What's new

Morgan Stanley: At $332 billion in 2022-23, India’s services exports are now 150 percent of the $218 billion recorded in 2019

NG Missile Vessels

Apr 9, 2023
Reaction score

India’s services exports are defying the global slowdown and continue to grow even as goods exports have contracted, according to Morgan Stanley, a US investment bank. At $332 billion in 2022-23, India’s services exports are now 150 percent of the $218 billion recorded in 2019 while the country’s share in global services exports has hit an all-time high of 4.9 percent, it said in a recent report.

The rise in software and business services, along with the emergence of Global Capability Centres (GCCs) set up by multinational firms in India, has played a crucial role in driving this growth, Morgan Stanley said. In the current fiscal too, the services exports growth is set to print above goods exports growth and help contain the current account deficit to 1.1 percent of GDP, it said.

The bank now sees a reorientation in India's growth model with a shift towards higher export market share, helped by a confluence of supply-side policy reforms and a move towards supply-chain diversification.

However, it has flagged potential risks in the cyclical drivers of global growth and challenges related to infrastructure development and talent supply. It has also warned that automation from software bots could pose a risk to highly commoditized work within BPO and other services.

Morgan Stanley’s take on the future outlook
“India's growth model is reorienting with a shift towards higher export market share, helped by a confluence of supply-side policy reforms and a move towards supply-chain diversification. While this will help the export of both goods and services, the gains are being reflected swiftly on the services side,” Morgan Stanley said. India's global services exports share has risen by 120 bps over pre-pandemic against 10 percent growth in goods exports share, it said, adding, “In the near term, we expect service exports to continue to grow above goods exports, especially given the uncertain global growth environment for fiscal 2024.

The tailwinds of lower global commodity prices alongside healthy trends in services exports improve the current account deficit outlook. "We expect India's current account deficit to narrow to 1.1 percent of GDP in FY24 from 1.9 percent of GDP in FY23 estimated,” it said.

Here are the five key questions addressed by Morgan Stanley in the report with regard to service sector exports in India.

What has driven the rise in services exports?

Gross services exports have risen to 150 percent of the pre-pandemic levels (2019) and were tracking $331.8 billion on a 12-month trailing basis as of April 2023, it said in the report. The growth in services exports has averaged 28 percent in the last 12 months versus 6.5 percent in the previous 12 months and has tracked double digits since June 2021. India’s market share in world services exports had risen to 4.9 percent as of December 2022 from 3.7 percent in 2019 (pre-pandemic). Software services exports accounted for the bulk of the share at 46 percent as of December 2022 (latest available data for breakup), having risen about 3 percentage points (ppt) from pre-pandemic levels (2019).

The second highest share is for business services, which accounted for 24 percent of total services exports (December 2022) and is about 3.5 ppt higher than the pre-pandemic level. In level terms, software services exports are tracking at over $140 billion i.e. 1.54x of 2019 levels, while business services have expanded at a more rapid pace, tracking at $75 billion i.e., 1.69x of 2019 levels. On a year-on-year (YoY) basis, the growth rate for software services picked up to over 20 percent YoY in 2021, and inched up further to 21.1 percent in 2022, close to 1.9x the growth rate of 11.4 percent recorded in 2019. Furthermore, business service exports growth has more than doubled to 35.1 percent YoY in 2022 from 14.9 percent in 2019.

What role have multinational companies’ GCCs played in the acceleration of services exports?

It should be noted that software and business services are the main drivers of robust services exports. However, with services exports being increasingly unbundled, a newer avenue of exports has emerged with large MNCs setting up GCCs, which are offshore offices, delivering a wide array of services across IT sector verticals. India accounts for approximately 40 percent of global GCCs and is home to 1,570+ of them, with 66 new GCCs opened up in CY22. As per estimates, GCCs account for nearly 25 percent of overall IT services exports currently. GCCs cater to high-value and knowledge-intensive projects, such as data analytics, artificial intelligence/machine learning, chip design, system design, robotics and other new-age technology solutions that are high in demand in the global tech market.

What is the outlook for services exports amid slowing global growth?

The growth in services exports has outpaced goods exports and defied the impact of a global growth slowdown. While goods exports contracted by 6.8 percent YoY in Apr-23 (3-month trailing basis), services exports continued to grow by 22.7 percent. Further, while goods and services exports move in tandem, the beta of services exports to global growth is lower and will thus provide a cushion against slower global growth. The bank expects services exports to slow to around 5-7 percent in FY24 from 28.6 percent in F23 reflecting the high base and weaker global growth, even as the rising share of GCC export revenues will provide a cushion.

