Lecture Note (Session 7) Is Service-led Growth a Miracle for India?

Services represent the fastest growing sector of the global economy and accounts for two-thirds of global output (WTO, 2009) 1. Introduction Services sector has emerged as largest and fastest growing sector in global economy. The sector provides more than 60% of global output and employment. Share of services in world transactions has been increasing (see Figure). Worldwide, FDI is shifting away from manufacturing sector towards service sector. In line with global trend, this sector has grown rapidly in India, especially since 1990s. World Exports of Commercial Services 2000-2010

Source: International Trade Statistics 2011; WTO In the Indian context, according to National Income Accounts classification, services sector consists of the following activities: Trade, hotels & restaurant, real estate, business & legal services, banking and insurance, public administration, defence, transport, storage, communication, community, social & personal services. The following is the component of some of these services. Trade: wholesale trade and retail trade in commodities both produced at home and imported, purchase and selling agents, brokers and auctioneers Personal services: Domestic, laundry, beauty shops, tailoring etc Communication: Postal, money orders, telephones, overseas communication services Community services: Education, research, scientific, medical, health, religious etc

Dwelling & real estate: Services associated with construction (building real estate on contract basis, building design, interior design etc)

In terms of income generation, services activities can be broadly classified as low-earning and high earning activities. Some of the examples of low-earning services activities are repair and maintenance services, local transport services, cobblers, shoe-shine, catering, hair dressing and dry cleaning. Examples of high earning services activities are legal services, IT/ITES, telecommunication services, financial & accountancy services, customer relations management, health and educational services, construction, housing and engineering and tourism, Retail, entertainment and media. The significant point to be noted here is development of high-earning services sector can automatically create demand for low-earning services. For example, IT boom in India has generated demand for transport services, dry cleaning, hair dressers, air-condition mechanics, courier services, physical security, catering etc 2. Significance of Services Sector for India: Currently services sector is the fastest growing sector of the Indian economy (Tables 1 and 2). A growing tertiarisation of structure of production and employment has been taking place in India. Since 1990s, services sector emerged as major sector of economy both in terms of growth rates and share in GDP. While other sectors experienced phases of deceleration, stagnation and growth, services sector has shown a uniform growth trends overtime. A major part of decline in share of primary sector in GDP was picked up by service sector. This is considered to be a unique feature witnessed by India.
Sectoral Growth of GDP (%) (Base: 1999-00) Period Agriculture and allied activities 2.16 2.97 2.70 2.73 Agriculture Industry Manufacturing Service sector

1950-51 to 1979-80 1980-81 to 1991-92 1992-93 to 2007-08 1992-93 to 2010-11*

2.16 3.04 2.70 2.68

5.36 6.10 6.06 6.34

5.21 5.58 6.39 6.74

4.55 6.20 7.98 8.27

* - Data from 2008-09 to 2010-11 are not final estimates Source: Instructor's calculation based on Handbook of Statistics on Indian Economy (HSIE), 2011 (RBI)

Table 2: Sectoral Composition of GDP (%) Year Agriculture and Allied Activities* 55 (48) 51 (45) 44 (39) 38 (34) 31 (29) 24 (22) 16 (13) 14 (NA) Industry and Manufacturing** 11 (9) 13 (11) 15 (13) 17 (14) 20 (15) 20 (15) 20 (16) 20 (16) Services

1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2008-09 2010-11

34 36 40 45 49 56 64 66

* Figures in brackets indicate the share of agriculture in GDP ** Figures in brackets indicate the share of manufacturing sector in GDP Source: Handbook of Statistics on Indian Economy, RBI.

Growth pattern in services sector has not been uniform across all services (Table 3). In post-1990s business services (which includes IT), communications & banking sectors experienced maximum growth. Growth of trade and communications increased consistently over the decades. In the first half of the current decade, majority of the service segments witnessed high growth. This trend clearly indicates that apart from ITES (which comes under business services), many other sectors have made credible contributions to the new found dynamism of the service sector. Table 3: Growth Rate within the Services Sector
Sixth Plan (1980-85) 5.3 5.4 2.8 6.9 3.5 6.7 7.5 7.3 6.1 3.9 Seventh Plan (1985-89) 6.5 6.9 5.7 7 1.8 5.3 13.4 8.1 7.9 6 3 Eighth Plan (1992-1997) 9.1 11.2 1.9 8.4 2.4 14.1 8.2 6.1 3.9 7 Ninth Plan (1997-2002) 7.3 9.3 4.7 6 2.2 21.8 9 7.2 8.5 7 Tenth Plan (2002-2007) 9.3 9 7.7 11.4 5.6 22.1 9.3 8.3 5.2 7.6

Trade Hostels& Restaurant Railways Other Transport Storage Communications Banking & Insurance Real Estate Public Administration Other services

Source: Government of India (2008)

In addition, services sector makes greater contribution to employment generation and exports (See Table 4, 5, 6 and Figure). The most visible and well-known dimension of the services boom in India has been in IT/ITES sector. Indian IT vendors focus on (i) Software development, (ii) Software products and (iii) BPO. Currently India commands 55% of the global market worth $90 billion for IT and BPO offshoring. IT software and services industry is now Indias top exporter among all services. Net foreign exchange earnings of software services industry have been highest among all services.
Sector Agriculture Mining & Quarrying Manufacturing Services Table 4: Sector-wise distribution of workforce 1951 1961 1972-73 1983 1993-94 74.6 0.4 8.2 16.8 76.2 0.5 8.6 14.7 73.9 0.4 8.8 16.9 68.6 0.6 10.7 20.1 64.7 0.7 10.5 24.1 1999-00 59.9 0.6 11 28.5 2004-05 58.4 0.6 11.7 29

Table 5: Employment Elasticity* Sector Agriculture, forestry and fishing Minining & Quarrying Manufacturing Electricity, gas and water supply Construction Trade, hotels and restaurants Transport, storage and communication Financial services Community, social and personal services Total 1983-84 to 1993-94 0.50 0.69 0.33 0.33 1 0.63 0.49 0.92 0.5 0.41 1993-94 to 1999-00 0 0 0.26 0.26 1 0.55 0.69 0.73 0.07 0.15 1999-00 to 2004-05

0.40 0.82 0.28 0.33 0.88 0.59 0.27 0.94 0.28 0.48

* Is a measure of percentage point change in employment within a given sector associated with a 1 percentage point

Source: Seema Joshi (2004) and Government of India (2008).

