DEPARTMENT OF ECONOMICS

India’s Trade in Services

by

L. G. Burange

Sheetal J. Chaddha

Poonam Kapoor

WORKING PAPER UDE 31/3/2009

JULY 2009

1

DEPARTMENT OF ECONOMICS UNIVERSITY OF MUMBAI

Vidyanagari, Mumbai 400 098.

Documentation Sheet

Title:

India’s Trade in Services

Author(s):

L. G. Burange

Sheetal J. Chaddha

Poonam Kapoor

External Participation:

-----

WP. No.: UDE31/3/2009

Contents: 35 P, 14 T, 8 F, 44 R

No. of Copies: 100 Date of Issue: July 2009

Abstract

The Indian economy has witnessed a major boost in the last decade, which can

chiefly be attributed to the growth of its service sector. India‟s service trade to GDP ratio has

risen to 48 percent of GDP in 2006-07 from 29.20 percent of GDP in the year 2000-01. India

has emerged as the fastest growing nation in global services trade. Acknowledging the

growing significance of the service sector in India and across the globe the paper analyses

services trade in India, its composition, revealed comparative advantage of various sectors of

services and compares their growth in the pre and post liberalization period. An assessment

of performance of services at the aggregated level is undertaken; the paper covers the period

from 1980 to 2007.

The paper illustrates that the major growth in the exports as well as imports of

services have occurred chiefly in the post liberalization period i.e. from the year 1991 to the

year 2007. For this period, India‟s exports of services have grown 19.34 percent and imports

have registered 15.91 percent growth. For the world, the growth was 8.27 and 7.74 percent

respectively. The paper identifies some of the significant concerns regarding Indian economy

growth which has been guided by its service industry. It is clear that the growth in the Indian

services sector is a result of change in the global environment, rather than any well planned

internal policy. The opening up of the economy has certainly propelled the growth of

services and its trade; however India needs to give focused attention to sustain this growth.

Key Words: Trade, Services, Liberalization, Revealed Comparative Advantage

JEL Code(s): F10, F14

2

India’s Trade in Services

L. G. Burange

Sheetal J. Chaddha

Poonam Kapoor

1. INTRODUCTION:

One of the key consequences of the advance in science and technology has

been the growth in trade across borders. The progress made in the field of

transportation, communication and the recent ascent of the internet has opened a

Pandora‟s Box for firms seeking to expand their businesses. The easing of the

regulatory framework in conjunction with liberal policies adopted by countries across

the globe has made the world a local market place. International trade in goods as

well as services has largely benefited from this trend. However, trade in „goods‟ is

different from trade in „services‟. The difference lies in the inherent nature of the

two. Services are characterised by intangibility, invisibility, transience and non-

storability, thus making them different from „goods‟. Of course, all these

characteristics mentioned above may not apply simultaneously to a service.

Moreover, „service‟ is a process, while „good‟ is an object. Hence, they can neither

be easily defined, nor measured. For example, tariffs and quotas are a reflection of

the barriers in merchandise trade. However, impediments to trade in services are

much more difficult to define and quantify. The quality of a „service‟ cannot be

identified before it is purchased, thus these are referred to as „experience goods‟. So

also, for a service to be rendered, often, the supplier and the consumer need to be in

close proximity. These differences between the two make trade in services different

from that in goods.

The conventional concept of trade in services hovered around those services

that could be transferred across borders. This involved a separation of the producer

and the consumer, as in the case of computer software. However, later the concept

The inputs of an anonymous reviewer and suggestions made by Shruti Yamini are gratefully

acknowledged. However, the authors remain solely responsible for any errors.

3

was broadened to incorporate non-separated services as well, where the consumer

may travel to the country of the service-provider or vice-versa. According to the

traditional view of economists services are perishable and non-tradable. Therefore,

there were neither any theories to address the possible problems of trade in services

nor any framework for the measurement of their trade. Initially some economists like

Baumol (1967) made valuable contributions to the study of „services‟. His „Cost

Disease Theory‟ discusses the rising costs associated with service industries. Hill‟s

(1977) concept of services was similar to the classical economists. He stated that

services cannot be accumulated and thus need provider and user to be in close

proximity.

Bhagwati (1984) analysed trade in services and focused attention on the

supply side effect on the growth of the service sector; and called the supply side

specialisation „splintering‟. According to him, there are two groups of services, first

one is that require the physical proximity of the user and the provider, and second

group is of those services which are not essentially dependent on the physical

proximity because of technical advancement. The second type of services like

banking and insurance is more in demand. Gordon and Gupta (2003) along with

supply side have also discussed demand side factors which were responsible for the

growth of the service sector in the 1990s. On the basis of their growth pattern, service

activities are being grouped into fast growers which include IT, communication

services, financial services, hotels and restaurants, community services, trade and

distribution services, and trend growers which include real estate, legal services,

transport, storage, personal services, and public administration and defence (PAD).

During the 1990s tradability of services increased many folds. Technological

change, greater mobility of people, cheaper transmission and communication costs,

and increase in merchandise trade have played a catalytic role in propelling the trade

in services. Karmakar (2005) addresses the world economy, post 1990s as „service

economy‟. In fact, trade in services is fast catching up and comprised about a fifth of

the total world trade in 2001 (WTO 2001).

The growing importance of services trade can be gauged from the fact that a

General Agreement on Trade in Services (GATS) was formulated in 1995 as a result

4

of the Uruguay Round of trade negotiations. GATS is the first set of international

rules for the international trade in services. It not only aims at stimulating trade and

development but also lends credibility and reliability to the system of international

trade. GATS also focus on the concerns of the developing nations. It provides

flexibility to the member countries; the members can choose service sectors they

want to offer for commitments under the GATS rules. The obligations under the

GATS comprise „General‟ and „Specific‟ commitments. The former are applicable to

all the member countries of the WTO, regardless of the sectoral commitments that

the member countries may offer. The latter apply to only those services that are

included in the member‟s GATS schedule. For the purpose of negotiations, the

GATS classify the entire range of services trade into following four „modes‟ (United

Nations 2002).

Mode 1 (Cross-Border Supply) refers to a situation where the services cross

international borders, for example a teacher dispatching teaching material to students

in other country; a doctor advising his patient abroad or designer sending designs for

clients of another nation through electronic means.

Mode 2 (Consumption Abroad) is where consumer moves into the territory

of the service provider country to consume services e.g. tourism, use of hotel or

restaurant services abroad; ship or aircraft undergoing repair abroad.

Mode 3 (Commercial Presence) implies that the service provider, in the form

of a legal unit moves into the geography of the consumer. A foreign company sets up

its subsidiaries, branches, or a joint venture in the host country e.g. foreign banks or

food chain setting up operations.

Mode 4 (Movement of Natural Persons) entails the export of workforce. The

service provider temporarily (for less than a year) enters another member country for

providing service e.g. fashion models or dancers , engineers, doctors, consultants, or

cooks visiting other countries to supply their services.

Many developing countries are reaping large benefits from the expanding

service sector within their economies. The presence of skilled and semi-skilled

workforce coupled with improved technology is enabling these countries to

undertake exports of the Mode 1 and Mode 4 type. As far as India is concerned, the

importance of the service sector in its economy is well-established. In the domestic

5

economy the services sector has considerably augmented its contribution. Between

1950-51 and 2003-04, the share of agriculture in GDP fell from 55.28 percent to

21.74 percent, while the share of industry and services increased from 10.65 percent

to 19.42 percent, and 34.07 percent to 58.83 percent, respectively. Since the 1990s

the share of agriculture has declined and that of the industrial sector has stagnated.

On the other hand, the services sector has been growing steadily. The growth of

India‟s service sector is much higher than the combined growth of agriculture and

industry. The World Bank (2004) attributes the immense growth in India‟s economy

in the decade of the 1990s to the thriving services sector. It is interesting to note that

in Indian economy the contribution of the services sector has climbed higher even

before the country can truly be called a developed one. Nevertheless further growth

of the Indian economy largely depends on the growth of its service sector (GOI

2009).

