India's comparative advantage in the crucial telecommunications, computer and information services trade has eroded in recent years, while China’s has improved.
India’s comparative advantage in the crucial telecommunications, computer and information services trade has eroded in recent years, while China’s has improved. Although India still retains its dominance in this space, an analysis of the revealed comparative advantage (RCA) in a dozen services segments, ranging from software to transportation, by the commerce ministry shows India is more competitive than China in only three of them.
Importantly, in the three services segments where India scores over China – telecommunications, computer and information services, other business services and financial services – its RCA dropped between 2012 and 2016, while that of China’s rose (See the chart). These three segments accounted for 70% of India’s external trade (both exports and imports) in services in 2016. This suggests the neighbour is trying to catch up where it has been lagging traditionally.
For instance, in telecommunications, computer and information services, where India has been traditionally strong, its RCA dropped from 4.103 in 2012 to 3.430 in 2016, while China’s inched up from 0.986 to 1.224, showed the analysis. In other business services, too, India’s RCA eased from 1.62 to 1.511 in four years through 2016, China’s went up from 1.267 to 1.278. The higher is the RCA, the more competitive is the country. The analysis is part of the latest report by the commerce ministry, titled “Sino-Indian Trade – A Perspective”.
Despite its apparent weakness in IT and software, China’s services exports totalled $209 billion in 2016, against India’s $162 billion, thanks primarily to its dominant position in segments like transportation, travel, manufacturing services (where physical inputs are supplied by others), maintenance, repair and construction services. So while India is the world’s eighth-largest services exporter, China occupies the fifth position.
The 12 segments that were chosen for the analysis made up for 98% of India’s and 100% of China’s services exports in 2016.
China’s external trade in services (both imports and exports) was much higher than India’s–$661 billion in 2016 against $295 billion. However, thanks to its much larger economy, services trade made up for 5.9% of China’s GDP, against India’s 11.4% in 2016. Of course, given the neighbour’s greater thrust to manufacturing since the turn of the century, the share of external services trade in China’s GDP dropped from 9.5% in 2000, while that of India rose from 7.8%.