Optimism abounds in India. Entrepreneurial spirit was unleashed by wide-ranging liberalising reforms that commenced in 1991. The Indian economy has shifted to a much faster growth trajectory, led by the dynamism of its SERVICES SECTOR: Unlocking Opportunity INDIA’S services sector – particularly high-end, knowledge-intensive services exports. Studies by a number of prominent analytical organisations are now projecting that India could outperform all of the world’s major economies over the next fifty years. By 2050, it could be the third largest economy in the world by a significant margin. Such developments would profoundly shift the world’s centre of economic gravity. This report does not seek either to substantiate or to disprove these rosy projections. Instead we ask: How might it happen? Is there a plausible path from today’s India to the projected giant economy of 2050? What opportunities might successful pursuit of that path generate for Australian services providers? And finally, what factors need to be taken into account along the way as Australian companies consider whether they should be seeking to participate directly in India’s growth? The report looks beyond headline services such as information technology and IT enabled services to examine emerging export and investment opportunities in education, telecommunications, financial services, infrastructure, construction management, tourism, film, healthcare, sports and related infrastructure, biotechnology, mining, retail, logistics and professional services. And it highlights the successes of some of the Australian services providers behind Australia’s increasingly dynamic services trade relationship with India. www.dfat.gov.au/eau INDIA’S SERVICES SECTOR Unlocking Opportunity DFAT Australian Government Department of Foreign Affairs and Trade Economic Analytical Unit ©Commonwealth of Australia 2007 This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth available through the Attorney-General’s Department. Requests and inquiries concerning reproduction and rights should be addressed to Commonwealth Copyright Administration, Copyright Law Branch, Attorney-General’s Department, Robert Garran Offices, National Circuit, Canberra ACT 2600 or by email to [email protected] Australia. Dept. of Foreign Affairs and Trade. Economic Analytical Unit. India’s services sector: unlocking opportunity. Bibliography. ISBN 9781921244056. 1. Service industries - India. 2. India - Commerce. 3. India - Economic conditions. 4. India - Economic policy. I. Title. 338.470954 Editing by Peter Judge. Typesetting by Lyn Lalor. Production by Jean Penny, Pirion Print and Design. Cover photo by Adrian Westwood, Firefly Creative. Executive Summary EXECUTIVE SUMMARYI ‘In 1991, with India running out of hard currency, Manmohan Singh…decided that India had to open its economy. “Our Berlin Wall fell…and it was like unleashing a caged tiger… We went from quiet self-confidence to outrageous ambition in a decade” [Tarun Das, Chief Mentor, Confederation of Indian Industries].’ (Thomas Friedman, The World is Flat) Optimism abounds in India. Well it might. Keynote reforms, initiated by the then Finance Minister Dr Manmohan Singh in 1991, provided the momentum for a major reduction of the role of the public sector in the economy, a degree of deregulation, and greater integration of India’s economy into international markets. India’s entrepreneurial spirit was unleashed. The result has been a shift from India’s traditional annual GDP growth rates of around 3.5 per cent to a much faster growth trajectory.1 Between 1991 and 2005 the economy expanded at an annual average of around six per cent. In the past three years growth has been higher still, at around eight per cent. Growth for 2006–07 may be even higher, with the economy expanding at an annualised rate of 9.2 per cent in the third quarter of 2006. These figures call to mind the performance of the economic success stories of East Asia – Japan, Taiwan, the Republic of Korea, the high-growth ASEAN economies and, most recently, China. Extrapolating from macro factors – such as demographics and potential for technological ‘catch-up’ – and assuming an ongoing reform effort, studies by a number of prominent analytical organisations have projected that India could even outperform these dynamic economies over the next fifty years. If so, these studies claim, by 2050 India could be the third-largest economy in the world (in market exchange rate terms) by a significant margin, behind only China and the United States. Such developments would profoundly shift the world’s economic centre of gravity. This study does not seek either to substantiate or to disprove these rosy projections. Any such attempt would be futile. Too much is dependent on factors which cannot be plausibly predicted, such as the ongoing willingness and ability of Indian governments to sustain a reform program over long periods; the health of the international economy; new developments in technology; and the shape of the international trading system. Instead we ask: How might it happen? Is there a plausible path from today’s India to the projected giant economy of 2050? What opportunities might successful pursuit of that path generate for Australian services providers? And finally, what factors need to be taken into account along the way as Australian companies consider whether they should be seeking to participate directly in India’s growth? 