The service sector has not only made waves in the domestic economy, but has

also managed to make its presence felt in the external trade of the country. India has

emerged as one of the top-most countries in exports and imports of services. India‟s

trade to GDP ratio, increased from 22.50 percent in 2000-01 to 34.80 percent by

2006-07. However on including services trade, the rise is much higher at 48 percent

of GDP in 2006-07 from 29.20 percent of GDP in 2000-01 (GOI 2008). The share of

services trade as a percentage of total trade in India in 2001 has been about 30

percent, which has far exceeded the world average (WTO 2001). In comparison to a

mere 5.40 percent of annual average growth in merchandise exports, the growth in

services exports has been a stupendous 23 percent. India‟s comparative advantage in

services exports is not only greater than goods, but is also increasing (World Bank

2004). After recognising the role of the service sector for the Indian economy,

India‟s stance towards the GATS changed radically. India was reluctant to support

the GATS in its early years. However, it later displayed keenness on negotiating with

other member nations and also undertaking reforms in this sector. India has a

comparative advantage in Mode 1 and Mode 4 type of services and is thus pushing its

interests with the other member nations (Das 2006).

In light of the escalating role of the services sector in the Indian economy, the

paper attempts to evaluate the performance of India‟s trade in services. In addition to

6

the growth in services trade, India‟s comparative advantage in services trade is also

evaluated. The principle of comparative advantage demonstrates that for trade to

occur the opportunity cost of production is more important than its absolute cost. The

concept of comparative advantage has been used by economists to explain the basis

of trade. The onus of developing the basic theory of comparative advantage goes to

Ricardo (1817). He explained that a country should specialise in products and

services in which it has a comparative advantage. His theory of comparative

advantage was further developed by Heckscher-Ohlin and Samuelson. Their model,

known as the H-O-S model, suggested that countries will produce and subsequently

export those products whose raw materials are available in abundance and import

such products that exploit the country‟s scarce factor. Balassa (1965) later developed

the concept of revealed comparative advantage (RCA). The term indicates that

countries specialise and export items which they can produce at lower cost in

comparison to the other countries. He suggested that the comparative advantage of a

country depends on its physical and human capital resources. Any country with a

change in human capital, physical capital and trade policies will witness a shift in the

comparative advantage of the various sectors.

A number of studies assessing comparative advantage in merchandise trade

have been conducted. However, the growing importance of services trade has led to

many recent studies in this area also. Smith (1992) examined the performance of

major competitor countries in the international financial services. He studied markets

of various financial services and evaluated performance on the basis of the shares of

the major institutional players in the US, Japan, UK, and Europe. He discussed how

banking sectors of different countries will behave in a liberalised international trade

environment. Acknowledging the recent growth of the services sector, Takatoshi and

Krueger (2003) analysed services trade in the Asia-Pacific region. They studied the

impact of increasing services sectors mainly telecommunications, financial services,

international tourism, and accounting, on the economies of Taiwan, Korea, and Hong

Kong. Kumar (2005) examined the strength of the South Asian countries and stated

that these countries have natural comparative advantage in labour intensive services.

He reviewed South Asian countries in the GATS framework of the four modes of

supply and concluded that all South Asian countries have RCA in Mode 4, i.e.

movement of natural persons. India also has a stronghold on Mode 1, i.e. cross

7

border trade, and along with its neighbouring countries like Sri Lanka and Nepal,

India has a comparative advantage in Mode 2, i.e. consumption abroad. Dash (2005)

on the other hand, scrutinised the economic implications of outsourcing for US and

India within the context of the Ricardian framework.

Seyoum (2007) studied revealed comparative advantage indices to measure

developing countries comparative advantages in selected services for the period 1998

to 2003. His work included services like business, financial, transport and travel.

Makoto (2007) investigated the comparative advantage structure of US trade in

services, using the RCA index. He showed that the variances in the RCA deviations

points out a similarity between the export structure of the U.S. and the world. He thus

concluded that the U.S. has a strong comparative advantage in knowledge-based

services.

Langhammer (2004) studied strengths and weaknesses of RCA for US, EU

and Japanese services trade where he argued that RCA in international trade in

services cannot be compared with RCA in trade in goods. According to him the

essential difference is that services need producer-consumer proximity and is also

dominated by various domestic regulations. Border measures do not greatly influence

the RCA in services trade but they are more influenced by different domestic

regulations.

The paper attempts to examine the growth in India‟s exports and imports of

services and evaluates the composition of services trade. It also assesses India‟s

comparative advantage in exports and imports of the services and analyses in which

particular sub-sector of service India enjoys a comparative advantage. This analysis

at the sub-sector level is beneficial for making conducive policies, which can aid the

acceleration of trade in services in India.

The above introductory section reviewed the concept and literature on

services trade and its growing worth. Section 2 of the paper deals with the

methodology of the study. The third and fourth sections evaluate the growth and

revealed comparative advantage in India‟s service trade respectively and Section 5

concludes the study.

8

2. DATA ISSUES AND METHODOLOGY

Even after being established as a prominent sector in all types of economies,

there is still a dearth of proper method of measurement, collection and sorting of data

in transactions of services. The increased transaction of services has enhanced the

need for better and internationally comparable data for negotiations and agreements.

However, while negotiations at the GATS level are based on the four modes

mentioned above, the data is not compiled in this form. This escalates the difficulties

at the level of negotiations during various rounds of talks of the WTO. Another

difficulty, especially in the case of India, is that the data available is at a very high

level of aggregation. This impedes scrutiny in greater depth. The comprehensive data

on the direction of India‟s services trade is also unavailable, thus restraining the

scope of the present study.

Nevertheless, in order to attain the above mentioned objective of assessing

India‟s services trade, the paper uses services data for India as well as the world from

two data sets in U.S. dollar values. The first set uses the IMF balance of payments

data for the period 1980 to 2007. This incorporates Transportation Services, Travel

Services and Other Commercial Services (OCS). However, the service categories in

this set are too broad, especially the category of OCS, and thus lack depth. The OCS

category comprises many services such as financial, insurance, legal, computer etc.

The importance of these services in world trade is escalating, and hence merits

attention.

International trade in services is classified as per the fifth edition of the

balance of payments manual (BPM5). The standard components of the BPM5

correspond to the four modes of services as described in the GATS framework. The

BPM5 classification of IMF comprises 11 categories of services. These categories

are further disaggregated at various levels and this is referred to as the extended

balance of payments classification (EBOPS). UN Service Trade provides data as per

the EBOPS classification and the paper uses this as a second data set for the period

2000 to 2005. However, the paper restricts itself to Level 1 of the EBOPS

classification since India does not report services data at lower levels. Yet another

limitation of the paper is that of the EBOPS data set itself. The world data in this case

9

w

i

wj

ij

X

X

x

x

w

wj

i

ij

X

xX

x

may not include all the countries since some of the countries do not report their data

as per the EBOPS classification. Hence, „world‟ here is restricted to the countries

reporting their data to UN Service Trade as per the EBOPS classification.

The study evaluates India‟s exports as well as imports of services in order to

obtain a complete picture of India‟s trade in services. In order to evaluate the growth

in India‟s service trade over two main policy regimes, i.e. the pre-reform and the

post-reform period, the study employs the kinked exponential growth rate model of

Boyce (1986), with the year 1991 acting as the watershed year with a major change

in policy orientation towards liberalisation. Thus the total period of 27 years, from

1980 to 2007, is categorised in two sub-periods. Sub-period 1 refers to the years 1980

to 1991, known as pre-reform period and the second sub-period comprises the years

from 1991 to 2007 referred to as the post-reform period. The annual compound

growth rate (ACGR) for the entire 27 year period is computed as per the log-linear

method.

