1. An Overview of the Indian Services Sector Arpita Mukherjee July 19, 2008

2. Outline of the Presentation Indian Services Sector - Trends and Developments Factors contributing to Growth Trade in Services India’s position vis-a-vis other Countries Sector-wise Services Trade Impact of Growth/Liberalisation/Globalisation External Barriers Domestic Challenges Reforms

3. Indian Services Sector Largest sector of the economy - contribution to GDP increased from 41% in 1990-91 to 61.8% in 2006-07 Since 1991, the services sector has grown at a faster pace than the economy as a whole Between 1990 and 2005, the average annual growth of services was 7.2% in India, compared to 3.1% in the US, 6.9% in Singapore and 3.2% in the UK Between 2002-03 and 2006-07, services contributed 69% to India's overall GDP growth Growth in services was over 11% in 2006-07

4. Indian Services Sector….. cont In 2005, services contributed to 69% of organized sector employment (Economic Survey 2007-08) Employment in IT/BPO services increased from 284,000 in 1999-00 to 1.6 million in 2006-07 Boston Consulting Group estimated 40 million new services jobs, $200 billion revenue by 2020 Certain services such as communication services, insurance and banking, IT have grown at a much faster rate than the growth of the service sector Total revenue of the IT/BPO sector increased ten folds since FY 1998

5. Factors Contributing to Growth Liberalisation since the 1990s – few entry barriers (retail, legal, railways, insurance, etc.) Positive impact of liberalisation – telecommunications Investment by Indian Corporate Attractive destination for Foreign Investment  Services sector (financial and non-financial) has attracted the highest cumulative FDI inflows: April 2000- March 2008. 22.64% of total inflows  Computer hardware and software ranked 2 nd, 13.07% of total inflows  Telecommunications – 6.81% Availability of educated English speaking manpower at competitive prices Government incentives and support

6. India’s Trade in Services Share of services in total trade of India increased from 20.9% in 1997 to 28.9% in 2006 Services exports as percentage of total exports nearly doubled – 20.3% in 1997 to around 39% in 2006 Nearly two-third of the revenue of IT/BPO sector is through exports Services import as percentage of total imports was 21.4% in 2006 India currently enjoys trade surplus in services Exporter of knowledge-based services Skilled Labour shortage - Ageing population on developed countries Importer of infrastructure services

7. Trade in Services… cont Outsourcing Hub About three-fourth of the Fortune 500 companies and at least half of Global 2000 corporations are sourcing technology related services from India Cost saving of 25-50% Moving up the value chain Multi-location delivery platforms Indian companies are investing abroad

8. Ranking of India in Trade in Commercial Services Source: WTO, International Trade Statistics 1996, 2007

9. India Position vis-a-vis Other Countries Source: WTO, International Trade Statistics, 2007 Note: Value is in billion dollars and share is in percentage terms.

10. RCAs for India Source: BoP Statistics, IMF

11. Sector-wise Services Trade Transportation Services Share was 1.2% in world’s export in 2006, 0.6% in 2000 Share was 3.3 % in world’s import in 2006, 2.1% in 2000 Travel Services Not among the top 15 exporters Share 1% in world’s import in 2006, was 0.6% in 2000 Other Commercial Services Share 4.2% in world’s exports in 2006 Share was 2.6% for imports in 2006

12. Sector-wise Services Trade Communication Services Ranked 4 th among exporting countries and 9 th among importing countries in 2006 Construction Services 7th largest exporter and 10 th largest importer in 2006 Financial Services 10 th exporter and 8 th importer in 2006 Computer and Information Services Ranked 2 nd in terms of exports and 7 th in imports in 2006

13. Impact… Performance and global competitiveness of the sector determines government’s negotiating position India has autonomously liberalised most of the service sectors Need foreign investment/technical know-how Exports are increasing - Indian service providers are facing several barriers in markets of export interest From a passive player in the Uruguay Round, India has an offensive interest in services liberalisation in the on-going Doha Round Important component of India’s Bilateral Agreements

14. Challenges - in Foreign Markets Barriers faced by professionals Lack of recognition of qualifications and experiences Restrictive work permit/visa regimes Non-transparent/cumbersome administrative procedures Economic Needs Tests/Labour Market Tests Wage Parity conditions Social security contributions without corresponding benefits Nationality/residency/citizenship/registration requirements Quantitative ceiling

15. Challenges - in Foreign Markets ……………. cont Barriers to establishing presence in foreign country Form of legal entity Local incorporation requirements FDI restrictions Nationality/residency requirements Economic Needs Tests Requirement to employ locals Restrictions on advertising Minimum capital requirements Limitation on foreign exchange and profit repatriation Limitation on the type of projects undertaken by foreign service providers

16. Challenges - in Foreign Markets……. cont Barriers to outsourcing/cross-border trade Commercial presence requirement Security/data protection issues Anti-outsourcing sentiments Non-recognition of qualifications Other Barriers Cumbersome licensing procedures Environment and labour standards Subsidies/Government procurement Security issues Lack of market knowledge Languages

17. Other Challenges High dependence on some key markets The US alone accounts for two-third of the software and services exports while Europe accounts for around 25 per cent. Within Europe, the UK accounts for around 15 per cent followed by Germany 2-3 per cent Competition from other developing countries

18. Domestic Challenges Infrastructure Quality of physical infrastructure affects the efficiency of the services sector In 2005-06, total logistic cost was 15% of GDP Shortages of Right Skills Do we really have excess supply? Gross enrollment ratio is 11% compared to the global average of 23.3 % Quality and standards

19. Domestic Challenges ……. cont Slow reform process Regulatory framework is evolving – energy, education, retail, postal and courier – uncertain investment climate Backdated/outmoded regulations High and multiple taxes Multiple clearances requirements Data Protection Lack of inter-ministerial coordination – piecemeal policies/liberalisation

20. What needs to be done? Comprehensive services sector policy Upgrade Infrastructure Logistic infrastructure – freight corridors, port facilities, storage and warehousing services, etc. Upgrading smaller cities & Urban planning Broadband & internet connectivity Electricity Establish the Regulatory Framework which promotes efficiency and competition Amend the outdated and outmoded laws Enact new regulations

21. What needs to be done? ……. cont Education & Skill Development Enhance both quantity and quality of higher education Enforcement of international standards of training and qualifications Revise curricula at regular intervals Focus on development of analytical and creative skills Teaching profession should be made more attractive Public private cooperation Collaborations with councils/industry bodies in training Ranking of institutes

22. What needs to be done? ……. cont Rationalize taxes, licensing, etc. Diversify exports markets and areas of operations Public-private cooperation in developing Global Market Strategies Indian Embassies needs to be more proactive Negotiate multilaterally/bilaterally to remove/reduce barriers in markets of export interests Ease trade barriers through Mutual Recognition Agreements Totalization Agreements Cooperation Agreements