India's service sector is losing its sheen

China has overtaken India in global commercial services exports, says trade economist Suparna Karmakar.

The writing on the wall is gradually becoming clearer. India's service sector prowess is already under challenge, and will be entirely overshadowed unless our policymakers wake up from their current complacent slumber, and pretty quickly at that.

A tiny sliver of hope comes from the fact that the Economic Survey of India this year finally reported what was a known fact for the past five years - that India is rapidly losing ground to China when it comes to global exports of commercial services.

Data from the World Trade Organisation indicate that although software and IT services exports have so far continued to be steady and India's share of global service exports rose to 4.4 per cent in 2010, China overtook India in the second half of the last decade and now accounts for 6.1 per cent of global commercial service exports (excluding intra-European Union).

It is true that the composition of service export baskets of the two countries is vastly different. India largely specialises in business service exports (reflected in the high share of "other commercial services" in total service trade).

Chinese exports are focused more on transport and travel services, the two together accounting for nearly 50 per cent of China's commercial service exports in 2010 compared to less than a quarter for India.

It is also possible that China's net importer status has encouraged analysts and politicians to gloss over the consistent growth in its service trade performance.

However, that state of affairs may change soon, as a closer look at the composition of trade data suggests.

China's exports of commercial services expanded by 32 per cent, nipping at the heels of India's 33 per cent expansion in 2010 (the countries were ranked 3rd and 5th respectively in the list of leading exporters of commercial services).

India's cause for concern, however, emanates from the fact that while China has been a net importer of services, for a few years now it has been a net exporter of "other commercial services".

In 2010, China's net surplus of "other commercial services" trade was $16.19 billion, a little less than half of India's surplus of $36.78 billion, presumably supported by the impressive growth in the infrastructure and trade-related services.

Comparing the change in shares of exports and imports in other commercial services further supports my case. Between 2005 and 2010, the growth in China's other commercial exports to the world averaged 25 per cent to the 18 per cent growth in its other commercial imports.

The corresponding export and import shares for India are a mirror opposite at 20 and 24 per cent respectively. The picture becomes a little more stark if we take the 2010 data; the growth rates of other commercial services exports and imports in China was 38 and nine per cent, compared to India's 36 and 66

per cent respectively.

It is, thus, not difficult to postulate that very soon India may post a net deficit in its other commercial services trade with the rest of the world.

Also notable is that India's net commercial services surplus was a mere $7.14 billion in 2010, presumably owing to a more rapid increase in the imports of transportation services in recent years, which grew at a rate 10 percentage points higher than the exports of transportation services from India.

Transportation services imports were around 40 per cent of India's total commercial services imports in 2010. A second cause for worry is that a recent forecast from the US-based Hackett Group is that offshoring of jobs (in finance, IT, and other business services) to India will begin to decline starting 2014, and will reach the end of its life-cycle in eight years.

Should that forecast come true, it will have serious implications for sectoral revenues and export earnings, and the last bastion of India's supremacy in services trade would have been breached.

Despite the finding being contested by other research firms like KPMG and AT Kearney that sees sustained prospects for the sector, it is undeniable that a demand-led slowdown in the domestic industry and increasing competition from other outsourcing hubs in the region will pose serious challenges in this decade.

In fact, the large build-up of capacity in some countries (including China), even in the sector of India's demonstrated global competitive advantage - IT and IT-enabled services - suggests that they might act as barriers to entering new markets.

India's particular development path has relied on fast growing services, accounting for 56.3 per cent of GDP in 2011-12 (according to the Advance Estimates), which has boosted its overall economic growth rates, social development indicators and even literacy levels for nearly two decades.

But the outlook for some of the services in the economy is now linked to global prospects, and the unfolding events in the euro area could lead to some sluggishness in the export-oriented parts of the sector.

Course correction calls for urgent policy interventions from policymakers, in the form of implementing more liberal service sector market access policies (including for services incidental to manufacturing) and speeding up non-interventionist regulatory and administrative reforms, both in the traded and non-traded service sectors.

Also, a more flexible official stance in the multilateral negotiations may prove helpful in improving sentiments, if only by boosting the morale of foreign investors and trade partners.

Desperate situations call for proactive measures.

The author is a trade economist