial transfer of advanced technology as in recent defence and aviation deals. A hybrid manufacturing and services export strategy is best suited to India. Madan Sabnavis, chief economist of the Bank of Baroda, said recently: “As India widens its manufacturing output, it can be geared to exports. Manufacturing is where most sustainable jobs are created and as we move along this path, we should look at exports as being an engine to fire.”

India is in a unique position of possessing both a skilled software ecosystem and a growing manufacturing base. Low wage costs make the export of manufactured goods from India attractive, as carmaker Maruti Suzuki has shown by exporting 2,63,068 passenger vehicles in January-December 2022. Maruti Suzuki India now accounts for 60 per cent of Suzuki’s global car production and 45 per cent of its global profits.

Maruti Suzuki is not alone in turbocharging car exports. Hyundai Motors India and Kia India will end the current fiscal with combined exports of over 2,50,000 passenger vehicles. Clearly, India’s export future lies in both services and manufacturing, not one at the expense of the other.

Minhaz Merchant The writer is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa 2014). He is founder of Sterling Newspapers Pvt Ltd., which was acquired by the Indian Express Group