Services Imperative

Services have been a key driver of economic growth since the 1990s, generating half of global employment and two-thirds of global GDP, surpassing agriculture and industry combined. Services Trade has grown from USD 11 trillion in 2018 to USD 15 trillion in 2023. World services exports surpassed USD 7.8 trillion in 2023, with an 8 per cent annual rise in current dollar values. In India too, services exports have surged from USD 204 billion in 2018 to USD 344 billion in 2023, while our imports have grown more slowly from USD 175 bn to USD 245 bn, resulting in a trade surplus. India’s share in global services exports rose from under 2 per cent in 2005 to 4.6 per cent in 2023, while India’s share of goods exports has only increased from 1 per cent in 2005 to 1.8 per cent in 2023. With the ever-expanding growth of the digital economy globally further exacerbated by technologies like AI, the monthly services trade has exceeded merchandise trade on November 24 and January 25. Recently announced figures for FY24-25 point to a significant yearly increase in services exports while merchandise stays flat. The government targets for 2030 to equalize the two at USD 1 trillion each, which would require a continuously faster CAGR for services exports. The dominant mode of supply in services currently is cross-border or Mode 1 supply, where India has comparative strengths. Two-thirds of global FDI inflows come from the Services sector, including in India.

However, all this potential could remain grossly unutilized unless there is a clear recognition of this importance that requires a major mindset change in emphasis both globally and in India. Especially, in the current environment where the US, led by Trump, has put merchandise tariffs on top of the trade agenda, almost exclusively so, we must all recognize and act to put Services at the mainstream of trade and investment discourse.

It would also be good to recall that restrictions on services remain broadly high across countries and sectors, with regulatory norms becoming increasingly stringent as measured by global indices like the Services Trade Restrictiveness Index (STRI) of the OECD. Irrespective of India’s legitimate concerns regarding the ranking of India, the fact remains that services liberalization multilaterally and through preferential agreements have failed to correct this situation substantially, with several sectors crucial to greater trade integration like Transport, Telecom and Professional services facing restrictions worldwide. A new study has suggested that policy reform,m which leads to a decrease in a country’s STRI by 0.05 (equivalent of 5 per cent) is associated with a nearly 10 per cent increase in cross-border services trade in the short term.

All these require significant course correction both at the policy level and for business strategy. India, with its strong foundation of IT/ITES sectors, skilled engineering and computer manpower, and globally admired Digital public infrastructure, should perhaps take the lead in this transformation at both multilateral forums and in its free trade engagements with other partners. This would concomitantly necessitate domestic reforms on the regulatory side, diversification of services exports and above all, timely and disaggregated country and sub-sector services trade data that is currently missing. Let us explore the key tenets of such a strategy.

Multilateral engagement at WTO

Services trade was one of the integral and crucial pillars of the Doha Round for India and some other developing countries. With the virtual demise of the Doha Round, Services negotiations at WTO have been paralyzed with no progress and very little engagement by members, including India. This does seem a trifle puzzling given that India was a demander in Services in the Doha Round & played a significant role in the WTO Ministerial Declaration on Services at the Hong Kong Ministerial Conference (MC) in 2005 as contained in Annex C: the only instance where detailed guidelines/modalities were provided at any MC. The time is ripe to bring Services back into the multilateral fold. The following initiatives are worth exploring:

* Since the Doha Round negotiations collapsed, the only notable achievement in Services has come from a Joint Statement Initiative (JSI) on Domestic regulations, a Plurilateral initiative that India did not join, largely on systemic grounds that such plurilateral engagements at WTO endanger the fundamental principles of the WTO. The results have since been incorporated by participating members in their respective schedules of commitments as Additional commitments on an MFN basis under the aegis of the Working Party on Domestic Regulations (WPDR), which makes it multilateral. However, these disciplines are not as extensive as the original mandate under Article VI:4 of GATS, which was being negotiated in WPDR and has been lying in deep freeze for a decade, particularly relating to Qualification requirements, which is a key tool for effective market access in Mode 4 and even Mode 1. India and other like-minded countries (developed and developing) could try to revive this by building on the JSI-led disciplines. Of course, this is likely to meet resistance from the US, EU and other developed countries as being unnecessary, and opinions could be highly divided. But pushing this multilaterally with support would have the dual advantage of pressing India’s systemic resistance to plurilateral efforts and acting as a counterpose to the agendas of those likely to resist this effort. But to sound and prove credible, India would first have to agree to bind these disciplines in its own schedule of commitments. On merit, this may not prove to be that difficult since almost all the legally binding commitments /best practices that are part of these disciplines are implemented by India domestically. In those rare instances that it might involve some forward tweaks in our domestic regulatory structure, it could be viewed as an opportunity to push needed reforms in certain service sectors, particularly Professional Services, which have lagged both in liberalization and modernization.

* Another crucial area of work on Services could be digitally delivered services, which is expanding Its quantum and coverage to almost all sectors. This would also be in line with the 13th MC Declaration at Abu Dhabi. The developmental advantages of digitally delivered services on achieving more inclusive growth for MSMEs, women, and startups are well documented. However, there exists a digital divide between and within Members and across service sectors. Identifying the barriers to such unequal growth could be a significant multilateral pursuit with the clear potential of benefiting all WTO members. These are unlikely candidates for FTAs.

* Aid for Trade - Services for development: The WTO & the World Bank submitted a Joint Report in 2023, “Trade in Services for Development”. It underscored the significant and multifaceted development impact of trade in services and the important opportunities it offers for developing economies. The report recommended increased levels of Aid, and at the Aid for Trade Global Review on 26 June 2024, a Joint program of activities was launched.

This initial work program is composed of four related components. The first is the preparation of a user-friendly Competitiveness Diagnostic Tool to help developing economies assess their competitive strengths and weaknesses in services trade, define their overarching national services trade policy objectives, and identify and prioritize technical assistance needs. The second and third components seek to overcome data constraints by aiding in the mapping out of core services trade measures and by building the capacity of developing economies to produce and use statistics on services trade and improve their quality. The fourth component aims to identify best practices in the export promotion of services to assist the efforts of developing economies to expand and diversify their service exports.

India must proactively participate in this work program both on its own behalf and for the Global South in line with its stated vision of providing leadership to the Global South.

Views expressed are personal