Figure: Leading Exp L ports of Com mmercial Se ervices* (Growth 2000-2007) r -

al istics, 2008 (WTO) Source: Internationa Trade Stati

3. Explanations for the Boom in the Services Sector in India: The major reasons for Indias success in IT-ITES and other services are as follows: (a) Well-trained, English-speaking and inexpensive specialists English has a key role in IT-ITES as most customers come from Anglo-Saxon countries. Naturally, German, Japanese and Spanish clients also appreciate service providers with respective language skills. But these providers are not always available and often have only regional scope (Eastern Europe, China, Latin America). India occupies top position in people skills and availability needed for IT outsourcing services (see Table 7). Most importantly, Indian specialists work for much lower pay than their US or European counterparts. German and US IT professionals in non-managerial positions earn US$ 50,000-70,000 per year. In EU-27, average was for employees in data processing and databases is roughly EUR 40,000. Income of an Indian IT employee with 1-2 years experience is roughly US$ 8,000. Those starting their first job in the sector earn roughly US$ 6,500 per year.
Table 7: People Skills and Availability Scores IT Outsourcing Services Country Relevant Size and Education Language experience availability capabilities of labour force United States(tier 2) 4.37 2.22 1.34 1.67 India 4.34 2.22 1.39 1.25 China 3.9 2.22 1.33 1.06 UK tier2) 3.94 0.55 1.39 1.67 Germany(tier 2) 3.92 0.58 1.4 1.33 Canada 3.69 0.31 1.47 1.67 France(tier 2) 3.93 0.53 1.37 1.22 Brazil 2.89 1.75 1.07 1.19 Spain 3.91 0.4 1.32 1.22 Australia 2.65 1.44 1.67 Singapore 2.61 1.52 1.38 Mexico 2.11 0.89 1.14 1.19 Indonesia 1.18 1.72 1.09 1.1 Malaysia 1.91 1.24 1.22 Thailand 1.77 0.63 1.16 1.03 Egypt 1.65 0.72 1.04 1.11 Philippines 1.38 0.83 1.94 1.22 Vietnam 1.08 0.68 1.22 0.97 Czech Republic 1.04 1.39 1.26 Sri Lanka 0.62 1.28 1.13 Source: The A.T. Kearney Global Services Location Index, 2011 Total Score

9.6 9.2 8.51 7.55 7.23 7.14 7.05 6.9 6.85 6 5.54 5.33 5.09 4.6 4.59 4.53 4.38 3.96 3.79 3.16

(b Inexpens b) sive overall package F Foreign clien do not, h nts however, bas their deci se isions on pay a alone. Their calculation are based on the tota costs aris r ns d al sing from a foreign ven nture. Addition costs are incurred for telecom nal mmunication infrastruc ns cture, mana agement and the d establishm ment of a workplace. E w Even factor ring in all s such additional costs, In ndia offers most inexpensive package compared to other offsh o hore location (see follow ns wing figures and Table e). Offshore lo ocation: US p.a. (ong SD going costs), per employ yee

sche Bank Research (2005) ) Source: Deuts

Country attractiven for outs ness sourcing and offshoring g

A.T. Kearney G . Global Servi ices Locatio Index on

(c High qua c) ality standar High n rds numbers of I companie that are ce IT es ertified according to internationally rec cognised qu uality standa ards (Six Sig gma, CMM Level 5 an ISO 9000 are nd 0) from Ind Of the software com dia. s mpanies wo orldwide wit a Capabil Maturity Model (CMM) th lity y Level 5 r rating - highe rating tha a software company c attain m est at e can majority are from India (d Population at working age is high d) n g h (e Liberal ec e) conomic poli environm icy ment (f Strong dem f) mand from industrial nat tions (g Global network of I g) n Indian emig grants - Ind dian expatria in the U made a m ates US major contribut tion. They established f e first contact in order t seal inter ts to rnational co ontracts and they continue to cultivate these conta e acts. In Indi itself the managers a also ofte returnees with ia are en onal experien gained i the US. E nce in Example: 95% of interna % ational comp panies in ST in TPs professio Bangalor are run by Indians wh have lived and worked abroad, mo re y ho d d ostly in US (h High inco elasticity of demand for services h) ome y d s (i Splinterin (means O i) ng Outsourcing Means contracting out busines operations that g) ss s were don internally by individu firms. Sp ne y ual plintering re esults in an i increase in n input dem net mand for servic from ind ces dustrial secto In their d or. drive to becoming more competitiv manufacturing e ve, units inc creasingly ou utsourced non-core fun nctions such as account ting or payr roll managem ment,

security guards, driv vers, canteen staff to ot n ther firms th giving r hus rise to a flou urishing ser rvices industry. (j Protectio to intell j) on lectual pro operty - Pr rotection of intellectual property is of f l particular importance in offshor r ring. Offsho supplier gains detail insight i ore led into the bus siness processes of his clie s ents. In som cases the supplier h access to sensitive d me e has o data or develops software which is no meant to be available to unautho ot e orised third parties/wron hands. In this ng n context, software pir racy is a ser rious problem Accordin to estimat software piracy is lo in m. ng tes e ow India: 69 (in 200 of softw 9% 07) ware used i India are pirated, i. has not been purch in e .e. hased commerc cially. (k Scalabili ability to handle large pro k) ity y e ojects For example, Largest Ch r hinese companie in the IT es T-ITES secto Neusoft, has 13,000 employees (Chart). In contrast, the top or, three Ind dian players TCS, In s nfosys and Wipro ha between 75,000 an over 110 ave n nd 0,000 employee The three largest Ind suppliers have a sha of over 46 in IT bas Indian export es. e dian are 6% sed revenues. They grow faster and a more pro w are ofitable than the smaller suppliers. In China, 3 la n argest offshore software developers hav a share of less than 15% in offshore market. Remaining share ve f is accoun nted for by a large numb of smalle suppliers (chart). This highly frag ber er gmented sup pplier structure is a disadvantage as cu ustomers wish to have r reliable, high h-quality ser rvice provid ders these usu ually being la arge suppliers