1 While some contend that growth picked up in the 1980s, Panagariya (2005) points out that growth was patchy. Growth was strong over 1988–89 to 1990–91, but this was largely a reflection of the liberalisation and deregulation measures under Prime Minister Rajiv Gandhi as well as expansionary policies that ended in the economic crisis of June 1991. It was the more systematic and deeper reforms commencing in 1991 that helped sustain India’s economic growth. P A G E iii INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY WHY SERVICES? This report focuses specifically on the services sector because of the central importance of services to India’s current economic expansion. Whereas the East Asian economies’ success has largely been built on the development of export-oriented manufacturing, India’s recent growth has been led by the dynamism of its services sector – particularly high-end, knowledge-intensive services exports. Services have consistently grown at a faster pace than the economy as a whole since 1991, when the reform effort was kicked off in earnest. They now occupy some 60 per cent of India’s GDP, based on the WTO definition of services which includes construction. Manufacturing, by contrast, has maintained a stubbornly static share in the economy at around 20 per cent, while that of agriculture – still far and away the largest employer – has dwindled. Productivity growth in India, unlike virtually all other regions of the world, has been strongest in services (IMF 2006). This is not to say that developments in other sectors are unimportant; nor that the profile of India’s economy will remain static over time. Already, for example, there are signs of an acceleration in the growth of India’s manufacturing sector. But to date, it has been services that have led the way; and their sheer size within the economy means they will continue to have a critical role. This is an unusual growth path. In terms of per capita income India remains a poor country. Yet the services-dependent profile of its economy is much closer to that which has typically been associated with middle-income developing countries. In general, development of the services sector occurs after developments in agriculture and manufacturing. In India’s case, the reverse has occurred. HOW CAN THE SERVICES BOOM LEAD TO SUSTAINABLE GROWTH? For the reformist approach that has led to India’s recent growth to be politically sustainable in the medium to long term, it must demonstrate benefits to all strata of society. The key imperative for Indian policy-makers is to improve the situation of a huge and growing, but relatively low skilled, rural working class. This means creating vast numbers of appropriate jobs. But the main driver of growth in the economy since 1991 has been a knowledge-intensive sector, which is never likely to become a mass employer of low-skilled labour. How to resolve the two? Fieldwork in the course of this study suggested that, in the minds of many participants in the Indian economy, there is a plausible route by which services-led growth could lead to broader-based development, and consequently to job creation on the necessary scale. Put simply, this would involve growth of dynamic services export sectors such as Information Technology–Information Technology Enabled Services (IT–ITES), and the income that growth brings to the country, providing a major stimulus to domestic demand and hence catalysing reform and growth in other sectors – including infrastructure development, construction, manufacturing and retail. It is the consequent growth in these other sectors, particularly manufacturing, which might be expected to provide the bulk of the required jobs over time. Though somewhat speculative, this idea, which is elaborated in Chapter 1, is of interest because it provides a plausible road map by which current developments might lead to the long-term projections. P A G E iv Executive Summary It also provides a framework for examination of India’s services sector as a whole which highlights the differing roles that different sub-sectors might play as the economy develops – and hence the differing types and timeframes for opportunities that are likely to arise for Australian services providers. THE ROLES OF DIFFERENT SUB-SECTORS Within an overall framework of services-led growth, different services sub-sectors clearly have different roles to play. These are examined in Chapter 2. Broadly speaking, the better performing services sub-sectors either have not been subject to significant amounts of regulation (notably IT–ITES) or have been deregulated and opened up to competition (most prominently, telecommunications and domestic air travel).