MANUFACTURING VS. SERVICES

All the focus being on the manufacturing exports in India has distracted attention from what might be a no less noteworthy development7. In past few years, it is India’s exports of services that has changed in the most significant, and perhaps alarming, way. One can see the problem looking at market shares. India’s share of world exports of services, after surging in the mid- 2000s, has flattened out.

What makes this development puzzling is that in recent years the composition of Indian exports of services is more favourable than that of Indian exports of manufactured goods. More of the former goes to the United States, and more of the latter to Asia. Since Asia has slowed down more rapidly, India’s exports of manufactures should have been more affected. Furthermore, in 2015, the rupee has depreciated strongly against the dollar which should have helped India’s exports of services.

These developments have longer-term implications. Realising India’s medium-term growth potential of 8-10 per cent will require rapid growth of exports. How rapid this should be is suggested by comparing India’s export performance in services with China’s performance in manufacturing at a comparable stage of the growth surge.

China’s global market share in manufacturing exports beginning in 1991 and India’s global market share beginning in 2003 were roughly similar. The magnitude of the challenge becomes evident when examining China’s trajectory over the last fifteen years.

To achieve a similar trajectory, India’s competitiveness will have to improve so that its services exports, currently about 3 per cent of world exports, capture nearly 15 per cent of world market share. That is a sizeable challenge, and recent trends suggest that a major effort at improving competitiveness will be necessary to meet it.