The flows of digital information have surged globally and are already exerting a greater impact on productivity and growth than the global trade in goods. There is evidence to clearly support this view. The digital surge has direct implications for India, which is already a leader among emerging markets in building a technologically advanced services sector based on information and communication technology.
As the country approaches its 70th Independence Day, building further on India’s comparative advantage in this area must become a critical goalpost for the next decade. And in the process of striving to remain a global growth leader, implementing the Goods and Services Tax (GST) reforms will be a vital contributing factor.
India’s strength in services
First, a look at the evidence on India’s strength in [1] modern services and digital flows, and then the suggestions for some of the reforms needed to bring India closer to the global productivity frontier:
- India’s share in global services exports, at over 3%, has risen much faster than India’s goods exports, and is already double its share of global goods exports.
- The share of India’s services exports in total Indian exports has reached 35%. This is, well above other emerging markets, and closer to the average in advanced economies.
- The exports of modern services have dominated the rise in India’s service exports, especially high value technology-oriented business exporting services, and research and development services. Modern services exports now account for about 70% of India’s service exports. This is much above that of other emerging markets. [2]
- India’s services exports, however, have diversified less than the country’s exports of goods, despite their high level of sophistication; and they have focused predominantly on high value computer-related exports.
Building India’s potential in services
How can India build on this growing potential in tradeable services, diversity these further, join new global value chains, and thereby create new employment opportunities?
The comparative advantages already exist. Among them, India has built the world’s first digital ID infrastructure that is already transforming online services, especially government-delivered services. However, India—like other emerging markets—still needs to build the necessary domestic digital infrastructure, especially through education in technology and digital skills. And, externally, it needs to assure access to global data flows.
Among domestic reforms, the passing of the GST Bill is a vital step forward in many ways. Most importantly, its implementation should eliminate the inconsistency between the taxation of goods and services, which has been a challenge to the classification of digital downloads and flows in India. It will also remove the differences in state levies and restrictions on interstate movements.
So far, India’s modern services have grown despite the complex interstate regulatory structure, indirect tax laws that don’t recognise the evolving business models of the modern services sector, and the ambiguity of interstate tax laws. Removing these barriers is vital to the future potential of the sector, and a consultative approach with the modern services sector and the states will be required to implement the GST and the linkages with supply and registration rules.
Among external reforms, India must widen the diversification and sophistication of its services exports by greater external integration—this will open new markets for trade in services. The steps being taken in India to liberalise foreign direct investment rules are an important factor. Joining potential regional trade agreements that promote open markets for digital goods and online services is another. But, ultimately, India should use its global weight to develop an open and level global playing field for multilateral trade in services through the World Trade Organisation (WTO), in part by deepening its commitment to the WTO General Agreement on Trade in Services (GATS).
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Anoop Singh is Distinguished Fellow, Geoeconomics Studies at Gateway House: Indian Council on Global Relations.
The chapter was originally published in “G20 Hangzhou Summit: Proposals for Trade, Investment, and Sustainable Development Outcomes” published by ICTSD.
Anoop Singh was a speaker on the Re-energizing Global Trade Growth: Trends and Measures panel at the 2016 T20 Trade and Investment Conference conducted by the International Center for Trade and Sustainable Development.
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[1] Based on the evidence summarized in IMF Working Paper WP/15/110, May 2015, “Made in India: Which Exports Can Drive the Next Wave of Growth.”
[2] Modern services is defined as products that can be stored and traded digitally, comprising finance, computer and information, royalties and license fees, and business services.