India’s famed services sector seems to be losing momentum. Imports of services have risen at a faster pace than exports in recent years, leading to a shrinking of the share of surplus in the overall services trade. From 29.2% in FY16, share of the services trade surplus in overall services trade fell to 24% in FY20. Of course, in absolute term, the surplus has risen from $70 billion to $83 billion during this period.
If the trend continues, shrinking services trade surplus will gradually erode the country’s overall trade balance, given that growth in good exports has remained stunted in recent years, thanks to external headwinds and internal structural bottlenecks. This adds to the woes of policy-makers already concerned about the impact of the pandemic on the country’s trade.
Merchandise trade deficit has widened from $119 billion, or 18.5% of the overall goods trade, in FY16 to $161 billion (20.4% of such trade) in FY20. This is despite the fact that global oil prices have mostly remained within the government’s comfort zone during this period.
Importantly, between FY17 and FY19, the share of telecommunications, computer and information services — the biggest segment — in the overall services exports plunged from 46.9% to 41.5%, suggesting that the country is finding it hard to further bolster its dominance in this crucial segment. The tightening of the Visa norms by the US continues to weigh on the trade prospect in this segment. The over-reliance on this segment to boost overall services exports also exposes the country to the shocks and external headwinds associated with it, analysts say, calling for further diversification of the export portfolio and restructuring of incentives, as the government prepares the next five-year foreign trade policy, to be effective from April 2021.
The data compiled by the Services Export Promotion Council show that seven of the 13 key services segment witnessed a worsening of trade balance in even absolute term between FY17 and FY19. These segments are business sevices, travel, transport, construction, certain government services, charges for the intellectual property rights and maintenance and repair work. From a surplus of $629 million, the business services segment witnessed a deficit of $1.3 billion during this period. Similarly, the deficit in intellectual property rights exacerbated from $5.2 billion in FY17 to $7.3 billion in FY19.
Although a weak rupee is expected to offer some cushion, the domestic currency is still “over-valued” by over 17% vis-à-vis a basket of 36 export-sensitive currencies, despite its depreciation in recent months, according to the RBI’s real effective exchange rate (REER) index. The domestic currency had remained “overvalued” by just over 16% in FY19 and close to 20% in FY20, according to the index.
However, if it’s any solace, domestic bottlenecks contribute to only about 25% of the slowdown in services trade, against 60% in goods trade, according to an HSBC report in 2016. This means, services exports are less vulnerable to the absence of domestic structural reforms than the outbound shipment of goods. But that shouldn’t deter the government from bringing in credible reforms, analysts have already cautioned.
Before the Covid-19 spread, commerce and industry minister Piyush Goyal had in February warned of abolishing the Services Export From India Scheme, saying the scheme hadn’t contributed to a rise in services exports and that a few players were cornering a major chunk of the incentives. Recently, when the commerce ministry extended the validity of the foreign trade policy (FTP) for 2015-20 by a year through March 2021, benefits under a similar scheme for merchandise exporters — MEIS — were allowed to continue. But it said a call on whether to extend the SEIS validity would be taken soon.