The revealed comparative advantage index is computed as per Balassa‟s

(1965) method. According to Balassa, comparative advantage is „revealed‟ by the

relative export performance of individual product categories. Thus,

RCAij = ………………………….………………….…… (1)

where,

RCAij = Revealed comparative advantage of the ith

country‟s, jth

service,

xij = Exports of the jth

service by the ith

country,

Xi = Total service exports of the ith

country,

xwj = World exports of the jth

service

Xw = Total world exports of services.

However, the Balassa index can be modified to arrive at the following equation.

RCAij = ……….……………………...…………..……… (2)

In order to get a complete picture of India‟s comparative advantage the import

counter-part is also computed hence,

10

w

wj

i

ij

M

mM

m

RCAij = …………………………….………………..….… (3)

where,

RCAij = Revealed comparative advantage of the ith

country‟s, jth

service,

mij = Imports of the jth

service by the ith

country,

Mi = Total service imports of the ith

country,

mwj = World imports of the jth

service,

Mw = Total world imports of services.

If the RCA index for export/import for a particular service is greater than 1, it

implies that the country has a revealed comparative advantage in the exports/imports

of that service and vice-versa.

3. INDIA’S EXPORT OF SERVICES

In order to analyse India‟s exports in services, the paper uses two different

classifications as mentioned in the methodology above. The first sub-section looks at

the exports of services at an aggregate level, while the second sub-section delves on

the disaggregate level.

3.1. Export of Services – Aggregate Level

India‟s share in the world export of services was quite small at 0.78 percent in

1980. The share fluctuated in the range of 0.53 percent to 0.89 percent right until

1998. In 1999, for the very first time India‟s share in the total world exports touched

1 percent. This period falls under the Ninth Five-Year Plan (1997-2002) which

commenced on April 1, 1997. In February 1997, sectoral level negotiations were

concluded in the area of financial services. In mid December 1997, member countries

achieved improved commitments with a larger scope of participation. This reflected

in the growth of India‟s share of export of services in the world from the year 1999 to

2006. In 2005 it crossed the 2 percent mark, and by 2006 it reached 2.71 percent

(Table 1). In fact, in this year, India‟s share of invisible exports in the world‟s export

of service was the highest. But in 2007, the share dropped marginally by 0.06 percent

points to 2.65 percent.

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Although the decrease in the percentage share was minimal, yet the decline

should not be ignored. The year 2007 falls under the Eleventh Plan (2007-2012).

The objective of this Plan is „faster and more inclusive growth‟. However the

services sector has experienced a dip in its share in the opening year itself. This

slowdown highlights the need for a well planned approach towards services and its

various sub sectors. In fact, China‟s share in world exports of commercial services

surpassed that of India at 3.3 percent in 2006 and the country was 2 notches higher at

the 8th

position, while India was placed at the 10th

rank (WTO 2007).

Table 1: India‟s Share of World Exports of Services (Percent)

Figure 1: India‟s Share of World Exports of Services (Percent)

In terms of growth in exports, service exports from India have grown faster

than world exports. India positively has great possibility for exports of various

services apart from software services (GOI 2009). For the period 1980–2007, India‟s

service exports witnessed an annual compound growth rate (ACGR) of 12.85

Year India's Share of

Exports of Services

1980 0.78

1981 0.70

1982 0.78

1983 0.89

1984 0.86

1985 0.86

1986 0.70

1987 0.61

1988 0.62

1989 0.62

1990 0.59

1991 0.59

1992 0.53

1993 0.53

1994 0.58

1995 0.58

1996 0.57

1997 0.68

1998 0.82

1999 1.00

2000 1.08

2001 1.13

2002 1.20

2003 1.29

2004 1.72

2005 2.25

2006 2.71

2007 2.65

12

percent, while world exports of services have grown at a compound rate of 8.56

percent. However, the entire growth in India‟s service exports has occurred mainly in

the post reform period at 19.34 percent (Table 2). Conversely, in the case of world

exports there has not been much change in the growth rates in the pre and post-

reform periods. In fact, in the case of world exports, the rate of growth in the post-

reform period has been marginally lower. In the case of India, it is quite evident that

service exports have greatly benefited from opening up of the economy.

Though transportation and travel services have also seen higher growth in the

post-reform period, it is the Other Commercial Services (OCS) category which is the

driving force behind the growth in India‟s exports of services. OCS has witnessed an

ACGR of 15.77 percent, which has surpassed the growth in transportation and travel

services for the entire 27 year period (Table 2). In fact, in the pre-reform period, the

growth in India‟s exports of the OCS category was less than a percent. However, the

post-reform period registered phenomenal growth in the category, thus registering a

growth rate of 25.53 percent.

Table 2: ACGR of Exports of Services of India and the World (Percent)

Services

Pre-Reform Period*

(1980-1991)

Post-Reform Period

(1991-2007)

Total Period

(1980-2007)

India World India World India World

Transportation 8.39 5.80 12.49 6.92 10.97 6.51

Travel 3.51 11.89 10.78 6.54 8.05 8.48

OCS 0.72 9.62 25.53 10.25 15.77 10.02

Total 2.49 9.08 19.34 8.27 12.85 8.56 *The terms pre-reform and post-reform period are used only in the context of India.

Figure 2: Trend in ACGR of Exports of Services of India and the World (Percent)

As mentioned in the methodology, invisible services in the BOP data of the

IMF is divided into three categories of services. Of these three categories, OCS

0

5

10

15

20

25

30

India World India World India World

1980-1991 1991-2007 (1980-2007)

Pre-Reform Period Post-Reform Period Total Period

Transportation Travel OCS Total

13

(which includes all commercial services excluding travel and transport) has emerged

as the most significant contributor to the earnings on the invisible account (Table 3).

In 1980, OCS comprised 30.16 percent of India‟s total service exports. By

1984, the share had doubled to 60.57 percent but between 1985 and 1997 OCS

witnessed a downward swing. In 1987, travel services took the lead with 41.12

percent of the countries total exports, while OCS recorded a share of 39.46 percent

followed by transportation services with a 19.43 percent share. By 1997 OCS again

became the largest sector with a 45.86 percent share in total exports. Since then OCS

has been the largest sector of service export and in 2006 it accounted for 77.93

percent of the total export of services.

Table 3: Percentage Share of Service Categories in Total Exports of Services

(India and World)

Year India World

Transportation Travel OCS* Total Transportation Travel OCS* Total

1980 15.60 54.24 30.16 100.00 36.82 28.36 34.82 100.00

1981 17.30 48.52 34.18 100.00 36.63 27.78 35.59 100.00

1982 15.71 42.07 42.23 100.00 35.05 27.76 37.19 100.00

1983 13.79 37.01 49.20 100.00 34.06 28.39 37.56 100.00

1984 15.92 23.51 60.57 100.00 33.56 30.06 36.38 100.00

1985 15.74 27.41 56.86 100.00 32.68 30.35 36.98 100.00

1986 17.01 36.88 46.11 100.00 29.74 31.93 38.33 100.00

1987 19.43 41.12 39.46 100.00 29.00 33.06 37.94 100.00

1988 23.25 37.83 38.93 100.00 29.70 33.78 36.52 100.00

1989 20.77 35.40 43.83 100.00 29.40 33.62 36.98 100.00

1990 20.81 33.81 45.38 100.00 28.60 33.93 37.48 100.00

1991 19.88 37.54 42.58 100.00 27.73 33.55 38.72 100.00

1992 21.16 46.91 31.94 100.00 26.42 34.52 39.06 100.00

1993 24.67 42.89 32.44 100.00 25.88 34.33 39.79 100.00

1994 28.42 37.67 33.91 100.00 25.72 34.00 40.28 100.00

1995 27.95 38.17 33.88 100.00 25.80 34.72 39.49 100.00

1996 27.70 39.44 32.86 100.00 24.58 34.83 40.59 100.00

1997 21.76 32.38 45.86 100.00 24.17 33.68 42.15 100.00

1998 16.02 26.64 57.34 100.00 23.33 33.02 43.66 100.00

1999 13.16 21.49 65.35 100.00 23.25 32.87 43.88 100.00

2000 12.34 21.58 66.07 100.00 23.46 32.17 44.37 100.00

2001 12.20 19.04 68.76 100.00 23.21 31.43 45.36 100.00

2002 12.93 16.22 70.85 100.00 22.54 30.60 46.86 100.00

2003 12.79 18.88 68.33 100.00 22.29 29.38 48.33 100.00

2004 11.53 16.27 72.21 100.00 23.05 29.04 47.91 100.00

2005 10.30 13.50 76.20 100.00 23.31 27.92 48.77 100.00

2006 10.16 11.90 77.93 100.00 22.67 27.26 50.07 100.00

2007 10.43 12.62 76.95 100.00 22.78 26.47 50.74 100.00 *Other Commercial services (Commercial Services excluding Travel and Transport)

