What Drives India's Surge in Service Exports?

• Published date: 01 February 2017
• Author: Pravakar Sahoo,Ranjan Kumar Dash
• Date: 01 February 2017
• DOI: http://doi.org/10.1111/twec.12411

What Drives India’s Surge in Service

Exports?

Pravakar Sahoo

1

and Ranjan Kumar Dash

2

1

Institute of Economic Growth, Delhi University, Delhi, India and Visiting Fellow, Bruegel, Brussels,

Belgium and

2

Symbiosis School of Economics, Pune, India

1. INTRODUCTION

EXPORTS facilitate better resource allocation, efficient management style, economies of

scale and efficiency of production –and thereby favourably impact economic growth.

This has been well established in the literature (Krueger, 1998; Zahler et al., 2014). On the

other hand, there are studies (Hallward-Driemeier et al., 2002; Wagner, 2007) that empirically

prove that most productive firms –owing to scale economies, efficient management and

production –engage in exports. Following the success of East Asian countries,

1

India

followed the export-led growth strategy in the 1990s as a part of its structural adjustment

programme comprised of liberalisation, privatisation and open economy policy approach.

Empirical evidence also suggests that the export-led growth strategy has been successful in

India (Dhawan and Biswal, 1999; Nataraj et al., 2001). While exports contributed only around

7 per cent of GDP until 1990–91, their contribution has increased substantially over the past

two decades and reached 24.64 per cent in 2011–12. In tandem, the share of service exports

in the GDP has also risen from a mere 1.39 per cent in 1990–91 to 7.73 per cent of GDP in

2011–12. The growth of India’s service exports

2

is in line with the Indian economy’s chang-

ing growth pattern, largely supported by the contribution of the services sector.

3

International exchange is increasingly taking the form of trade in tasks/processes (trade in ser-

vices) than trade in products (trade in goods) as the production and business processes are sliced

into different parts that are performed in different locations across the world (Grossman and

Rossi-Hansberg, 2008). Trade in services refers to one economic unit performing some activity

for the benefit of another across countries. The process of producing a service is the activity that

affects the person or goods belonging to some economic unit, whereas the output itself is the

change in the condition of the person or goods affected (Hill, 1977). Increasing tradability allows

the cross-border exchange of services, such as professional services, that previously required the

close proximity of providers and consumers (World Bank, 2010). India is one of the beneficiaries

of the increase in world trade in services. India’s open economy policy since 1991 along with

We gratefully acknowledge three anonymous referees for valuable and insightful comments that helped

us to improve our paper. However, usual disclaimer applies.

1

East Asian countries have experienced a sustained increase in exports and economic growth following

the export-led growth strategy over the past three decades. Several studies have established the effective-

ness of trade liberalisation strategies in promoting higher economic growth in East Asian countries

(Krueger, 1998).

2

For example, the growth rate of services exports between 2000–01 and 2011–12 was nearly 881 per

cent in current prices, which is far higher than the 140 per cent absolute increase in world total exports

in services during the same period.

3

The contribution of the service sector to the GDP increased from 50 per cent in 1990–91 to 66 per

cent in 2011–12.

©2016 John Wiley & Sons Ltd 439

The World Economy (2017)

doi: 10.1111/twec.12411

The World Economy

wide-ranging economic reforms in sectors such as finance, information technology, telecom,

(Table 1) FDI led to increase in digitised economic activities that help ed India connect with the

rest of the world. Further, the availability of skilled manpower at internationally low wage rates

due to the government-supported higher education sector facilitated services-led growth and

India’s surge in services exports, particularly modern services exports (MSE).

4

Much of India’s services exports constitute exports of MSE such as software, business,

financial and communication services. Modern services, which have been growing much faster

than traditional services exports (TRSE), include travel and transportation in case of India. The

share of MSE contributes almost three-quarters of India’s total services exports. Further, India

(particularly since 1991 onwards) has progressively allowed foreign investors in many services

sectors by hiking equity caps (Sahoo et al., 2013; Sahoo, 2014), which enabled Indian firms to

get integrated with the rest of the world. These reforms along with the availability of well-

trained graduates and improved information and communication technology (ICT) infrastruc-

ture have allowed India to reap benefits in the international services exports market.

Given the high trade andtransaction costs in India because of poorphysical infrastructure, India

has been increasingly depending on services exports to fill the gap created by the deficit in goods

exports and maintain external stability and growth. Although India’s share in the world services

exports has gone up from 0.97 per cent in 2000 to 3.3 per cent in 2013 –duemostlytoexpansion

in software, business and financial services –India could be a bigger player in the world services

market provided it adopts the right policies to use the existingendowment factors efficiently.

Services are direct inputs into the production function and improve the productivity of other

factors of production. Therefore, sustaining productivity and competitiveness in services expor ts

is important for India’s services sector-led growth. Although many studies have analysed the fac-

tors affecting India’s total exports and manufacturing exports, there is hardly any empirical study

that systematically analyses determinants of service exports in India over the last three decades.

In this context, the present paper empirically examines the determinants of India’s services

exports. As some services like software, business and financial services, which constitute

modern services, have witnessed tremendous growth during the past few decades, we not only

examine the determinants of services exports but also the modern and traditional services

exports separately. Some of the questions the present study attempts to answer are as follows:

(i) Are the determinants of India’s services exports any different from other country-specific

and cross-sectional studies? (ii) Are there any differences in determinants of modern and tra-

ditional services exports? (iii) Is there any role for financial sector development, FDI inflows

and telecommunication penetration for the success of India’s services exports? The study con-

centrates on factors like financial sector development, telecommunication, human capital and

FDI flows as the past three decades have witnessed substantial reforms and progress in these

sectors in case of India (Table 1). Unlike other studies, where single infrastructure and finan-

cial indicators are considered, the study has developed a composite financial development

index and infrastructure index by taking all the relevant financial and infrastructure indicators.

Our focus is to examine whether the determinants of phenomenon success of India’s services

4

Our classification of total trade into traditional and modern services is based on the analysis provided

by Baumol (1985), Ghani and Kharas (2010) and Eichengreen and Gupta (2013). Based on the informa-

tion and communication technology (ICT) revolution and rapid growth in 3Ts such as technology, trans-

portability and tradability, financial services, insurance, business processing and software services could

be considered as modem services compared with transport and travel services, which is categorised as

traditional services.

©2016 John Wiley & Sons Ltd

440 P. SAHOO AND R. K. DASH