By Maneck Davar
India’s ambition to reach a $5-trillion economy is predicated on the growth of its international trade to $2 trillion by 2030, equally contributed by merchandise and services. This translates into a three-fold growth, or almost 20% CAGR, over this period. The commerce ministry expects services exports to overtake merchandise and manufacturing, or at least be on par. This is possible only if services are viewed the same as manufacturing in terms of fiscal encouragement and incentives. Around 50% of services exports are accounted for by IT-ITeS, which continues to innovate and grow. The rest is the input from management, legal, accounting, logistics, travel and tourism, education, health care, and other sectors. Services sectors beyond IT require careful nurturing, especially capex-intensive sectors like hospitality, healthcare, and education.
Even though it comprises over 50% of the GDP, dwarfing agriculture and manufacturing, the services sector doesn’t receive the recognition or the encouragement in the form of the incentives it deserves. One reason is the perception of the sector consisting of only IT. The IT sector has flourished because of minimal government intervention; ergo, the sector as a whole does not require any handholding. This is a fallacious perspective.
Take the case of exports. Last year, the government claimed that manufacturing and merchandise exports had crossed the $400-billion Rubicon, an extremely creditable performance considering the ravages of Covid. However, services exports had exceeded $254 billion, an increase of over 20% year-on-year, despite the contribution being from just three sectors— education, healthcare, and travel and tourism (despite the latter getting reduced by more than $20 billion because of travel restrictions in the pandemic).
As the then chairman of Service Export Promotion Council (SEPC), I predicted, after the first quarter of 2021, that services exports would surpass $250 billion, hoping tourism would revive by the third quarter, but consecutive Covid waves erased that possibility. Despite this, achieving this milestone is a credit to all who harnessed our intellectual capital in services.
Further, merchandise and manufacturing exports are $200 billion negative-we imported $600 billion against exports of over $400 billion. Meanwhile, services exports were over $100 billion, underlining the importance of ensuring that the growth trajectory in services exports is maintained. This year the deficit in merchandise exports-imports is widening due to the impact of rising crude prices. Yet, there is a huge imbalance in the incentives offered. During the reign of the Merchandise Exports Incentive Scheme (MEIS), merchandise exporters benefited to the extent of over Rs 40,000 crore in 2018-19, whereas under the corresponding Services Exports Incentive Scheme (SEIS), exporters could avail of only a tenth of that amount. Even though SEIS is under the Foreign Trade Policy, it was only through intense advocacy that a sum of Rs 2,000 crore was earmarked for services exports for 2019-20, largely on compassionate ground as sectors like travel and tourism had suffered immensely due to Covid restrictions. These incentives cannot be viewed as charitable handouts—they serve to make businesses internationally competitive and recognise contributions made by service providers. These incentives are temporary impetus providers, and it is imperative that there be a slew of economic measures with long-term effects and benefits for services.
Quadrupling services exports over the next 7-8 years is a herculean task, and not achievable unless there is a strategic road map with the right government intervention. The burden cannot be only on the IT sector, which, at present, contributes around 55% of the total services exports. Clearly, other sectors will have to bring exponential growth to the table.
Consider international tourism. We attract 10 million tourists every year. This is underwhelming, considering the diversity we offer. Prime minister Modi has exhorted the diaspora to insist that at least five of their acquaintances visit India. The goal should be to triple arrivals. For that, we need to embark on a crash program to enhance infrastructure. While the government can work on physical connectivity through public-private partnerships by building more airports and highways, it will require individual entrepreneurship to increase the hospitality quotient by adding more hotel rooms. The government provides attractive incentives, including direct taxation for green field projects in the manufacturing sector. The same blueprint requires to be initiated for the services sectors, especially in the building of hotels, hospitals, and universities, especially those attracting forex.
Policymakers have incentivised manufacturing by introducing the Productivity Linked Incentives (PLI) scheme with a well laid out process that ensures investment in capex, resulting in increased productivity and avenues for employment. A similar scheme for services can be introduced with substantial scope in areas like hospitality, education, and healthcare.
In these adverse times, if economic momentum has to be sustained and every effort has to be made to yield the desired result, then the perception of services, especially its exports, has to radically transform. This is also to ensure that, as a major economy, India’s reliance should be on multiple horses in the race.
(The author is Former chairman, Services Exports Promotion Council)