top of page
InduQin

Skills, The Secret Sauce


India’s business services exports have grown so rapidly of late that their incremental impact is now nearly as large as that of IT services exports. While their base is smaller, they grew by $21 billion last year, whereas the growth in IT services exports in 2022 was $27 billion. Can this surge be sustained? Axis Capital’s research shows a global tide in services trade, and India is gaining market share. There are both structural and cyclical reasons behind these trends.

The most important structural reason is disaggregation in services value chains. Put simply, the same service is being broken up into multiple parts, which different individuals or firms can deliver from different locations. This is like what we have seen in goods value chains over the past few decades. The display glass of your smartphone is likely from a US firm, liquid crystals from a German firm, display drivers from a Taiwanese firm and the backlight from China. This fosters specialisation and innovation, and boosts trade.

Similarly, other than client-facing parts today, many services, including high-end strategy consulting, can be done remotely. More than 40% of employees in some global consulting firms are now based in India. We have case studies of global procurement by US retailing giants to the rapid development of operating systems for cars being done in India. International banks have been expanding rapidly in the country for more than a decade.

In several cases, the shift in jobs is no longer about India’s lower costs but increasingly about skill arbitrage. For example, if an auto company wants to increase its future EV portfolio, it needs more designers and engineers. They can only be found in India.

This is supported by a rapid increase in cross-country internet connectivity, with capacity growing at a compounded annual rate of 35%. This enables faster transfer of data, which is necessary for seamless cross-country collaboration. Demography-driven shortage of workers in the developed world is also helping, as does improving education in India. While immigration may be a solution, intensifying anti-immigrant sentiments shows this has limits. The persistence of working from home (in the top 10 US cities, the return-to-office is still half of pre-Covid levels) has also helped — WFH means work-from-anywhere and is the first step towards offshoring.

These factors have meant that global trade in ‘modern services’ (financial, communication, computer, technical, legal, advertising and business services) is growing faster and now accounts for 40% of global services trade. Given that these dominate India’s services export mix (75% of the total), its services trade is growing faster than the world. Additionally, India’s share of global modern services trade has also picked up from 6% in 2018 to 8% last year, nearly 2.5 times its share of global GDP.


The growth acceleration seen in the years after Covid had some cyclical drivers, too. But they are now fading. Excessive fiscal stimulus in the US had meant unfilled job openings rose sharply, accentuating the move to India to find people with skills. The pickup in wage growth exacerbated the cost arbitrage, allowing for more work to be shipped offshore. A significant part of global services trade is also linked to goods trade, like freight, logistics and insurance. As global goods trade falls back to pre-Covid levels, these services are slowing, too. Therefore, year-on-year growth in India’s services exports has slowed in recent months, but we see this as a temporary correction, as the structural drivers remain intact. In India, growth for both imports and exports started rising from 2017 onwards and accelerated further after Covid. Exports have done better, driving a doubling of net invisibles (including remittances too, which are also an export of services) between 2018 and 2023. Even if the pace of growth going forward slows to that seen between March 2017 and March 2020, net invisibles will grow to $265 billion in three years, higher than the largest annual goods trade deficit India has ever seen.

This transition to a current account surplus is a manifestation of what demographics predict (falling fertility increases savings for a few decades), and if achieved, would improve India’s macroeconomic stability (low dependence on foreign capital) and make India a supplier of savings to the world.

Services exports can create around 3 million direct new jobs over the next three years, 2 million of them high-paying. If this continues, it could be as transformative for India’s aspirations as well as its middle class and cities as the IT services sector has been over the past three decades.

For this momentum to persist, if not accelerate, active policymaking must address hurdles. A major challenge is creating new urban hubs to house these workers, as the current centres may not be able to expand rapidly. Global firms may be wary of shifting work till they are clear on the tax structure — India must improve the pace of signing advance-pricing agreements.


By Neelkanth Mishra

https://economictimes.indiatimes.com/epaper/delhicapital/2023/sep/06/et-edit/skills-the-secret-sauce/articleshow/103406902.cms

20 views0 comments

Commentaires


bottom of page