The growing significance of OCS exports is in line with world trends. In the

case of world service exports too, OCS has been the largest sector since 1982, closely

14

followed by transportation and travel. In 1982, OCS accounted for 37.19 percent of

the world‟s total service exports and its share grew to 50.74 percent by 2007. The

comparative study of service export data of India and world revealed that the OCS

sector holds the major share of total exports in both. However India also enjoys

comparative advantage in exports of the OCS category as reflected in Table 4. It is

significant to understand why India has RCA in one particular sector of services.

Other sectors of services are neither experiencing much growth nor have any

comparative advantage. From a broader perspective it is evident that transport and

travel are associated with infrastructure while OCS is a more human intensive sector.

Table 4: India‟s RCA in Service Exports (1980-2007)

Figure 3: India‟s RCA in Service Exports

3.1.1. Transportation

Transportation services cover all transport services which are carried out by

the people of one economy for the citizens of another nation. It involves air, ship and

Year Transport Travel OCS

1980 0.42 1.91 0.87

1981 0.47 1.75 0.96

1982 0.45 1.52 1.14

1983 0.41 1.30 1.31

1984 0.47 0.78 1.66

1985 0.48 0.90 1.54

1986 0.57 1.16 1.20

1987 0.67 1.24 1.04

1988 0.78 1.12 1.07

1989 0.71 1.05 1.19

1990 0.73 1.00 1.21

1991 0.72 1.12 1.10

1992 0.80 1.36 0.82

1993 0.95 1.25 0.82

1994 1.11 1.11 0.84

1995 1.08 1.10 0.86

1996 1.13 1.13 0.81

1997 0.90 0.96 1.09

1998 0.69 0.81 1.31

1999 0.57 0.65 1.49

2000 0.53 0.67 1.49

2001 0.53 0.61 1.52

2002 0.57 0.53 1.51

2003 0.57 0.64 1.41

2004 0.50 0.56 1.51

2005 0.44 0.48 1.56

2006 0.45 0.44 1.56

2007 0.45 0.47 1.51

15

other transport of passengers and goods, chartering of transporters along with crew

and supporting services (United Nations 2002). This is the service sector which is

closely linked with trade of merchandise. Better transportation services of a country

immensely affect its trade of goods and other services.

While exports of transportation services from India did not comprise a major

share of India‟s total service exports even in 1980, the share declined further by 2007

(Table 3). This may be attributed to the expansion of the OCS category in the export

basket of services, since in comparison to the world; growth in India‟s exports of

transportation services has been higher at 10.97 percent for the entire 27 year period

i.e. from 1980 to 2007, while for the world it is 6.51 percent (Table2). Not only has

the post-reform period seen higher growth than the pre-reform period as far as India

is concerned, but the growth in exports during this period has been twice that of the

world exports of transportation services (Table 2). Economic growth in India in the

post-reform has accelerated. Increased economic activity has resulted in greater

volume of trade and thereby the use of transportation services.

The European Union, United States and Japan are the leading exporters of

transportation services in the world, with a combined share of 60 percent in 2006.

India‟s share in world exports of transportation services however, was much smaller

at 1.22 percent in 2006, while China‟s share was higher at 3.3 percent (WTO 2007).

Nonetheless, India does feature amongst the top 15 exporters in the world. However,

the sector did not display any revealed advantage in the entire period of the study,

except for a three year period between 1994 and 1996.

3.1.2. Travel

In the Indian context, travel services are the second largest contributor to the

export basket of services. According to the UN Service Trade Manual (United

Nations 2002), travel services comprise collection of commodities and services

consumed by travellers in the foreign countries during their stay of less than one

year. The World Economic Forum Report (WEF 2008) on Travel and Tourism

Competitiveness across the World placed India at the 65th

position in overall growth

among 130 nations. According to the Report (p.19), „India is well assessed for its

natural resources (ranked 13th

) and cultural resources, with many World Heritage

16

sites, both natural and cultural. The country also benefits from good price

competitiveness (ranked 20th

overall), despite somewhat high comparative hotel

prices. India also has quite a good air transport network (ranked 35th

), particularly

given the country‟s stage of development, and a reasonable ground transport

infrastructure (ranked 39th

)‟. The number of foreigners arriving in India has more

than doubled between 1991 and 2007, as can be seen from the Table 5 below. There

was a dip mainly in 2001 and 2002, with tourist arrivals witnessing negative growth,

which may be attributed to the terrorist attacks in September 2001 in the US.

However, tourist arrivals in India from 1991 to 2007 have displayed an

ACGR of 8.23 percent (Table 5). In spite of the rise in tourist arrivals, India‟s share

in world tourist arrivals is less than even 1 percent at 0.55 percent in 2007.

Nonetheless, foreign exchange earnings from tourism have escalated four-fold from

$3 billion in 2002 to $11.96 billion in 2007 (GOI 2008b). India is thus seen as a

leading tourist destination by the international community abroad.

Table 5: Number of Foreign Tourist Arrivals in India

Source: Indiastat (2009a) Figure 4: Foreign Tourist Arrivals in India

Year Tourist Arrivals in India

Numbers

(Million)

Growth Over

Previous Year (%)

1991 3.15 -

1992 3.10 -1.64

1993 3.54 14.43

1994 4.03 13.79

1995 4.64 15.16

1996 5.03 8.38

1997 5.50 9.34

1998 5.54 0.71

1999 5.83 5.28

2000 5.89 1.05

2001 5.44 -7.76

2002 5.16 -5.13

2003 6.71 30.07

2004 8.36 24.62

2005 9.95 19.01

2006 11.75 18.07

2007 13.23 12.62

ACGR (%) 8.23 -

17

In spite of this rapid expansion, the growth in India‟s exports of travel

services has been below the growth rate of total services, at 8.05 percent for the 27

years that the study covers (Table 2). The growth in world exports of travel services

has been marginally higher at 8.48 percent. A stark contrast is observed, if the growth

in the two sub-periods is considered. During the pre-reform period, the growth in

world exports of travel services exceeded that of India. On the other hand, in the post

reform period, the growth in India‟s exports of travel services was much higher than

the world at 10.78 percent (Table 2). The opening up of the economy may have led to

an increase in business travellers. Also medical and health tourism received a boost

during this period.

However, travel services at large have seen a poor performance in comparison

to the OCS category. Unfortunately, India lost its RCA in the travel category by

1997. The financial carnage in the Asian markets in the post 1997 period may have

impacted business and leisure travel immensely, thus reducing the number of

travellers arriving in India. India had a revealed comparative advantage right from

1980 which remained only till 1983. In 1984 and 1985 the sector did not illustrate

any advantage. However, the entire decade from 1986 to 1996 was good for the

Indian travelling sector since during this period India displayed a comparative

advantage. This can be attributed to the fact that in the year 1986 the Indian airline

industry started relaxing which resulted in additional capacity. India could not

maintain its RCA and from 1997 onwards right until 2007, it did not demonstrate any

revealed advantage. Inept government policies proved detrimental for the air travel

industry. On the other hand, China has become the third largest exporter of travel

services, surpassed only by the EU and the United States. In fact, Africa too has

emerged as an important tourist destination because of natural environs and

adventure tourism it offers. India, with less than a percent share of international

tourist arrivals, does not even feature among the top 15 travel service providers in the

world.