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(l Global IT revolution, w l) which provid great op ded pportunity fo IT/ITES. or (m Easy op m) ption For many entre epreneurs, s services are an easier s segment to enter because they usually require les physical infrastructure than indus and are subject to f y ss e stry fewer controls (e.g. restrict tive labour p policies not applicable). The profita . ability of sun nrise sectors like s IT/ITES and telecom mmunications was vastly greater tha that of old manufac y an der cturing indus stries, like texti or steel. The cost a iles . arbitrage bet tween India and the ma arkets that of ffered offshoring contracts has been massive, and it has been routine for IT firms t enjoy a 30 per cent p s m d n to profit margin o sales-a lev unthinka on vel able for man nufacturing c companies. In telecomm munications, also, even tho ough the pol licy challeng have been substanti and repe ges ive etitive, the a arrival of m mobile telephony vast untap y, pped demand and a sha reduction in costs as the econom of scale have d, arp n mies kicked in have allo n, owed a prof fitability tha has made access to c at capital easy, especially after , policy ch hanges in 199 and 2003 99 3. Gupta et al. (2008) use d from the Annual Su G ( data e urvey of Ind dustries (ASI to compar the I) re growth o industries that are mo dependen upon infr of ore nt rastructure, h have greater financial n r needs, and are m more labour intensive. They find t r that, in the post-delicen nsing period companies that d, s were abo the medi in terms of infrastru ove ian ucture intensiveness grew 10 per cen less than those w nt which w were below the median those wh n; hich were a above the m median in terms of la abour intensive eness grew 19 per cent l 1 less than tho which w ose were below t median; and, those more the dependen on market for financ grew 18 p cent less. That is, the costs of po infrastruc nt ts ce per . e oor cture, poorly de eveloped fin nancial mark and rigid labour law were signi kets d ws ificant differ rentiators. T the To extent th services firms have l hat lower infras structure dep pendence, an restrictive labour law do nd e ws not apply to them, they have been in a better position to grow th their co y t n han ounterparts in the n industrial sector. (n Demand n) d-repression - Service sector is simply playing catc n es s ch-up-decade of es 1 represse demand have created a huge ma ed d arket for serv vices, rangin from telec ng coms to fina ancial services, from educat tion to health services, a even tran h and nsport.

In the pre e-liberalisation period, teleco services we scarce; the t n om ere transport netwo was rudim ork mentary; and fin nancial services, fo the most par were confine to a narrow urban elite. or rt, ed

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(o) Subversive entrepreneurship - In some cases, the growth of the services sector was based on subversive entrepreneurship. A good example is the cable TV industry, which mushroomed in a grey legal area, and was considered too small and fragmented to merit government attention until as many as 60 per cent of all TV households were hooked on to cable. When this stage was reached, even the industry wanted some clear rules, especially to facilitate access to capital. 4. Is Indias Services Boom Unique or Unusual? The standard development model has involved seeing the share of agriculture going down and that of industry going up in terms of both gross domestic product (GDP) and employment; and, after a fairly long period in which per capita incomes climb to upper-middle income levels, the share of the services sector rises while that of industry falls-with agriculture, by then, having a share of between 5 and 10 per cent. It is often argued that the Indian growth model appears to have skipped the intermediate stage, giving rise to a debate whether a growth model heavily based on service sector growth is sustainable. Many observers have argued that in a low income economy like India 66 per cent (in 2010-11) share of services in GDP is unnatural. It is in this sense that India is perceived to be an outlier. However, Jim Gordon and Poonam Gupta (2003) argue that the outlier thesis does not hold if one looks at the empirical evidence. Using cross-country data, they plot the rise in the share of services as per capita income rises: in 1990, India was very much on the trend line. It moved above the trend by 2001, when followed the decade in which services significantly outpaced industry. However, even then, the variation was less than in many other economies (see Figure). Perhaps, perceptions of the 'distorted' nature of Indian growth could be a result, in part, of China's well-known success in manufacturing. The industry-services mismatch seems particularly sharp when India-China comparisons are made. Interestingly, however, Jim Gordon and Poonam Gupta find that the outlier is not India but China, whose preponderance of manufacturing is what is truly unusual.

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owth pattern of services in India su n s ustainable? 5. Is the present gro This is indee the case, as will be argued belo As new service sect T ed ow. tors get ont the to growth t turnpike, mo services will be ad ore s dded to the list of rapidly growin sectors in the ng n economy y. (a Changing Consumpt a) g tion patterns Till the lib s: beralization of the early 1990s, the trend y in private final consu e umption exp penditure wa a straight as tforward one e-the share o services i the of in total consumption ba asket (at 199 99/2000 pric rose by around 3 pe ces) ercentage poi each decade: ints rom around8 per cent in 1950/1 to 11 per cent in 1960/1; 1 per cent i 1970/1; 17 per 8 n 14 in that is, fr
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cent in 1 1980/1; and, 21 per cen in 1990/1. However, this trend c , nt changed dram matically an by nd 2000/1, t share of services in p the s private consu umption was 31 per cent that is, up by 10 percen s t, ntage points. B 2006/7, it was up ano By t other 8 perce entage points indicating that the pac had quick s, g ce kened further in the 2000s. A shift in th consumpt n he tion pattern of this natur indicates that the dem re mandside impe to grow in service will contin Indeed, it will only get stronger etus wth es nue. r.
TotalEx xpenditureas s%ofPercap pitaFinalCon nsumptionEx xpenditure(P PFCE) (1999/2000p ( prices) 1950/ 1960/ 1 1970/ 1980 0/ 1990/ 2000/ 2 2006/ 1 1 1 1 1 7 1 Food,be everages,andtobacco 68.83 68.12 6 65.29 61.4 4 56.67 48.06 4 42.13 Clothingandfootwea ar 2.64 3.36 4.11 5.42 6.03 5.95 5.08 Rent,fue elandpower 18.29 14.81 1 13.56 13.8 82 12.78 11.35 1 10.02 Furniture e,furnishing,appliances, andservices 2.06 2.68 2.98 2.58 8 3.07 3.38 3.96 Services 8.18 11.03 1 14.06 16.7 78 21.45 31.26 3 38.81 ofwhich Medicalcareandhealthservices 1.67 2.02 3.13 3.94 4 3.24 4.71 4.4 Transpor rtandcommu unication 2.84 3.06 4.07 5.7 7 9.83 14.46 1 18.37 Recreatio on,education nandcultural 1.43 services 1.33 2.34 2.18 8 2.75 3.68 4.86 4 Source:" "ServcingIndia'sGDPGrow wth",SunilJainandT.N.N Ninan[Origina alsource;CSO O]

