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Services Exports Play Key Role in Balancing India’s Current Account Deficit

Published: December 29, 2023
Author: TEXTILE VALUE CHAIN

The latest Balance of Payments data released by the Reserve Bank of India reveals that services exports have played a crucial role in keeping India’s current account deficit in check during the second quarter of this fiscal year. A recent paper by the Office of the Chief Economic Adviser titled & Re-examining Narratives – A Collection of Essays’ confirms the increasing significance of services exports, noting their resilience to changes in global demand and their upward movement in the value chain.

According to the paper, India has made significant strides since the early 2000s when it primarily offered cost-cutting, back-end IT services. Today, India provides high-value IT, law, and management services while also being integrated into global value chains in software.

With capabilities at both ends of the services value chain, India has secured market power in the international arena. However, the absence of granular data on services makes it challenging to delve into specific details. Nevertheless, the export data from April to November this year showcases a divergent trend between manufacturing and services exports. While services exports witnessed a growth of 5.93%, merchandise exports experienced a decline of 6.3%.

A significant finding highlighted in the Finance Ministry paper is the decrease in income and price elasticity of all exports. Income elasticity refers to the responsiveness of export growth to changes in global demand. The paper reveals a decline in income elasticity from 5.67 for 1991-2008 to 3.44 for 2009-2022. Similarly, the price elasticity of exports deteriorated from minus 2.7 to minus 0.4 during the same period.

However, it is crucial to note that these macro figures do not provide insights into the conditions of specific goods and services. The paper acknowledges some weakness in the manufacturing sector, attributing the drop in elasticities to the growing share of services
exports. Nevertheless, certain segments within manufacturing, including high-value engineering goods, chemicals, transportation, pharmaceuticals, and petroleum products, have evolved in complexity and sophistication.

Despite this progress, the paper points out that India’s export advantage has improved in sectors that have achieved complexity but declined in traditional sectors such as textiles, footwear, clothing, hides and skin, stones, glass, and minerals. This imbalance deserves attention, considering these traditional sectors & sizable employment opportunities.

While services are crucial for India’s export growth, there is a need to review schemes like the PLI constantly. Additionally, as India faces new trade barriers related to the environment, intellectual property rights, labour, sanitary and phytosanitary regulations, and gender, it must actively explore new markets in the East while advocating for the interests of its exporters on the global stage.

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