What is the implication for growth and macro stability?

In the near term, the investment bank expects some slowdown in services export growth, however, this will likely be cyclical and short-lived. Further, while IT-related hiring has slowed (as per the Naukri Jobspeak Index) and was tracking at -22 percent YoY in April-23, it is a result of a high base as hiring grew 33 percent in April 2022 and 105.9 percent in April 2021. Over the medium term, the investment banking firm’s IT analysts expect India's technology services exports to grow at a CAGR of 11.5 percent in the next decade, versus 10 percent over the past decade, with an increase in market share from 15 percent of worldwide IT services spending in 2021 to 22 percent by 2031. The services trade surplus tracked 4.3 percent of GDP in F23 versus a range of 3-3.4 percent of GDP between fiscals 2017 and 2022. The bank believes that services trade surplus as a percentage of GDP will likely remain steady in F2024 and thus with a narrowing merchandise trade deficit they expect the current account deficit to narrow to around 1.1 percent of GDP in FY24 versus the estimate of 1.9 percent of GDP in FY23.

What are the risks?

In the near term, risks could emanate from the cyclical drivers of strength in global growth. The key risk is a potential recession in the global economy, especially if it were a deep and prolonged recession in the US, which could reduce services sector exports.

From a domestic perspective, some challenges that could affect the medium-term trajectory of services export growth could be slower scaling up of physical infrastructure and/or increasing demand-supply mismatch of talent, leading to wage pressures, which in turn would erode India's competitiveness as a business destination. Finally, increasing risks of automation from software bots could keep work from moving offshore. The multinational bank sees this as a risk to highly commoditised work within business process outsourcing (BPO) and other services.

Services exports to overtake merchandise trade by FY28: SEPC

India’s services exports are expected to overtake merchandise exports in the next five years on the back of above-par growth in emerging areas of service economy, a senior official at the Service Export Promotion Council said Thursday.

“Our projections show that by 2027-28 services exports would touch $780 billion, a tad above goods exports that year,” director general of the council Abhay Sinha said.

For the current financial year the council has set a target of $400 billion for services exports, a 21% growth from FY23, when the exports totalled $332 billion. Last year services exports grew 31% while merchandise exports were up 6.7% on year to $450 billion.

The Federation of Indian Export Organisations estimates that merchandise exports will grow to $500 billion this fiscal. Services exports will be $100 billion less than goods exports this year.

Government has set a target of $2 trillion exports by 2030 with both merchandise and service exports contributing equally. For merchandise exports to reach the target of $1 trillion growth of 14.5% per year will be required. “It looks quite ambitious but achievable,” Director General of Foreign Trade Santosh Kumar Sarangi had said on Tuesday.

Share of services exports in India’s exports is rising rapidly. From 34% in 2014-15, it grew to 42% in 2022-23.

"As the IT services sector is showing a decline in growth rates, exports of some other services will be increasing,” Sinha said.

The sectors to watch out for in services trade are tourism, financial services, aviation, sea transport services and freight, construction and engineering design, entertainment and content creation, market research, environment services, accounts and bookkeeping, and legal services.

Exports of business services which includes back-end office functions, market research, legal services, advertising and market research was $58 billion in April-December 2022 as against $58.9 billion in 2021-22.

Transport services exports which were $28.1 billion in April-December 2022-23 as against $ 32.6 billion in 2021-22 should pick up more. Financial services exports grew 51% on year in April-December of last year to $8.1 billion. Construction services exports were $2.7 billion in April-December of last year as against $2.6 billion in the whole of 2021-22.

“To achieve the $1 trillion target of services exports the government is looking forward to out of box ideas for creating market access and business opportunities globally,” Sinha said.

Industry should stand on its own and not look for traditional incentives which the schemes like Service Export from India Scheme provided, he said.

Under SEIS service exporters were given a percentage of their net foreign exchange earnings as transferable Duty Credit Scrips. The scheme was discontinued from 2020. A similar scheme for exporters of goods MEIS was also discontinued in 2021.

While merchandise exporters got a new scheme – Remission of Duty or Taxes on Exported Products (RoDTEP). There is no such scheme announced for service exporters and since then some sections of the industry have been demanding something similar for the sector.

“We did one study on Duty Remission on Export of Services Scheme on the lines of RoDTEP but because of complexity and unique characteristics of each service sector it was not found feasible,” Sinha said.

"The government is receptive to policy reform, change in regulatory framework, infrastructure support and enhancing Ease of Doing Business for the sector,” he added.

Top Bottom