(b Exports: Since libera b) alization beg gan, India's services exp ports have in ncreased 15-fold: from US$ 5 billion in 1990 to U 74 billion in 2006 (s Figure). Exports of b n US$ see business serv vices, mostly I IT/ITES, hav increased at over 2 per cent per year in the past d ve d 25 n decade, a re ecord unmatche anywhere in the worl (see Figur As a res ed e ld re). sult, while In ndia's share in global tra is ade approach hing 1 per ce (up from 0.4 per cen in 1990/1) its share in the global services tra is ent m nt ), n l ade double th By 2005 services ex hat. 5, xports accou unted for 35 per cent of India's total exports of g goods and servi ices, compar to a mere 9 per cent for China. T figure was 28 per cen for the US and red e The nt S 35 per ce for the UK. ent U

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According to NASSCOM the total so A M, oftware and services bus siness has go up from US$ one m 17 billion in 2003/4 to US$ 52 bi n t illion in 200 07/8, and of t this, exports grew from U 13 billi to US$ ion US$ 40 billion. Sin the glo nce obal BPO m market alon stands a around U ne at US$ 150 bi illion, NASSCO estimate that the ad OM es ddressable m market is larg enough to leave enou headroom for ge o ugh m growth fo several ye or ears. Accord ding to a stud done by M dy McKinsey an Company for NASSC nd y COM, the total market for what is calle Remote In w ed nfrastructure Manageme is around US$ 100 billion e ent d currently and aroun three-four y, nd rths of this can be offsh hored. Acco ording to Mc cKinsey, Ind is dia well posi itioned to ca apture around US$ 15 bil d llion of this b business in t next five years, that i by the e is, 2013.
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Over time, a host of new service ar O w reas are also likely to g o grow. For in nstance, the USA stands to save over US$ 1.5 billion annually if only 10 p cent of U patients ch U per US hoose to und dergo medical treatment ov verseas for j just 15 low-risk proced dures. Harpal Singh (for l rmer chairman of Fortis, th healthcare group of c he e companies) has calculat that the scope for pr ted roviding me edical services in India for nationals of other coun f ntries can be compared t what has been achiev in to ved software services. (c The retai sector: A India's mi c) il As iddle class h grown i both size and propor has in e rtion, organized retailing has grown f d h from its tin beginning Accordin to a stud by the In ny gs. ng dy ndian Council f Research on Internat for h tional Econo omic Relatio (ICRIER on the reta sector, ar ons R) ail round US$ 35 b billion will be invested i organized retailing ov the next 5-7 years. T will be done b in d ver This by homegrown India firms as w as by jo ventures with well-known inter an well oint s rnational reta ailers like Wal l-Mart and Carrefour. IC C CRIER estim mates that w while the tot retail business (inclu tal uding mom and pop stores) will grow 1 per cent a d ) 13 annually bet tween 2006/ and 2011/12, the organ /7 nized retail sec will grow 45-50 per cent per an ctor w r nnum. It will also increa its marke share to 16 per l ase et cent by 2 2011/12. Acc cording to th consulting firm Techn he g nopak, this w rise furth to 25 per cent will her r by 2017/ /18. Siz of Indian Retail Indu ze ustry (US$ b billion)

(d Entertain d) nment: Ove the past 3 years, t entertain er 3-4 the nment and m media sector has r grown by around 19 per cent per annum, an according to FICCI P y nd g Pricewaterho ouse Coopers the s, industry will continu to grow at around the same rate, to touch annu revenue o US$ 28 billion ue t o ual of by 2012. Within this, animation and gaming are new phe enomena, em merging as a serious bus siness just a few years ago The Bolly w o. ywood film industry is likely to ne m early double in size ove the e er next five years, inc e cluding (if the ADAG group fora is anything to go b tie-ups with ay by) Hollywood involving the co-prod g duction of fi ilms.

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Size of Indian Me edia Busines (Rs million) ss n)

(e Internatio e) onal Financ Services: With India integrating into the global economy the cial a y, two-way flow of mo oney has involved from being not just payment for trade but also m m money being inv vested in ph hysical capita as well as in stocks a bonds. M al and Moreover, w Indian firms with buying fi firms in othe countries, there has al been an outflow of capital as w as substa er lso well antial fees paid for a variet of financia services. A d ty al According to the Report of the High Powered E o t h Expert Committ on Makin Mumbai an Internati tee ng ional Financ Centre (M cial MIFC), the best way to look at this transition and its impact, is to look at the traded , -to-GDP ratio to begin with. It has now risen to around 36 per cent, an the perio of increa can almo directly be correlate to p nd od ase ost ed changes in policy tha have crea at ated a realist market fo the rupee, dropped tar tic or , riffs sharply and y, removed virtually all physical co l ontrols on int ternational tr rade (see Fig gure).
Evolution of the Trade/G E GDP Ratio

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Grow of Gross Flows on t Current Account wth s the t

As A a result, th gross flow have rise from arou US$ 15 billion a qu he ws en und uarter in the early 1990s to over US$ 150 billion today. In te o erms of shar of GDP also, this re re epresents a s sharp increase. Based on th projected size of exp he d ports/Imports, FII and F inflows, the fees paid by FDI Indian fir to inves rms stment banke overseas, etc., the MI projects the total ex ers , IFC s xternal flows over s the next decade. It th works out what this means in te hen s erms of brok kerage fees, currently pa to aid financial firms locat outside the country Based on a weighted average p ted y. n d paid to merc chant bankers f different services, M for MIFC calcula the total fees that In ates ndia stands to gain if Mu o umbai is to beco an inter ome rnational fina ancial centre The estim e. mate for 2015 is US$ 48 billion, base on 5 ed the medi ium-low pro ojections of overall flow A higher degree of integration w ws. r would mean that n this figur could incr re rease substan ntially.
(f) Banking Se f) ector:

