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An Overview of the Indian Services Sector

An Overview of the Indian Services Sector. Arpita Mukherjee July 19, 2008. Outline of the Presentation. Indian Services Sector - Trends and Developments Factors contributing to Growth Trade in Services India’s position vis-a-vis other Countries Sector-wise Services Trade

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An Overview of the Indian Services Sector

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  1. An Overview of the Indian Services Sector Arpita Mukherjee July 19, 2008

  2. Outline of the Presentation • Indian Services Sector - Trends and Developments • Factors contributing to Growth • Trade in Services • India’s position vis-a-vis other Countries • Sector-wise Services Trade • Impact of Growth/Liberalisation/Globalisation • External Barriers • Domestic Challenges • Reforms

  3. Indian Services Sector • Largest sector of the economy - contribution to GDP increased from 41% in 1990-91 to 61.8% in 2006-07 • Since 1991, the services sector has grown at a faster pace than the economy as a whole • Between 1990 and 2005, the average annual growth of services was 7.2% in India, compared to 3.1% in the US, 6.9% in Singapore and 3.2% in the UK • Between 2002-03 and 2006-07, services contributed 69% to India's overall GDP growth • Growth in services was over 11% in 2006-07

  4. Indian Services Sector…..cont • In 2005, services contributed to 69% of organized sector employment (Economic Survey 2007-08) • Employment in IT/BPO services increased from 284,000 in 1999-00 to 1.6 million in 2006-07 • Boston Consulting Group estimated 40 million new services jobs, $200 billion revenue by 2020 • Certain services such as communication services, insurance and banking, IT have grown at a much faster rate than the growth of the service sector • Total revenue of the IT/BPO sector increased ten folds since FY 1998

  5. Factors Contributing to Growth • Liberalisation since the 1990s – few entry barriers (retail, legal, railways, insurance, etc.) • Positive impact of liberalisation – telecommunications • Investment by Indian Corporate • Attractive destination for Foreign Investment • Services sector (financial and non-financial) has attracted the highest cumulative FDI inflows: April 2000-March 2008. 22.64% of total inflows • Computer hardware and software ranked 2nd, 13.07% of total inflows • Telecommunications – 6.81% • Availability of educated English speaking manpower at competitive prices • Government incentives and support

  6. India’s Trade in Services • Share of services in total trade of India increased from 20.9% in 1997 to 28.9% in 2006 • Services exports as percentage of total exports nearly doubled – 20.3% in 1997 to around 39% in 2006 • Nearly two-third of the revenue of IT/BPO sector is through exports • Services import as percentage of total imports was 21.4% in 2006 • India currently enjoys trade surplus in services • Exporter of knowledge-based services • Skilled Labour shortage - Ageing population on developed countries • Importer of infrastructure services

  7. Trade in Services…cont • Outsourcing Hub • About three-fourth of the Fortune 500 companies and at least half of Global 2000 corporations are sourcing technology related services from India • Cost saving of 25-50% • Moving up the value chain • Multi-location delivery platforms • Indian companies are investing abroad

  8. Ranking of India in Trade in Commercial Services Source: WTO, International Trade Statistics 1996, 2007

  9. India Position vis-a-vis Other Countries Source: WTO, International Trade Statistics, 2007 Note: Value is in billion dollars and share is in percentage terms.

  10. RCAs for India Source: BoP Statistics, IMF

  11. Sector-wise Services Trade • Transportation Services • Share was 1.2% in world’s export in 2006, 0.6% in 2000 • Share was 3.3 % in world’s import in 2006, 2.1% in 2000 • Travel Services • Not among the top 15 exporters • Share 1% in world’s import in 2006, was 0.6% in 2000 • Other Commercial Services • Share 4.2% in world’s exports in 2006 • Share was 2.6% for imports in 2006

  12. Sector-wise Services Trade • Communication Services • Ranked 4th among exporting countries and 9th among importing countries in 2006 • Construction Services • 7th largest exporter and 10th largest importer in 2006 • Financial Services • 10th exporter and 8th importer in 2006 • Computer and Information Services • Ranked 2nd in terms of exports and 7th in imports in 2006

  13. Impact… • Performance and global competitiveness of the sector determines government’s negotiating position • India has autonomously liberalised most of the service sectors • Need foreign investment/technical know-how • Exports are increasing - Indian service providers are facing several barriers in markets of export interest • From a passive player in the Uruguay Round, India has an offensive interest in services liberalisation in the on-going Doha Round • Important component of India’s Bilateral Agreements

  14. Challenges - in Foreign Markets • Barriers faced by professionals • Lack of recognition of qualifications and experiences • Restrictive work permit/visa regimes • Non-transparent/cumbersome administrative procedures • Economic Needs Tests/Labour Market Tests • Wage Parity conditions • Social security contributions without corresponding benefits • Nationality/residency/citizenship/registration requirements • Quantitative ceiling

  15. Challenges - in Foreign Markets …………….cont • Barriers to establishing presence in foreign country • Form of legal entity • Local incorporation requirements • FDI restrictions • Nationality/residency requirements • Economic Needs Tests • Requirement to employ locals • Restrictions on advertising • Minimum capital requirements • Limitation on foreign exchange and profit repatriation • Limitation on the type of projects undertaken by foreign service providers

  16. Challenges - in Foreign Markets…….cont • Barriers to outsourcing/cross-border trade • Commercial presence requirement • Security/data protection issues • Anti-outsourcing sentiments • Non-recognition of qualifications • Other Barriers • Cumbersome licensing procedures • Environment and labour standards • Subsidies/Government procurement • Security issues • Lack of market knowledge • Languages

  17. Other Challenges • High dependence on some key markets • The US alone accounts for two-third of the software and services exports while Europe accounts for around 25 per cent. Within Europe, the UK accounts for around 15 per cent followed by Germany 2-3 per cent • Competition from other developing countries

  18. Domestic Challenges • Infrastructure • Quality of physical infrastructure affects the efficiency of the services sector • In 2005-06, total logistic cost was 15% of GDP • Shortages of Right Skills • Do we really have excess supply? • Gross enrollment ratio is 11% compared to the global average of 23.3 % • Quality and standards

  19. Domestic Challenges …….cont • Slow reform process • Regulatory framework is evolving – energy, education, retail, postal and courier – uncertain investment climate • Backdated/outmoded regulations • High and multiple taxes • Multiple clearances requirements • Data Protection • Lack of inter-ministerial coordination – piecemeal policies/liberalisation

  20. What needs to be done? • Comprehensive services sector policy • Upgrade Infrastructure • Logistic infrastructure – freight corridors, port facilities, storage and warehousing services, etc. • Upgrading smaller cities & Urban planning • Broadband & internet connectivity • Electricity • Establish the Regulatory Framework which promotes efficiency and competition • Amend the outdated and outmoded laws • Enact new regulations

  21. What needs to be done? …….cont • Education & Skill Development • Enhance both quantity and quality of higher education • Enforcement of international standards of training and qualifications • Revise curricula at regular intervals • Focus on development of analytical and creative skills • Teaching profession should be made more attractive • Public private cooperation • Collaborations with councils/industry bodies in training • Ranking of institutes

  22. What needs to be done? …….cont • Rationalize taxes, licensing, etc. • Diversify exports markets and areas of operations • Public-private cooperation in developing Global Market Strategies • Indian Embassies needs to be more proactive • Negotiate multilaterally/bilaterally to remove/reduce barriers in markets of export interests • Ease trade barriers through • Mutual Recognition Agreements • Totalization Agreements • Cooperation Agreements

  23. Thank You

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