UPSC PRELIMS 2020 : India’s Services Exports to exceed Merchandise Exports

India’s Services Exports to exceed Merchandise Exports

Topic : India’s Services Exports to exceed Merchandise Exports

Topic in Syllabus: Indian Economy

 

Context:

India’s Services Exports to exceed Merchandise Exports

India may perhaps soon cross a unique turning point when its export of services becomes bigger than its export of merchandise (other than oil and gems & jewellery).

 

Background:

The export of gems & jewellery is classified as merchandise trade.

However, in reality what is being exported is the value created by the work of those who cut and polish imported diamond roughs and work on precious metals (also imported).

Leaving aside the official classification, this is export of services.

There is supreme irony in this services-manufacturing conclusion.

In this context, the US first proposed, in the 1980s, that a new round of global trade talks should be expanded to include not just merchandise trade but also trade in services.

At that time, India was a strong critic of the idea of opening up markets for trade in services.

 

Current Scenario:

Globally, services trade accounts for less than 20% of total trade.

In India’s case, if all of exports (including oil and gems & jewellery) is taken, then the share of services is 40%.

Over the first 4 months of this financial year (2019-20), services exports fetched $74.05 billion.

This is not far short of what was fetched by merchandise exports, excluding oil and gems & jewellery ($79.81 billion).

Since the former is growing at over 8%, and the latter at less than 2%, the turning point may be no more than a year or two away.

 

Challenges:

  1. Export of services becoming bigger than export of merchandise is not necessarily something to celebrate.
  2. The structural flaw at the heart of the Indian economy, which finds reflection in the export pattern are –
    1. the failure of domestic manufacturing, specifically the Make in India programme
    2. the consequentially outsized share of GDP and trade accounted for by services
    3. The other limitations to manufacturing growth includes –
    4. the relatively high cost of power, land, transport, port charges and shipping rates
    5. inefficiencies in the labour market
    6. unrealistic exchange rate for the rupee
    7. Indeed, as services exports continue to succeed, the rupee will become stronger.
  3. Consequently, a large part of the manufacturing sector, with their smaller profit margins, will find it steadily harder to compete internationally.
  4. This will almost certainly result in a shortage of domestic job opportunities for millions of rural youngsters.
  5. It is to be noted here that high-value services exports create fewer jobs than manufacturing.
  6. Yet the likely prospect is that the manufacturing-services imbalance will grow.

 

Significance:

  • India, for sure, had a competitive advantage in this area (services trade).This is because India has cheaper technologists, doctors, accountants, space scientists, etc, than almost all other countries.
  • It has offered India an advantage in trade negotiations as well.E.g. in the negotiations for Regional Cooperation for Economic Partnership, India has been offering a two-sector deal to the leading economies of the Asia-Pacific
  • India demands that if RCEP countries open up on services trade, it will open up further on merchandise trade.

 

Way Forward:

  • Among the things that India is pushing for is liberalisation of something classified as “Mode 4” in the multilateral trade services agreement.This covers the movement of “natural persons”.
  • The argument is that other countries must allow more work migrants from India. E.g. the controversy over the H1B visa
  • The counter-argument is that the movement of “natural persons” is a citizenship issue, not one of trade.
  • Ironically, this is precisely the argument that India uses to try and stop the flow of migrants from Bangladesh.

 

Sample Question:

The national income of a country for a given period is equal to the:

(a) total value of goods and services produced by the nationals

(b) sum of total consumption and investment expenditure

(c) sum of personal income of all individuals

(d) money value of final goods and services produced

 

Solution (a)