The T impact of the spread of banking on GDP g o d g growth is w establish well hed. The ban nking sector's c contribution to GDP rose from 7.5 p cent in 2001/2 to 10 per cent in 2006/7. It sh e per hould be remem mbered that this contrib bution took place when the vast m n majority of I Indians rema ained unbanked For instan National Sample Su d, nce, l urvey data rev that ove half the 45 million far veal er 5 rmers in the country have no access to credit, eithe informal o formal. A of these, just around half n er or And d have access to forma credit. All told, around three-quar al l rters of farm have no access to fo mers ormal This kind of exclusion i worst in the central, eastern, an north-eastern parts o the f is nd of credit. T country - less than a fifth of the i indebtedness in this regio is to form sources o credit. s on mal of The T Invest In ndia Savings Survey of 2 2007 reveale similar tre ed ends, with ju 14 per ce of ust ent agricultu ural farm lab bour having bank acco g ounts. The f figure was o only a little better for none agricultu wage lab ural bour, at 25 p cent. The numbers indicate tha the problem is not just with per ese at m t the geogr raphical spread of the b banking sector which, as is well kno s own, is still poor in the rural areas. Th same is also borne o by the f he out fact that, ev in the c ven case of the t top-most inc come quartile, less than ha of those w take lo alf who oans take the from the banking sector (see Ta em e able). ggests that bank formal b lities may b too cumb be bersome, or credit risk assessments too This sug stringent for most pe eople. Given that around half the lo n d oans taken by those in th lowest inc y he come are est over 36 per cent per ye the scop for growt in the ban ear, pe th nking quartile a at intere rates of o sector is clearly large e.
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Sources of Loans by In ncome Grou up (% of persons who have taken l f o loans in last tw years) wo

Though the banking sector has grow rapidly o T b wn over the past decade (t ratio of bank the loans to GDP rose from 22.7 per cent in 2 f 2000 to 46 p cent in 2 per 2007), this s share is sma as all compared with many countries. Not surpris d y singly then, even the la argest Indian banks are quite n small wh compared on a globa scale: only one bank, t State Ban of India, figures in th top hen al y the nk he 100 global banks in terms of asse It is rank eightieth Therefore, it can be sa t ets. ked h. , afely asserted that d if greate financial inclusion is to be ach er s hieved, the growth of the banking sector, an its g nd contribut tion to GDP, will have to increase m , o manifold.
Finally, as th exposure of Indians to other fin he nancial instru uments (mut tual funds, e equity investmen microfina nts, ance) is limite vast poten ed, ntial lies in the areas (see Figure). ese e

Incidence o Savings in Different Fin of nancial Instr ruments

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6. Factors determinin the sustain ng nability of IT T-ITES grow wth: .1. p hain: 6. Moving up the value ch

Traditional IT services software and application developme represe lions sha of T T d n ent ent are offshorin in India. Of the total I export rev ng O IT venues only 16% (in 200 06-07) come from high-v e value added se ervices such as engineer ring & R&D off-shore product dev D; velopment an made-innd -India software products (se Figure). This is due t various barriers such as high R& and mark ee to &D keting costs, ris entry bar sk, rriers (MNC dominance and softw C e), ware piracy in domestic mkt. Henc to c ce, maintain leadership position, Ind IT indus will hav to invest i innovation and in evo p dian stry ve in n olving newer bu usiness models that can deliver grea value to the custom ater o mers. Examp Innovation in ple: areas suc as remote diagnostic c ch e care and tele e-pathology in medical f field (started happening from d India). H However, in the near futu we seem to be in the safety zone due to following facts t ure, m e s: In ndia attained competitiv strength in offshore IT services w 65% sh d ve n with hare of the g global offshore mark and 46% share of glo BPO ind ket % obal dustry The T scope for future ex fo xpansion co ontinues to be large as only 10% of potent s % tially addressable global IT/IT market h been rea TES has alized estion is wh if others (China, Ph hat s hilippines e etc) catch up with us i IT p in But, the bigger que offshorin ng?

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Why W doesn't any major I products evolve out of the India IT landsc IT an cape, even a the as industry thrives on the services conveyor be In India the number of product companies have t elt? a r t grown fi ive-fold from 102 in 1999-00 to 5 in FY2 m 539 2009-10 not includin captive R ng R&D centres. B most of them are sm and-med But mall dium busines units with turnover be ss h etween Rs 2 crore and Rs 50 crore. From just $113 million in F FY1999-00, the Indian s software product industr has ry grown to $1.64 billio in FY2009 o on 9-10. According to Infosys CE and MD Kris Gopala A EO akrishnan I is not that we are now It t where in the pr roduct swee epstakes. Lo at two K ook Kerala comp panies, IBS and SunTec, the form a mer global IT product bra in the tr T and ransportation and logistics domain, a the latte a reputed n n and er name in the billing and payments ar p rea. He is also bullish about Info h fosys' own b banking pro oduct, Finacle. It is one of the top three core banking so olution prod ducts in Eur rope, and a across ng s Pacific, and w have cro we ossed $200 m million in bil llings for Finacle developin countries and Asia-P in 2009-10. That is 3% of our business tu urnover and the product prospects are very go ts ood. There ar also produ solution that are licensed to c re uct ns clients. The are poi solutions for ere int s', instance, that are a boon to many retailers. O y Often, there a operators who have m are s multiple products and mult tiple vendor and they seldom hav a comprehensive sup rs ve pply chain v visibility. We see some of these client becoming big over ti ts g ime, benefit ting both of us. Gopalakrishnan k f knows only too well the diff fficult path fo IT produc to turn su or cts uccessful in the global a arena. Fina is acle 23 years old, he say making it almost as old as Infosys itself. ys, s A combinat tion of ris capital, knowledg sk , ge/entrepren neurship, ecosystem and governm ment policy can pitch I Indian comp panies into leadership p position in I products (see IT s Box). (a Governme policy: a) ent (i) ( There is a need for incentives and mandates t buy the te d to elecom prod ducts from In ndian companie and supp es port Indian exports. Th here is not a single exc change or b back-end tele ecom equipmen that come out of Ind nt es dia. The inp puts gained from selling to price-c conscious In ndian consume and busi ers inesses are a also regarded as a vital link in deve eloping glob bally compe etitive products. .