Although India has a great potential in providing a wide array of travel

services such as medical tourism, education tourism etc. it does require to upgrade its

infrastructure before results from this sector can be expected. The low cost of highly

18

skilled health professionals in India in conjunction with the shifting demographic

trends in the developed world present an enormous opportunity for India. On an

average, treatment costs in India are a fraction of the costs in developed countries

like the UK and the US Still India fails to lure foreigners due to poor infrastructure,

unhygienic and dirty surroundings that our cities offer (Marcelo 2003).

India also has the potential to be a great tourist destination for varied types of

tourism such as adventure tourism, rural tourism, religious tourism (for Indians

abroad), spiritual tourism (for foreigners), business tourism and cruise tourism. To

convert this potential into reality a lot of work has to be done. For example, safety

and security of tourists arriving in India is mandatory and therefore steps in this

regard must be initiated. A world-class infrastructure and diversifying the source of

tourist arrivals are few other aspects that should be considered. Initiative and

assistance from the government is also forthcoming in terms of announcements of

various schemes like Assistance to Large Revenue Generating Projects, Creation of

Land-Bank for Hotels and Scheme for Product/Infrastructure Development for

Destination to name a few. Yet, India seems to have a long way to go and this can be

gauged from the fact that the number of hotels approved by the Ministry of Tourism

is as low as 1437 with a total of 84327 rooms as on December 31, 2007 (GOI 2008b).

3.1.3. Other Commercial Services (OCS)

This category not only has the largest share of India‟s service exports, but this

is the only sector which showed RCA in 21 out of 27 years covered in this study.

(OCS is the total of all the commercial services excluding travel and transport

services). Business process outsourcing (BPO) activities, which are a part of IT-

enabled services, fall under other business services as per IMF classifications. The

growth in India‟s exports of this category during the post-reform period has enabled

India to achieve a growth rate of 19.34 percent for total services (Table 2).

India evidently has advantages in services sector which are skilled and

semiskilled labour intensive. Computer and information sector has been the fastest

growing segments. The factors which have helped India to gain an edge in this sector

are as follows -

19

3.1.3.1. Abundance of Human Resource

India is endowed with the wealth of population. India is the second most

populated country in the world. The population in India as at 0:00 hours on 1st March

2001 stood at 1,027,015,247 persons (GOI 2001). With this, India became only the

second country in the world after China to cross the one billion mark. China also

enjoys a great advantage in terms of large pool of people but the Chinese could not

capture the service industry as they have limitation in terms of an English speaking

workforce. Abundance of educated workforce has helped India to become a strong

contender in trade of services across the world.

3.1.3.2. Superior Competency

India is home to a huge number of educated, English speaking, technology -

savvy personnel. In fact India produces a large number of graduates every year and

most of these graduates have knowledge of the English language. Every year,

approximately 19 million students are enrolled in high schools and 10 million

students in under-graduate degree courses across India. Moreover, 2.1 million

graduates and 0.3 million post-graduates pass out of India's non-engineering colleges.

The government‟s continued investment in higher education since independence in

terms of the establishment of educational institutes as well as subsidisation of

education have produced a pool of knowledgeable workers capable of performing

skilled and specialised tasks. India has one of the largest Higher Education systems

in the world. This has helped in human resource development of the nation. India is

also emerging as a hub of good and affordable technical education. The Indian

education system provides immense attention to mathematics and science, the quality

of professionals churned out by the Indian system is at par with international

standards. Quantitative concepts coupled with English proficiency make India one of

the favourite contenders for IT/BPO work.

3.1.3.3. Factor Cost Advantage

One of the most important features of the Indian workforce is its cost

effectiveness. In India, the manpower cost is almost one-tenth of overseas. For

20

example, one person cost per annum in the US is approximately $40,000 while in

India it is only $5,000 (indobase.com). Despite the fast pace of growth of the Indian

economy in the last decade, the average income of a person has barely crossed

Rs.3000 per month (Economic Times 2009). Along with lower wages compared with

the overseas wages, the exchange rate of the Indian rupee and the US dollar also

makes the Indian work force more attractive.

3.1.3.4. Different Time Zone

India has an 8 to 12 hours time difference with respect to the overseas markets

like the US, which enables India to offer round-the-clock services to its clients.

Indian companies are able to work in a shift system which helps in better utilisation

of their resources. Most of the Indian call centres serve clients from US between 5:30

p.m. to 9:30 am and during the day utilise the same resources to serve clients from

other parts of the world.

3.1.3.5. Improved Infrastructure

There has been a notable expansion and up gradation of power availability,

international bandwidth condition, status of roads and highways. Along with these

improvements the privatisation of the telecom sector has helped India give better

results in the IT/BPO sectors.

3.1.3.6. Initiatives by the Government

The Indian government has comprehended the potential of the IT sector to

influence economic growth in the country. Some of the government‟s policies have

been of immense value in the growth of the computer and information sector. These

policies have helped India emerge as a BPO/IT hub. India definitely needs to

maintain the momentum of growth in the computer and information segment but it

needs to nurture other service sectors as well. Countries like China, Philippines,

Mexico, Malaysia and Canada can give India tough competition in the same

segments if essential steps are not undertaken. China with its largest pool of people

has already surpassed other countries in the area of manufacturing. With

21

improvement in the language skills of its workforce, China could easily challenge

India‟s supremacy in the service sector. Certain problems that the sector in India is

facing include –

High marketing, travelling and transportation costs. This makes exploration of

new markets very expensive and adversely affects the expansion of business.

High attrition rate and poaching are pushing manpower costs upward resulting in

reduced profit margins.

Lack of privacy regulations and data protection acts are accumulating as major

threat for further development.

3.2. Exports of Services – Disaggregate Level

The BOP data of the IMF presents a broader picture from 1980 onwards with

service transactions classified only in three categories. For empirical judgment it is

vital to examine transaction of services under more categories and other existing

data. The paper thus analyses UN Service Trade which classifies trade of services in

eleven categories. However, the data is available only from 2000 to 2005. This

additional data enables us to present a slightly detailed picture of the Indian service

sector.

As per the UN Service Trade data, the share of transportation services in total

service exports has been in the range of 11 percent to 14 percent from 2000 to 2005

and in the world it hovered around 22 percent to 24 percent (Table 6). Although the

overall volume and value of transport services in India as well as in the world has

been increasing its share in total exports does not fluctuate much. The share of travel

service exports from India also plummeted from 22.98 percent in 2000 to 13.68

percent by 2005. Thus, both data-sets point towards the declining contribution of

these services in India‟s export earnings.

If we look at the components of the other commercial services (OCS)

category which include the entire range of services from serial no. 3 to 11 in Table 6

above, we realise the significance of computer and information services in India‟s

exports. In fact computer and information services make up almost 40 percent to 50

percent of our earnings from exports of services. This is mainly owing to a number of

22

reasons presented in the earlier paragraphs. Moreover, the laying down of fibre-optic

cables and the threat of the Y2K bug affecting all the computers in the world by the

end of 1999 presented India with an immense opportunity.

The tedious task could be performed at competitive prices only by Indian

software engineers and this gave a boost to the Indian software industry. India thus

emerged on the global map as an important outsourcing destination for the IT

industry the world over (Friedman 2005). This enabled the service to comprise a

major share of India‟s export basket. However in world exports, the sector did not

reflect the kind of vibrancy which has been observed in the Indian scenario. The

share of the sector in world exports ranged between 1 percent and 3 percent between

2000 and 2005.

