Don’t ignore the services sector

Even though it comprises over 50 per cent of the GDP, dwarfing both agriculture and manufacturing, the services sector does not receive the recognition — and more importantly, the encouragement in the form of incentives — it deserves. One of the reasons for this is the perception at one level of the sector as comprising only IT, and the IT sector has flourished because of minimum government intervention. Ergo, the sector as a whole does not require any hand holding. This is a fallacious perspective.

Take exports. The year 2021-22 was an astounding success in this endeavour with the government proudly claiming that manufacturing and merchandise exports had crossed the $400 billion rubicon, an extremely creditable performance considering the ravages of Covid-19. What was a footnote, however, was that services exports had exceeded $254 billion, an increase of over 20 per cent year-on-year, even though contribution from three sectors — education, healthcare and especially travel and tourism — was overall reduced by over $20 billion because of travel restrictions during the pandemic.

As then chairman, Service Export Promotion Council (SEPC), I had predicted after the first quarter in 2021 that services exports would surpass $250 billion, hoping that tourism would revive by the third quarter. But consecutive waves of Covid erased that possibility. In spite of this, to achieve this milestone of over $250 billion is a credit to all those who have harnessed our undoubted intellectual capital in services.

Further, consider that merchandise and manufacturing exports are $200 billion-negative in that we imported $600 billion versus our exports of over $400 billion. Services exports, by contrast, were over $100 billion-positive, underlining the importance of ensuring that the growth trajectory in services exports is maintained. This year, the deficit in merchandise exports-imports is widening with the impact of rising crude prices.

Yet, there is a huge imbalance in the incentives offered. During the reign of MEIS (Merchandise Exports Incentive Scheme), merchandise exporters benefited to the extent of over Rs 40,000 crore in 2018-19, whereas under the corresponding SEIS (Services Exports Incentive Scheme) exporters could avail of only a tenth of that amount. Even though SEIS is committed under the Foreign Trade Policy, it was only through intense advocacy that a sum of Rs 2,000 crore was finally earmarked for services exports for 2019-20, largely on compassionate grounds as sectors like travel and tourism had suffered immensely due to Covid restrictions. These incentives cannot be viewed as charitable handouts — they serve to make businesses internationally competitive as well as recognise contributions made by service providers. These incentives are clearly temporary impetus providers and there must be a slew of economic measures with both long-term effects and benefits for services.

To quadruple services exports over the next 7-8 years is surely a herculean task and certainly not achievable unless there is a strategic road map with the right sort of government intervention. The burden cannot be only on the IT sector, which at present contributes around 55 per cent of total services exports. Clearly, other sectors will have to bring exponential growth to the table.

Consider international tourism. We attract 10 million visitors every year. This is underwhelming considering the diversity we offer. Prime Minister Narendra Modi has exhorted the diaspora to prevail upon at least five of their acquaintances to visit India. The goal should be to triple arrivals. For that, we need to embark on a crash programme to enhance infrastructure. While the government can work on physical connectivity through public-private partnerships by building more airports and highways, it will require individual entrepreneurship to increase the hospitality quotient by adding more hotel rooms. The government provides attractive incentives, including direct taxation for green field projects in the manufacturing sector. The same blueprint must be initiated for the services sectors, especially in the building of hotels, hospitals and universities, with an emphasis on those that attract forex.

Policymakers have incentivised manufacturing by introducing the Production Linked Incentives (PLI) scheme with a well-laid-out process that ensures capex investment, resulting in increased productivity and avenues for employment. A similar scheme for services can be introduced with substantial scope for capex in areas like hospitality, education and health care.

In these adverse times, if economic momentum has to be sustained and every initiative and effort has to be made to yield the desired result, then the perception of services, especially their exports, must radically transform. This is also to ensure that as a major economy, India’s reliance should be on multiple horses in the race — manufacturing and services.

The writer is former chairman, Services Exports Promotion Council