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(ii) Local start-ups should be provided the opportunity for local start-ups to compete on government projects (like Israel does). For example, the US and Israels defence and high-tech industries offer some fresh insights. The US has for long pursued programmes such as 8(A) and HUB Zone to harness the innovative potential of the SMEs for military and economic strength. Federal agencies including the department of defence and NIH set aside 2.8% of their annual research budgets for SMEs and commercialisation of academic research. Indias ministry of defences new procurement policy says that prime contractors should set aside a portion of their business for SMEs. If the policy is strictly implemented, software product firms in the aerospace, machine system automation and controls can reap benefits. The ministry should not only protect public sector navratna companies, but also ensure that private SMEs can benefit from set-offs of global tenders. (iii) Government should apply more technology. Directly or indirectly, government will be much bigger than the private sector. E-governance projects often explicitly rule out involvement of local niche software players, even if the company has credible deployments. Qualification criterion like independent revenue (not the companys total revenue) is a difficult hurdle to cross for many SMEs. Domestic software firms have built successful products in documentation management, IT infrastructure, language tools, recognition and payments. Setting aside certain percentage of projects for Indian SME product companies in e-governance projects is a must to encourage local innovation. (b) Entrepreneurship: The approach of the entrepreneurs and investors to building technology companies in India has been timid/nervous. Indian companies need to be alert about grabbing opportunities as in the way start-ups like Tejas Networks have done. Once the collapse of the World Trade Centre upset their business plan of targeting global markets, the start-up did a quick turnaround and picked up business in India just the point when domestic demand started to boom. Today 80-90% of Indias ethernet traffic for local area network goes to Tejas equipment. (c) Capital: Access to institutional finance is yet another area that needs to be addressed. The number of VC and PE investments has grown substantially but the value of these funds are small and their portfolio strategies limits their interest, investment and hence the development of key technologies. Software product entrepreneurs should have easy access to collateral-free funding. IP valuation for collateral is an accepted practice in all developed world and Indian banks must be educated and encouraged to adopt the practice. Credible external benchmarking can also help Indian software product companies to fortify their true claims and challenge the competitors. Finally, angel investors should be free to open up their wallets even more. 13-14 deals in a year is low. We need every angel to do at least 5 deals. (d) Ecosystem: A mature ecosystem, Sillicon Valley for instance, should be able to generate start-ups in new areas every 10 to 15 years. We went through a cycle where failure was not accepted and risk taking was an issue. We as a society were always focused on self reliance and import substitution. If you look like product companies that are world leaders now, Microsoft or Oracle, nobody paid attention to them in their first few years. And that was important as you need time to privately evolve. In India, all that is getting developed now. There is angel funding. Money is not a major issue now. We are starting to see a lot of experienced people coming out and starting up ventures, especially from large MNCs. Also, assembling talent from other sources takes time. We have to get that foundation ready. Once we get going in the Sillicon Valley, we draw from a pool of talent from even giants
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like Google, Yahoo and Microsoft. Don Valentine, the founder of Sequoia drew talent from Sillicon Velley (IBM and Xerox PARC). He was the original investor in Apple and then Cisco and Google. Their foundational companies were IBM and Xerox.
BOX:HigherProductivitywillbeaDreamUnlessMindsetChanges IndianITindustryisatacrossroads.Theprofessionalservicesmodelisnolongerfuellingthegrowthit oncedid.Productivity,asmeasuredbyrevenueperemployee,haslongbeenstagnantamongIndianIT majors. The leading Indian IT powerhouses bring in $45,000 per employee per year while for the secondand thirdtier firms, it sinks to $30,000 per year. Compare that to Google and Facebook, which make upwardsof$1millionperemployeeperyearinrevenue,andenterprisesoftwarecompanieslikeOracle bringin$350,000peremployeeperyear.InIndianIT,thesenumbersareadistantdream.Theydon't havetobe. Yet, higher productivity will remain a distant dream unless there is a wholesale cultural and mindset change. Google and Facebook are rewarded with high productivity because of their f lexible cultures thatempoweremployeesandtheirintrinsicrisktakingattitude. Indian companies, by contrast, have very conservative topdown corporate cultures. The services businessmodelalsoencouragesbloat,andthebloatbecomesacorepartofaculture. Inaproductcompany,allourincentivesarealignedtousepeopleasefficientlyaspossible.Inaservices business model, the more headcount a project can justify, the more money it makes, which makes it difficultforaprojectmanagertouseresourcesefficiently. AtZoho,weresistedtheeasyallureoftheservicesbusinessinourearlydays(inthelate1990s),instead choosingtoforgeapathbasedoncreatingcompellingproducts.Itwasadifficultpathatfirst,because therejustwasn'tanyexpertiseinbuildingproductsinIndiaandpenetratingamarketwithnewproducts isnevereasy. Afteraslowstart,wehaveemergedasoneoftheleadingsoftwareproductcompaniescomingoutof India.Ourproductivityisnotyetonparwithourglobalpeers,butitisstillsubstantiallyaheadofIndian servicescompanies.Wehavesetourselvesthegoalofreachingglobalproductivitylevelsinthenext5 years. Howdowedoit?Itallcomesdowntoculture.WeturneverypieceofreceivedwisdominIndianITon itshead.WedonotcareaboutcertificationslikeCMM.Ourrecruitmentmodelfocusesonrealability and passion than on degrees and paper credentials. We are proud to say that most of our people actuallywereoriginallyrejectedbythemajorITcompaniesinIndiatheirlosswasourgain. We do not have the rigid hierarchy, endless meetings, and a slavish devotion to process that characterisethelifeofmostITprofessionals.Instead,weemphasiseflexibility,adaptationandcultivate a certain disregard for authority in our people we absolutely prohibit ancestor worship in our company!Ourpromotionsarebasedondemonstratedperformance,notonthenumberofyearsspent doingit.Itisnotuncommonforrelatively"junior"peopleinpositionsofauthorityinourfirm. Wedonotforceanyonetostaywithus;wefollowthesame"atwill"employmentrulethatiscommonin theUS,meaningthatanyonecanleaveusanytime,withabsolutelynonoticetousiftheychoose.Yet ourattritionrateisamongthelowest.Thatisnotforlackofopportunity:ouremployeesallknowthat theirexperienceatZohoisveryvaluable,buttheyvoluntarilychoosetostaybecauseofthecultureand opportunity. 23