Table 6: Percentage Share of Exports of Services in India and World as per the

EBOPS Classification

Sr.

No. Service

Description

2000 2001 2002 2003 2004 2005

India World India World India World India World India World India World

1 Transportation* 13.44 24.26 14.04 23.66 13.63 22.81 12.94 22.31 12.31 24.57 11.02 24.75

2 Travel* 22.98 30.67 20.38 29.73 17.80 28.42 20.33 27.27 17.52 29.02 13.68 28.29

3 Communication 7.48 2.05 4.89 2.14 4.36 2.12 4.00 2.16 3.64 1.98 3.83 2.15

4 Construction 3.52 1.85 0.94 1.87 0.96 1.85 1.85 1.82 1.29 1.86 1.61 1.95

5 Insurance 1.77 1.92 1.87 2.16 1.98 3.02 1.69 3.25 2.29 2.24 1.83 2.02

6 Financial 2.28 5.59 1.90 5.25 3.63 5.99 1.21 6.15 1.35 4.99 2.99 5.45

7 Computer and

Information 41.66 1.97 49.10 2.45 51.60 2.59 51.66 2.99 46.52 2.78 41.44 2.85

8 Royalties and License Fees

0.39 5.83 0.14 5.65 0.12 5.53 0.13 5.72 0.19 6.63 0.23 6.03

9 Other Business

Services@ 2.19 22.38 3.37 23.05 4.34 23.43 5.23 24.13 13.58 21.86 22.61 22.59

10 Personal, Cultural and

Recreational

0.00 0.99 0.00 1.53 0.00 1.63 0.00 1.53 0.28 1.39 0.22 1.27

11 Government Services, n.i.e.

4.28 2.48 3.37 2.50 1.57 2.61 0.97 2.67 1.05 2.69 0.54 2.64

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

* The figures are slightly different from the aggregate level due to different sources of database.

@ Other business services include merchanting and other trade-related services, operational leasing services, miscellaneous

business, professional and technical services.

In case of world exports, apart from the two major categories of travel and

transportation, it is the financial, royalties and other business services which are more

important. In fact, the share of other business services in India‟s exports too has

phenomenally escalated since 2004. Nonetheless, the figures clearly advocate that

India has an advantage in computer and information services. India is among the key

traders of Asia of these services (WTO 2007).

23

The share of communication, construction and government services has on

the other hand witnessed a decline in the case of India while it has stagnated in the

case of the world. Nevertheless, India does enjoy a comparative advantage in exports

of communication and computer and information services (Table 7). Both these

sectors have demonstrated RCA right since 2000. The RCA in case of computer and

information services has been much higher, although it is declining in case of both.

In fact, along with computer services, India is also a leading exporter in

communication services and featured in the top 5 exporters in the world in 2005

(WTO 2007).

Table 7: RCA Index of India‟s Service Exports as per the EBOPS (2000-2005)

Service

Code

Sr.

No. Services

RCA Index

2000 2001 2002 2003 2004 2005

205 1 Transportation* 0.55 0.59 0.60 0.58 0.50 0.45

236 2 Travel* 0.75 0.69 0.63 0.75 0.60 0.48

245 3 Communications 3.65 2.28 2.06 1.85 1.84 1.78

249 4 Construction 1.90 0.50 0.52 1.01 0.70 0.83

253 5 Insurance 0.92 0.87 0.66 0.52 1.02 0.91

260 6 Financial 0.41 0.36 0.61 0.20 0.27 0.55

262 7 Computer and Information 21.11 20.03 19.91 17.29 16.73 14.53

266 8 Royalties and License Fees 0.07 0.03 0.02 0.02 0.03 0.04

268 9 Other Business Services 0.10 0.15 0.19 0.22 0.62 1.00

287 10 Personal, Cultural & Recreational 0.00 0.00 0.00 0.00 0.20 0.18

291 11 Government Services, n.i.e. 1.73 1.34 0.60 0.36 0.39 0.20 *The figures are slightly different from that of the aggregate level due to different sources of database.

Globally, the banking, financial and insurance services (BFIS) are the fastest

emerging segments in outsourcing businesses. Although India may not have revealed

an advantage in exports of financial services, it has displayed RCA in exports of

insurance services in 2004 (Table 7). Construction is yet another category where

India has displayed an advantage in a few years. Thus, it is this space that India

should pursue, not only because of its importance in world exports, but also due to

the advantage that India can offer. Then, our service exports will not be heavily

concentrated in computer and information services and some degree of diversity will

be achieved.

4. INDIA’S IMPORTS OF SERVICES

India‟s imports of services is also analysed as per two different classifications

mentioned in the methodology. The first sub-section uses the IMF balance of

payments data to discuss imports at the aggregate level, whereas the second sub-

24

section relies on the EBOPS classification for examining imports at a disaggregated

level.

4.1. Imports of Services –Aggregate Level

From less than one percent, India‟s share in the world service imports in 1980

escalated to 2.55 percent by 2007. Interestingly, it took 18 years for India to import

about one percent of the total world services by 1998. However, it took only 7 years

for India to double its share in world imports of services to 2.01 percent in 2005

(Table 8). Moreover, in conformity to the export scene, India‟s imports of services

have also witnessed higher growth compared to world imports (Table 9). While

world total service imports have displayed an ACGR of 7.96 percent, imports of

services in India have showcased a ACGR of 11.93 percent for the period 1980 to

2007 (Figure 6). As in the case of exports, imports of services from India also have

witnessed tremendous growth in the post-reform period. The growth in India‟s

imports of services trebled to 15.91 percent, while growth in world imports registered

slower growth in the post-reform period.

In line with world trends, the growth in service imports is primarily seen in

travel and other commercial services (Table 9). In terms of contribution to the import

bill also, it is essentially these two categories which have augmented their

importance. In 1980 the OCS category comprised 34.77 percent of India‟s import

bill. By 2007, about 50.81 percent of India‟s total service imports consisted of other

commercial services (Table 10). Especially since 1999, the share of the OCS

category in the import basket has been more than 45 percent in most of the years.

Transportation services on the other hand have seen a decline in their percentage

share of total service imports in India as well as the world. In fact, in the case of

India, the category has seen a massive downslide in its share as it almost halved from

a whopping 61.35 percent in 1980 to 38.87 percent in 2007.

4.1.1. Transportation

The growth in imports of transportation services has been below average for

India as well as the world. Nonetheless, in comparison to the world, India‟s imports

have witnessed higher growth (Figure 6) if we consider the entire 27 year period.

25

Table 8: India‟s Share of World Imports of Services (Percent)

Figure 5: India‟s Share of World Imports of Services

With reference to the two sub-periods, the growth in India‟s imports doubled

in the post-reform period and interestingly enough it was about twice the growth in

world imports also (Table 9). India has a comparative advantage in the imports of

transportation services. Table 11 highlights that India has enjoyed comparative

advantage in imports of transportation services right since 1980. Amongst all the

three categories, it is only transportation which has shown a comparative advantage

in imports consistently for the entire period of the study. This advantage in imports

arises from the absence of a well-developed transport sector in the domestic

economy. The transport sector mainly comprises air transport, sea transport and the

others category. The growth in India‟s air and sea transport services has been

constrained due to lack of investment.

