This document discusses India's emerging services sector. It provides an overview of the size and growth of services in the Indian economy. Services now account for over 50% of India's GDP and are growing faster than other sectors of the economy. Major services industries include information technology and business process outsourcing, telecommunications, construction, finance, and transportation. While services make up a large share of India's economy, employment in services remains lower than its output. The document also examines India's growing trade in services, with major export markets being the United States, United Kingdom, and United Arab Emirates.

1. India’s Emerging Services
Sector
Matthew Reisman and Isaac Wohl
Services Division, Office of Industries
October 21, 2010
Image Source: Wikimedia Commons

2. Agenda
• Study scope
• Services in the Indian economy
• India’s services trade
• Gravity model
• Directions for future research

3. Study scope
• Services in the Indian economy
• International trade in services
• Empirical analysis
• Industry studies
– IT-BPO, telecom, energy, air transport,
education, and finance

4. Services’ share of output is
relatively large…
Services' Share of GDP, 2008
60
50
40
30
20
10
0
India LMI Average China Indonesia
Source: World Bank

5. …and growing
Growth in value added (% per annum)
1985 1990 1995 2000 2005 2008 CAGR,
1985–2008
Agriculture 0 4 -1 0 6 3 3
Manufacturing 3 5 15 8 9 4 6
Services 8 5 10 6 11 10 8
Source: World Bank

6. Wholesale and retail trade lead
services output…
Services output by industry, 2006-07
Community, social, &
personal services Wholesale & retail
22% trade 24%
Tourism 3%
Electricity, gas, &
Transport, storage, &
w ater supply 3%
communication 14%
Banking & insurance
9%
Real estate & Construction 13%
business services
13%
Source: CSO, National Accounts Statistics 2006–07

7. …but other industries are growing
quickly
Revenues (US$ billions)
80
60
40 Telecom
IT-BPO
20
0
2004 2005 2006 2007 2008
Sources: NASSCOM and Hot Telecom

8. Services’ share of employment is
lower than its share of output
Services' share of GDP and employment, 2005
60
50
40
30 GDP
20 Employment
10
0
India Malaysia Philippines
Source: World Bank

9. India's Services Exports
Softw are Services
120 Travel
USD billions 100 Business Services
80
Transportation
60
40 Communication Services
20 Insurance
0
Financial Services
5
6
7
8
9*
*
0*
00
00
00
00
00
Government not included
01
-2
-2
-2
-2
-2
04
05
06
07
-2
elsew here
08
09
20
20
20
20
Other Services
20
20
India's Services Imports Softw are Services
Travel
120
100 Business Services
USD billions
80 Transportation
60
Communication Services
40
20 Insurance
0
Financial Services
5
6
7
8
9*
*
0*
00
00
00
00
00
Government not included
01
-2
-2
-2
-2
-2
-2
04
05
06
07
elsew here
08
09
20
20
20
20
20
Other Services
20
Source: RBI

10. India's Services Exports
9,000
United States
8,000
United Kingdom
7,000
France
USD millions
6,000
Australia
5,000
Japan
4,000
Denmark
3,000 Netherlands
2,000 Hong Kong
1,000 Italy
0 Canada
1999 2000 2001 2002 2003 2004 2005 2006
India's Services Imports
9,000 United States
8,000 United Kingdom
7,000 France
USD millions
6,000 Australia
5,000 Japan
4,000 Denmark
3,000 Netherlands
2,000 Hong Kong
1,000 Italy
0 Canada
1999 2000 2001 2002 2003 2004 2005 2006
Source: OECD

11. Market Liberalization
• GATS commitments in business services, communications,
construction, financial services, health services, tourism
• FTAs with Sri Lanka and Singapore; member of South Asian Free
Trade Area; negotiating services agreement with ASEAN
Significantly Moderately Restricted
liberalized liberalized
Computer services Financial services Accounting
Telecoms Construction Legal services
Health Distribution
Air transport
Source: Mattoo, Mishra and Shingal 2004

12. Empirical Analysis: Gravity
Models
Image Source: www.bierbower.net

13. A basic gravity model
lnIMij = β 1 + β 2 lnYi + β3 lnYj + β 4ln Dij +εij
• i = country i
• j = country j
• IM= imports
• Y = GDP
• D = distance

14. Our additional variables
• A = adjacency
• CL = common language
• SFDIR = services FDI restrictiveness
index
• REM = remoteness

15. Services FDI Restrictiveness Index
Foreign Ownership
No foreign equity allowed 1
1–19% foreign equity allowed 0.6
20–34% foreign equity allowed 0.5
35–49% foreign equity allowed 0.4
50–74% foreign equity allowed 0.2
75–99% foreign equity allowed 0.1
Screening and approval
Investor must show economic benefits 0.2
Approval unless contrary to national interest 0.1
Notification (pre- or post-establishment) 0.05
Operational Restrictions
Board of directors/managers
majority must be nationals or residents 0.1
at least one must be national or resident 0.05
Duration of work permit for expatriates
less than one year 0.1
one to two years 0.05
three to four years 0.025
Other operational restrictions up to 0.1
Total (capped at 1.0) Between 0 and 1
Source: Golub, “Openness to Foreign Direct Investment in Services,” 2009.

16. Remoteness
Source: http://www.anzacday.org.au/education/childhood/part1.htm

17. REMi=Σdim/ym
• dim = country i’s distance from all trading
partners
• yim = GDP of i’s trading partners

18. Our models
Panel regression (random effects), 2000-06
lnIMjit = β 1 + β2 lnYit + β3 lnYjt + β 4 lnDij + β 5 Aij + β 6 CLij +β 7 SFDIRi + β 8lnREMit+
β 9lnREMjt+ β 10Y01+ β 11Y02+ β 12Y03+ β1 3Y04+ β14Y05+ β 15Y06+εij
Ordinary Least Squares (OLS), 2004
lnIMji = β 1 + β 2 lnYi + β3 lnYj + β 4 lnDij + β 5 Ai j + β 6 CLij +β 7 SFDIRi + β 8lnREMi +
β 9lnREMj +εij

19. Dependent variable— ln(Services Imports)
Random
effects OLS
Services FDI restrictiveness -1.373 ‡ -1.314 ‡
(-3.85) (-3.41)
ln (importer's GDP) 0.914 ‡ 0.850 ‡
(29.62) (25.73)
ln (exporter's GDP) 1.809 ‡ 0.987 ‡
(16.64) (25.51)
ln (distance) -1.214 ‡ -0.996 ‡
(-16.9) (-12.44)
ln (importer's remoteness) 0.186 † 0.012
(2.03) (0.12)
ln (exporter's remoteness) 0.746 ‡ 0.121
(6.94) (1.43)
Adjacency 0.096 0.272
(0.61) (1.26)
Common language 1.177 ‡ 1.163 ‡
(7.3) (6.84)
Constant -45.664 ‡ -33.396 ‡
(-19.66) (-14.46)
Number of observations 4,455 858
R-squared 0.737 0.700
‡ significant at the 1 percent level
† significant at the 5 percent level

20. Potential effects of liberalization
India’s SFDIR score: 0.38
Liberalization to mean SFDIR score Liberalization to minimum SFDIR score
(0.24) (0.04)
Increase in imports (percent) Increase in imports (percent)
Random 19.2 46.7
effects
OLS 18.4 44.7

21. Directions for Future Research
• In-depth examination of other industries
• Political economy of protectionism and
liberalization
• Other trade effects
• Welfare effects

22. Thank you
Image Source: www.indif.com