WebelievethepathaheadforIndianITisinembracingmoreflexibilityandinnovation,discardingideas that may have worked in the past but no longer work in today's age. The path to productivity lies in empoweringemployeestoreachtheirfullhumanpotential. Source:AuthoredbySridharVembu.HeisfounderandCEOofZohoCorporation.ZOHOCorporationare themakersoftheonlineZohoOfficeSuiteaswellasseveralbusinessapplications.Hehasbeeninthe newsnotonlyforcreatingoneofthefirstonline(CloudComputing)officesuitesasacompany,butalso fortheuniquestaffingpracticesofZOHOwhichhireseconomicallydisadvantagedhighschoolgraduates andputsthemthroughtwoyearsofeducationwithastrongfocusonengineering/software.Thisarticle appearedinTheEconomicTimesdated14February2012. 6.2. HR related challenges:

No economy, and more so one looking at rapid growth in its services sector, can grow beyond a point if its population is largely illiterate, or semi-literate. Yet, this seems precisely what India is managing to do. Despite very high primary school enrollment ratios, the level of functional literacy achieved is low because of very high drop-out rates, and. the poor standards achieved in most primary schools. According to one study, as much as 80 per cent of the population in the 18-22 age group is illiterate (See Figure). While that figure may seem high to many, India's track record when it comes to higher education-especially in science and technology-is even worse. So far, the way out has been to privatize the already largely privatized education system. Thus, India's largest IT/ITES firms virtually run their own universities-that is, places where graduates of Indian schools and universities are once again trained to meet the requirements of their current jobs. However, such firm-level-and even industry-level solutionsare at best stop-gap measures. If a more permanent solution is not found, it could well slow India's progress on the services front. As the skills shortage grows, salaries will keep rising to the point where business becomes globally uncompetitive. Figures cited in the India Labour Report 2007, prepared by India's largest temping company Teamlease Services, show that only under a third of India's IT graduates are employable in the IT sector. Another set of figures- this time relating to employability in multinational companies that have slightly higher standards-suggest that only a fourth of India's engineering graduates are employable. The figure for finance and accounting professionals is even lower, at 15 per cent. Annual surveys by the NGO, Pratham, show the quality of learning in schools in rural India is abysmal. As many as a fifth of those in class V cannot read a single paragraph, and as many as half cannot read a simple story. A fifth cannot perform simple operations in maths like division and subtraction. A mere 7 per cent of those in the 15-29 age group receive even vocational training, of which less than a third receives it through formal training.

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Penetra ation Levels of Educati (18-22 A Group) s ion Age

Certainly, Ind C dia's educati budgets are nowher near what are needed Apart from the ion re t d. m levels of education, what also m f matters for an economy trying to develop on the basis o the y of services sector is the extent of th use of info e he formation tec chnology, as well as R& spending The s &D g. World B Bank capture most of t es these parameters in its Knowledge Economy I Index (KEI) (see ) Table): it takes int account levels of e to education, in nformation technology, as well as the s c s n , ing in mind the d economic incentives regime in a country, and then normalizes them keepi country's population. To no one's surprise, In s . s ndia's absolu scores la behind tho of peer g ute ag ose group countries s. Knowl ledge Econo omy Index
Country y K KEI Ec conomicInce entive andInstructio a onal Regime Recent 9.1 16 5.5 57 6.1 16 1.5 55 4.3 3 4.0 01 3.3 36 3.6 67 19 995 9.2 6.75 5 7.21 1 2.43 3 4.81 1 3.31 1 4.02 2 3.48 8 novation Inn Education ICT T

USA Korea.Rep. Malaysia Russia Brazil China Indonesia a India

Recent 1995 t 9.1 7.67 6.16 5.58 5.5 4.36 3.27 3.04 9.51 7.85 6.04 5.53 5.03 3.48 3.46 3.13

Rece ent 1995 Recent 199 95 Recent 9.45 8.47 7 6.82 6.88 8 6.06 6 5.1 3.31 3.95 9.58 8.16 6.2 5.61 5.88 4.26 2.4 3.61 8.79 8 7.89 7 4.35 4 7.62 7 5.78 5 4.06 4 3.45 3 2.11 9.42 2 8.3 4.17 7 8.04 4 3.95 5 3.63 3 3.92 2 2.56 6 9.02 8.74 7.3 6.26 5.87 4.28 2.94 2.45

1995 9.83 8.2 6.57 6.05 5.5 2.74 3.5 2.87

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The T governm ment has now set its min to increasing public spending on education. T w nd There is also a greater wil llingness to allow the p private secto an expanded role, es or specially wh it hen comes to technical education. and for pub o blic-private partnerships. All of th will imp his prove supply, a also (one hopes) qua as ality. The de emand for e education, in turn, will be driven by the n higher sa alaries comm manded by a educated p an person-the m median multi iple being se even when s salary levels of the illiterate are compar with thos having po e red se ost-graduate degrees.
6. Lack of fo .3. ocus on dome estic IT mark ket:

In ndian IT in ndustry is p predominant export o tly oriented. Bu domestic IT deman is ut, c nd witnessin gradual change in In ng c ndia: from predominan hardwar driven tow ntly re wards a ser rvices oriented (Graph). Liberalisation is the key driver of inc n creased IT a adoption in I India. Signif ficant IT adopti was witn ion nessed in tel lecom and b banking secto These tw sectors a ors. wo accounted fo 35or 40% of d domestic IT services spe ending in In ndia. Pressur of compet re tition in sectors like airl lines, insurance and manu e, ufacturing; a e-govern and nance initia atives are ex xpected to enhance dom mestic demand f IT servic in near fu for ces uture.