These services have failed to keep pace with the growth in demand, thus

leading to their imports. In fact the participation of Indian ships in India‟s overseas

Year

India’s Share of

Imports of Services

1980 0.72

1981 0.76

1982 0.84

1983 0.95

1984 0.90

1985 0.95

1986 0.84

1987 0.83

1988 0.83

1989 0.84

1990 0.72

1991 0.68

1992 0.70

1993 0.66

1994 0.77

1995 0.84

1996 0.87

1997 0.95

1998 1.07

1999 1.24

2000 1.29

2001 1.34

2002 1.33

2003 1.38

2004 1.66

2005 2.01

2006 2.40

2007 2.55

26

0

5

10

15

20

25

India World India World India World

1980-1991 1991-2007 (1950-2007)

Pre-Reform Period Post-Reform Period Total Period

Transportation Travel OCS Total

Table 9: ACGR of Imports of Services of India and the World (Percent)

Services

Pre-Reform Period

(1980-1991)

Post-Reform Period

(1991-2007)

Total Period

(1980-2007)

India World India World India World

Transportation 5.54 5.00 12.49 6.97 9.88 6.25

Travel 10.06 11.46 19.82 6.14 16.14 8.06

OCS 4.68 9.33 19.06 9.46 13.57 9.41

Total 5.40 8.35 15.91 7.74 11.93 7.97

Figure 6: Trend in ACGR of Imports of Services of India and the World (Percent)

trade has declined from 36 percent in 1984-85 to 29.80 percent by 1996-97. Over-

regulation and procedural constraints have marred the progress of the port and

shipping sector. Even in terms of investments, the sector could garner only 3 percent

of the total investments in 2007 (Commodity Online 2008).

4.1.2. Travel

The share of travel in India‟s total imports of services surged by about five

times from 3.88 percent in 1980 to 15.19 percent in 2001. However, since 2002, the

share witnessed a steady downslide to touch 10.32 percent in 2007. Nevertheless, this

category has displayed the highest growth in the 27 years that the study covers at

16.14 percent (Table 5). The growth in India‟s imports of travel services is almost

twice as that of the world. With regard to both pre and post-reform periods, India has

witnessed above average growth in the imports of travel services. Table12 shows that

the number of Indians travelling abroad has gone up by almost five times between

1991 and 2007. The number of Indians going abroad has grown at an ACGR of 9.32

27

Table 10: Percentage Share of Services in Total Imports of Services

(India and World)

Year

India World

Transportation Travel OCS Total Transportation Travel OCS Total

1980 61.35 3.88 34.77 100.00 41.67 26.89 31.44 100.00 1981 61.13 4.55 34.32 100.00 42.15 25.06 32.79 100.00 1982 61.81 5.58 32.61 100.00 40.45 25.01 34.54 100.00 1983 57.64 6.25 36.11 100.00 39.96 25.28 34.76 100.00 1984 59.38 8.56 32.06 100.00 39.14 27.02 33.84 100.00 1985 58.32 9.28 32.39 100.00 37.72 28.07 34.21 100.00 1986 56.45 7.89 35.66 100.00 34.74 30.11 35.15 100.00 1987 56.23 7.78 35.99 100.00 33.92 31.44 34.64 100.00 1988 58.61 7.69 33.70 100.00 33.70 32.43 33.87 100.00 1989 57.50 7.25 35.25 100.00 33.71 31.95 34.34 100.00 1990 57.52 6.62 35.86 100.00 32.06 32.19 35.75 100.00 1991 55.93 7.48 36.59 100.00 31.66 31.94 36.40 100.00 1992 60.55 7.11 32.34 100.00 30.42 33.22 36.36 100.00 1993 62.56 7.46 29.98 100.00 30.01 32.21 37.78 100.00 1994 56.83 9.57 33.60 100.00 30.21 32.21 37.58 100.00 1995 56.68 9.90 33.42 100.00 30.48 31.87 37.65 100.00 1996 58.61 8.30 33.09 100.00 29.01 31.87 39.12 100.00 1997 55.50 10.93 33.58 100.00 28.77 31.19 40.03 100.00 1998 49.98 12.07 37.95 100.00 27.75 30.82 41.43 100.00 1999 40.95 11.79 47.26 100.00 27.41 30.83 41.77 100.00 2000 46.06 14.24 39.70 100.00 28.57 30.03 41.39 100.00 2001 42.93 15.19 41.88 100.00 27.78 29.11 43.11 100.00 2002 41.02 14.38 44.59 100.00 26.69 29.15 44.16 100.00 2003 37.73 14.53 47.74 100.00 26.94 28.53 44.53 100.00 2004 37.50 13.65 48.86 100.00 28.26 28.05 43.70 100.00 2005 42.36 12.65 44.99 100.00 28.89 27.22 43.89 100.00 2006 39.96 11.66 48.38 100.00 28.77 26.19 45.04 100.00 2007 38.87 10.32 50.82 100.00 28.45 25.56 45.99 100.00

percent. Outbound travel from India is increasing substantially, given the rising

disposable incomes of the urban population. The emergence of low cost carriers has

also led to an increase in the number of people travelling abroad for leisure as well as

for business purposes.

Travelling within the country is far more cumbersome and expensive in

comparison to travelling abroad. In recent times the number of students pursuing

higher studies abroad is increasing substantially. Easy availability of education loans

and capacity constraints in quality institutions in the home country has led many

students to pursue higher studies in foreign lands. In spite of this spike in

contribution to the import bill, India does not have a comparative advantage in

imports of travel services.

28

Table 11: India‟s RCA in Service Imports

Figure 7: India‟s RCA in Service Imports

4.1.3. Other Commercial Services (OCS)

This category enjoys almost 50 percent share of the import basket of services.

In 1999, the share of the category in total imports of India took an immense leap

from 37.95 percent in 1998 to 47.26 percent (Table 10). Nevertheless, the RCA index

has fluctuated between an advantage and a disadvantage, throughout the period of the

study (Table 11). However, for the period 1986-1991 and since 2002, the category

has displayed consistent comparative advantage in imports. Since the category

includes many services in its fold, the following section looks at a slightly detailed

Level 1 of the EBOPS classification. The Level 1 of the EBOPS classification

comprises eleven categories of services, which are summed up as the OCS category

in the IMF Balance of Payments data.

Year Transportation Travel OCS

1980 1.47 0.14 1.11

1981 1.45 0.18 1.05

1982 1.53 0.22 0.94

1983 1.44 0.25 1.04

1984 1.52 0.32 0.95

1985 1.55 0.33 0.95

1986 1.63 0.26 1.01

1987 1.66 0.25 1.04

1988 1.74 0.24 1.00

1989 1.71 0.23 1.03

1990 1.79 0.21 1.00

1991 1.77 0.23 1.01

1992 1.99 0.21 0.89

1993 2.08 0.23 0.79

1994 1.88 0.30 0.89

1995 1.86 0.31 0.89

1996 2.02 0.26 0.85

1997 1.93 0.35 0.84

1998 1.80 0.39 0.92

1999 1.49 0.38 1.13

2000 1.61 0.47 0.96

2001 1.55 0.52 0.97

2002 1.54 0.49 1.01

2003 1.40 0.51 1.07

2004 1.33 0.49 1.12

2005 1.47 0.46 1.03

2006 1.39 0.45 1.07

2007 1.37 0.40 1.10

29

0

2

4

6

8

10

12

Indian Nationals Going Abroad (Millions)

Linear (Indian Nationals Going Abroad (Millions))

Table 12: Indian Nationals Going Abroad

Source: Indiastat (2009b) Figure 8: Indian Nationals Going Abroad

4.2. Imports of Services – Disaggregate Level

As per the EBOPS classification, India‟s share in imports of transportation

services has declined between 2000 and 2005 (Table 13). Travel on the other hand

has witnessed some fluctuations. However, financial services have seen a massive

decline in their share between 2000 and 2005. Notably the share of this service in

India‟s imports was considerably higher than world imports in 2000. However, a

consistent fall in share of this service in India‟s imports led to the category enjoying

an almost similar share as of world imports.

Nonetheless, the share of financial services in India‟s imports has plummeted

at the cost of an immense leap in the share of the other business services category.

An interesting trend that emerges is that financial and computer services have

displayed comparative advantage consistently. As a result of the reforms, a number

of financial services providers were allowed to enter India. Being a nascent market,

India was seen as a lucrative market for financial services by established companies

abroad.

