Domestic Reform and Multilateral Trade Openness Vital to Sustain India's Services 'Revolution'

DOMESTIC REFORM AND MULTILATERAL TRADE OPENNESS VITAL TO SUSTAIN INDIA’S SERVICES ‘REVOLUTION’

New Delhi June 8, 2004 — Securing the gains delivered by India’s ‘services revolution’ demands deeper reforms at home, combined with a more aggressively outward-looking negotiating stance in international trade talks, says a new World Bank study. 

 “India must address two critical challenges,” says the study. “Externally, the problem of actual and potential protectionism, and domestically, the persistence of restrictions on trade and investment, and weaknesses in the regulatory framework.”

 The report Sustaining India’s Services Revolution – Access to Foreign Markets, Domestic Reform and International Negotiations, is to be presented on  June 14, 2004 at a roundtable sponsored by the Federation of Indian Chambers of Commerce and Industry (FICCI) at Federation House, Tansen Marg, New Delhi.

 This report notes that India’s exports of services grew by 17 percent a year through the 1990s.  This was almost twice the nine-percent growth rate of the services sector as a whole, which itself accounted for nearly 60 percent of India’s overall economic growth.

 While the most visible growth has been in information technology and business process outsourcing services, the report notes that other types of services, such as telecommunications, financial and community services, hotels and restaurants, have also grown faster than overall GDP.   The Bank report argues that this phenomenal growth has occurred, in large part, due to services trade liberalization, both in India and internationally, which has provided access to a growing external market for services for Indian firms, while also attracting foreign direct investment in services to India.

 “The report provides evidence that liberalized services such as information technology and telecommunications have attracted significant investment, have grown faster and created more jobs than the protected services sectors,” said Michael Carter, Country Director, India, World Bank.

Foreign direct investment (FDI) in services grew by 36 percent in 2001, almost twice the rate of growth in India’s non-services FDI. Information technology-related services accounted for 34 percent of India’s services exports in 2001-02, up from 19 percent in 1997-98.  Within this area, the proportion of business process outsourcing —data entry, data conversions, medical transcriptions, insurance claims, call centers and database services— has grown six-fold in just four years, from four to 24 percent.

 “There are no signs that this growth will slow down,” the Bank report says, citing recent private studies forecasting 38 percent average annual growth in business services outsourcing to India through to 2008.

“The current round of WTO negotiations offers India a remarkable opportunity to eliminate existing barriers to its services exports and prevent the introduction of new ones,” said Aaditya Mattoo, co-author of the report.  This has grown more urgent recently, as job outsourcing to India has become a political lightning rod prompting demands for increased protectionism in North America and Europe. The report argues that India can take a far more aggressive position in services negotiations thanks to its significant unilateral liberalization. 

The report emphasizes that liberalization must also deliver benefits to the poor and weaker sections of society. “The challenge is to devise innovative policies and efficient instruments to ensure that the efficiency gains from liberalized markets translate into more effective attainment of social goals,” said Deepak Mishra, co-author of the report. One model, the report suggests, is the universal service fund already set up in the telecommunications sector, in which part of the revenue is set aside to finance service provision in more remote areas without undermining the overall efficiency. Other suggestions include:

• India should take a far more aggressive position in international negotiations on the General Agreement on Trade in Services (GATS), and seek to lock-in the current open international trade regime for cross-border trade in services.
• Seek liberal access for the strictly temporary movement of skilled professionals as employees of trans-border companies, or to fulfill services contracts.  For these classes of providers, movement would be facilitated by the creation of a service provider visa with streamlined and transparent procedures.
• Open professional services such as accountancy and legal services, and retail distribution to international competition, and eliminate restrictions on trade in financial and telecommunications.
• Reduce discretion in the issuing of licenses and permits, and eliminate unnecessary red tape that inhibits efficient operation of firms, capital movement, and productivity.
• Reduce restrictions on the operation of domestic firms in road transport, financial, accountancy and construction services.
• Improve regulation in health and education to protect the interests of Indian consumers and to help Indian service providers secure access to foreign markets.
• Along with liberalization, institute policies and programs to ensure that the poor and vulnerable sectors of Indian society gain access to the improved opportunities that India’s services revolution offers.

These steps, the World Bank study suggests, would help India sustain its services revolution and build a more competitive domestic economy, both of which underpin the country’s prospects for continued economic growth and poverty reduction.

Cover (pdf - 64k)
Table of Content (pdf - 56k)
Executive Summary (pdf - 52k)
Chapter 1 - The Remarkable Dynamism of India's Services Sector (pdf - 477k)
Chapter 2 - Liberalization and Performance of India's Services Sector (pdf - 308k)
Chapter 3 - Sustaining India's Services Revolution: External and Domestic Challenges (pdf - 981k)
Chapter 4 - Harnessing International Negotiations to Obtain Improved Access and Promote Domestic Reforms (pdf - 120k)
Appendix: Pattern of Trade in Services (pdf - 348k)
Bibliography (pdf - 44k)