Year

Indian Nationals Going

Abroad

Numbers

(Million)

Growth

Over

Previous

Year (%)

1991 1.9 -

1992 2.2 15.79

1993 2.7 22.73

1994 2.7 0.00

1995 3.1 14.81

1996 3.5 12.90

1997 3.7 5.71

1998 3.8 2.70

1999 4.1 7.89

2000 4.4 7.32

2001 4.6 4.55

2002 4.9 6.52

2003 5.4 10.20

2004 6.2 14.81

2005 7.2 16.13

2006 8.4 16.67

2007 9.8 16.67 ACGR

(%) 9.32 -

30

Table 13: Percentage Share of Imports of Services in India and World as per the

EBOPS Classification

*The figures are slightly different from that of the aggregate level due to different sources of database.

However, the RCA index has declined in the case of both the services,

although the fall in case of the former has been greater (Table 14). Banking and

financial sectors were moderately liberalised in the 1990s and India enjoyed a

comparative advantage in the imports of these services. The foreign banks and

financial service providers have displayed greater efficiency when compared to the

Indian service providers. The foreign audit forms in India for e.g., are much bigger in

terms of the number of accountants employed per firm. Indian audit firms on the

other hand are more fragmented. Similarly, the business generated per employee in

the case of foreign banks far exceeds that of the Indian banks because foreign banks

are mostly located in the urban centres in India. In fact, the non-performing assets of

Indian banks exceed those of the foreign banks (World Bank 2004).

Communication and construction services, on the other hand, have gained

comparative advantage since 2001. Many of these services were liberalised during

the 1990s and foreign direct investment norms were also eased. Telecommunication

services received the maximum liberalisation along with software services. In fact, in

case of the former, India went beyond its commitments in the GATS and

aggressively opened up the sector. As a result the sector received almost 19.70

percent of the total FDI approvals between 1991 and 2002. FDI inflows from

Sr.

No. Service

Description

2000 2001 2002 2003 2004 2005

India World India World India World India World India World India World

1 Transportation* 32.29 27.13 29.56 26.06 23.76 24.89 19.11 24.79 20.89 26.85 24.37 27.02

2 Travel* 25.45 30.82 25.70 29.76 24.26 29.25 29.56 28.69 24.16 29.09 21.17 28.42

3 Communication 1.15 2.20 3.15 2.33 7.01 2.27 6.34 2.27 3.40 1.96 2.66 2.00

4 Construction 1.51 1.50 4.41 1.65 9.63 1.70 6.06 1.65 3.30 1.70 2.81 1.76

5 Insurance 2.02 3.06 2.39 3.92 2.54 4.60 2.98 4.85 3.32 4.54 3.25 4.28

6 Financial 17.91 3.06 10.78 2.78 10.08 3.09 5.74 3.04 3.83 2.87 4.31 3.14

7 Computer and

Information 5.36 0.93 5.73 0.96 5.35 1.33 3.91 1.46 3.68 1.25 4.41 1.43

8 Royalties and

License Fees 2.13 6.11 3.08 6.19 2.56 6.26 3.64 6.61 3.28 6.67 2.40 6.38

9 Other Business

Services 9.28 21.08 12.80 22.21 13.16 22.32 20.93 22.25 33.68 20.82 34.29 21.33

10 Personal,

Cultural and Recreational

0.00 1.37 0.00 1.31 0.00 1.34 0.00 1.31 0.00 1.21 0.00 1.21

11 Government

Services, n.i.e. 2.90 2.73 2.41 2.84 1.66 2.95 1.74 3.08 0.47 3.04 0.32 3.03

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

31

Table 14: RCA Index of India‟s Imports of Services as per the EBOPS

Classification (2000-2005) Service

Code

Sr.

No. Services

RCA Index

2000 2001 2002 2003 2004 2005

205 1 Transportation* 1.18 1.12 0.94 0.76 0.77 0.89

236 2 Travel* 0.82 0.86 0.82 1.02 0.82 0.73

245 3 Communications 0.52 1.34 3.04 2.76 1.71 1.31

249 4 Construction 0.99 2.65 5.59 3.63 1.91 1.58

253 5 Insurance 0.66 0.60 0.55 0.61 0.72 0.75

260 6 Financial 5.80 3.85 3.22 1.86 1.32 1.36

262 7 Computer and Information 5.79 5.97 4.03 2.67 2.94 3.08

266 8 Royalties and License Fees 0.35 0.49 0.40 0.54 0.49 0.37

268 9 Other Business Services 0.44 0.57 0.58 0.93 1.60 1.59

287 10 Personal, Cultural & Recreational 0.00 0.00 0.00 0.00 0.00 0.00

291 11 Government Services, n.i.e. 1.05 0.84 0.55 0.56 0.15 0.10 *The figures are slightly different from that of the aggregate level due to different sources of database.

Netherlands in the telecommunication sector between 1991 and 2007 have been

substantial. Out of the total FDI approvals from the Netherlands, 41.48 percent have

gone to this sector. Moreover, phenomenal growth in this sector led to an advantage

in the imports of construction services also, since these services include installation

services for telephone network equipment. India‟s imports of personal, cultural and

recreational services and government services are negligible and have stagnated in

general. Both export and import of government services has displayed a decreasing

trend.

5. CONCLUSIONS

India has emerged as a leading services provider in the post-reform period.

The paper thus attempts to assess the growth, composition and comparative

advantage of India‟s service trade for a 27 year period from 1980 to 2007. A

comparison is also made between the growth in services exports and imports in the

pre-reform and the post-reform period. Results suggest that services exports in the

post-reform period have witnessed tremendous growth in all the three categories. But

it is the OCS category which has led India‟s success story. A deeper probe into the

OCS category as per the EBOPS classification indicates the unparalleled importance

of computer services in India‟s export basket. However, India needs to spruce up

exports in other categories as well, since computer services form a small portion of

world exports. Along with OCS, India has displayed a comparative advantage in

exports of Other Business Services, construction and insurance services as well.

Hence, these are the service categories where India needs to diversify its attention.

32

As far as the import scene is concerned, India‟s share in world imports is

almost similar to its share in world exports. The growth in imports of services of all

the three categories in the post-reform period has also been higher. The imports of

travel and OCS have been above average for the entire 27 year period. Transportation

has seen below average growth, although India has a comparative advantage in

imports of the same. In terms of the EBOPS classification, transportation, travel and

other business services contribute significantly to the import bill. Communication

and construction services too are gaining ground in the import basket with India

displaying comparative advantage in their imports as well. The index of RCA in the

case of financial and computer services has seen some decline between 2000 and

2005. These are, hence, the service categories which need to be evaluated carefully

for further liberalisation.

The development in the Indian service sector is not a result of a well planned

program or a policy. The change in the global scene and other economic and political

factors are responsible for propelling the growth in India‟s service sector. India

definitely has the right elements for becoming the preferred service provider as

discussed in the present paper. This growth has helped India gain economic stability,

confidence and respect at the international level. Now it is crucial to develop a long

term perspective. Otherwise India will lose its sheen as a preferred service provider.

Where India‟s GDP has grown at 8.4 per cent during 2005-06 and its Services trade

balance in US $ 32727 million, it is imperative to improvise and remain innovative to

retain markets and maintain stability. India must develop marketability for higher-

end services. India needs to work for the recognition of its professional qualifications

like, law, medicine etc. at the international level. Indian graduates must gain

proficiency in other languages like Chinese, Spanish, and Japanese. India needs to be

more transparent in its system with lesser and reduced bureaucracy. Better

infrastructure for all sectors should be a priority. Reforms in the Intellectual Property

Act, data security and privacy protection will prove advantageous. To minimise the

effect of the slowdown of developed economies on the service sector, focused

attention is required to develop other sectors of services.

33

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