The T following are the ma reasons for the narro base of t domestic IT-ITES m g ajor ow the c market in India a highlighte in a NAS as ed SSCOM-IDC Study on t Domestic Services (I C the c IT-ITES) M Market Opportun nity. (i Significan portion of domestic co i) nt f orporate IT spends lies in-house. In n-house spen nding on IT se ervices accou unts for mo than half of corpora IT spend in India, w ore f ate d while outsou urced spends ac ccount for 45%. In-housing IT spen 4 nding includ training c des costs, salarie of in-hou IT es use staff and associated overheads o (i Majority of CIOs fel that dome ii) lt estic custome were not a focus area for IT se ers ervice providers Also, CIO felt that I service p s. Os IT providers ha ardly offer In ndian custom mers the kin of nd commitm ment and exp pertise that t they offer th global c heir customers. C CIOs believe that potenti of e ial domestic IT market is still not ap c i ppreciated by many of do y omestic IT services prov viders (i The leve of awareness about th potential o using IT as an enable of compe iii) el he of er etitive advantag has been poor. The cost arbitra continue to be les attractive justification for ge age es ss n outsourci in India. Hence, IT companies need to clea articula value pro ing arly ate oposition of their f services a relate it to business benefits and
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(i CIOs are under press iv) sure to justify IT investm by demo fy ment onstrating va (compe alue etitive advantag delivered from IT in ge) d nvestments. Higher expe ectations fro IT requir CIOs to m om re move from rou utine IT oper rations to strategic IT ma anagement. This means that they ne to spend most eed of their t time and eff in day-to fort o-day operat tions of IT s solution. He IT servic provider are ere, ces rs expected to play a ke role in hel d ey lping CIOs i streamlini their IT o in ing operations (v Apart fro banking, financial s v) om , services and telecom ne verticals (manufactu d ew s uring, tourism, healthcare) need to be d n developed to expand IT s services market in India. (v Larger an mature IT users incre vi) nd T easingly pref end-to-en IT service This will be a fer nd es. l major gro owth engine for domesti IT market. e ic 6.4. C Country-spe ecific concen ntration of ex exports (USA & Europe) A ): Efforts at exp E panding UK and Europe markets have intensi ean ified in the p few yea to past ars avoid risk. But this market is stil dominated by the U.S and East Europe. Cont m ll d S tinental Euro is ope reluctant to engage with India du to languag hurdle. IT majors are also targeting Southeas and w ue ge T e st East Asia for more bu a usiness
Geograp phical Conce entration of I IT-BPO Exp ports

6. Metro-ce .5. entered IT d development or slow ge eographical spread IT: IT SEZ are further incre T f easing digita divide. Bu off late things are c al ut, changing: In ndias BPO deli ivery footprint had grow beyond a few metros to encompa some 250 delivery p wn s ass points in 30 loc cations. The implication of this is the need to increase de e n elivery centr which m res means creation o both socia and physical infrastru of al ucture in the Tier 2 and 3 cities. 6. Infrastru .6. ucture const traints: Even in the metros, let a E m alone Tier-II and Tier-I cities, IT industry ha been spen I III T as nding substanti amounts on transport ial tation, powe communi er, ication and s security. All these add u to l up the total industry co Money saved on th ost. hese fronts can be deployed for m more constru uctive and ucture creatio in Tier II and Tier III cities. on I projects a infrastru

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6.7. Growing global competition: Competition from Pakistan, Bangladesh, Israel, Latin America, Ireland, Singapore, China, Malaysia, Philippines, Eastern Europe, South America, South Africa, and Sri Lanka has been increasing. The last 5 are aggressively competing for BPO space by offering a variety of fiscal and other incentives. However, dominant Indian players are adopting a proactive approach. They recruit experts from competitors (Pakistan, Bangladesh and China) and thereby expanding their capacity. According to Infosys CEO and MD Kris Gopalakrishnan it's no more a case of Indian IT companies being seen as local companies with big turnovers, but global players in the true sense of the word. According to him one can see a distinct trend of companies extending their footprints across the globe. And these are primarily because of two reasons: Firstly, there is the need to support clients and their businesses in languages other than English, for which a singlelocation operation will not suffice. And secondly, there is the need to take advantage of timezone differences. We are, after all, talking about 24X7 services and no company can afford to offer any less in a globally competitive arena. For Infosys, that global mantra is quite evident. The company has full-fledged operations out of the Philippines, China, Poland, Czech Republic, Mexico and Brazil, and consultancy offices in 40 countries. It is all about multiple delivery capabilities in multiple locations. A closer look at those locations reveals that it is a winning mix of locations that feature different languages and cost-effective operations. 6.8. Low R&D spending: Presently only 2-4% of total spending of software companies in India are spend on R&D. Against this, internationally reputed software firms spend 14-19% 6.9. Growing competition from MNC IT companies: Today, 80% of top 100 IT companies in the world have their presence in India. In 20022003 foreign affiliates accounted for about 58% of Indias exports of back office services using offshore mode. They are competing with local companies both for Indian workers and foreign contracts. This combination is driving up wages and squeezing margins. From the perspective of financial capability, pedigree (record), heritage MNCs have an edge. However, expertise of dominant Indian players puts them 10 to 15 years ahead of their international rivals. 6.10. Persistent threat from anti-outsourcing lobby in USA: Results in difficulty of securing right type and number of American visas. Hence, handling political process in US will be important. However, Cognizant CEO Francisco DSouza says the recent protectionist measures by USA cannot be treated as rhetoric. He thinks there are some real pressures in the US right now because of high unemployment rate (10%). To him, the discussion needs to go back to what is the alternative question. Because the challenge we have in the US is that while unemployment is at 10%, the IT unemployment is very low. The reality is that US is not producing scientists and engineers at the rate that the industry needs. So, its a real problem for US companies. To compete in the US companies in the world is becoming more technology intensive. He thinks the Border Protection Bill, the visa bill was unfortunate because sufficient debate didnt happen around the broad implications of such a move when it comes to competitiveness of companies inside the US. Its in everyones interest for the economies of the world to recover, and the fastest way to achieve this is by making the
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companies healthy. He thinks its very very dangerous when you try to hold back a key pool that companies need in order to be competitive: which is talent. Many companies are responding to the backlash by announcing more local hiring in the US. 7. Service sectors that will see accelerated growth in the coming years (i.e. in the medium term) in India: a) Telecommunications: Telecom density has grown by leaps and bounds because prices have been cut to the bone, with local and long distance calls costing a tiny fraction of what they used to. The result is that the industry is able to make a profit even when the average revenue per user has dropped to a couple of hundred rupees per month. A supporting role has been played by the steady drop in handset prices. b) ITES: The labour cost arbitrage and satellite connectivity that drove the initial business successes have been supplemented by movement up the value chain for the delivery of more sophisticated services, including business consulting which ties in with the re-engineering of business processes and their eventual outsourcing/off shoring. These have proved to be sustainable business models, driven by focused companies that have demonstrated entrepreneurial drive and ingenuity. c) Road transport: The rapidly expanding road network, with a proper system of national highways, has speeded up truck movement by 50 per cent and more. d) Rail transport: The improved traffic and operating ratios achieved by the railways, and the large investments planned for expanding the system (like the dedicated freight corridors from the north to ports in the west and east) mean that there will be active competition between road and rail. e) Civil aviation: Could sustain the growth if oil prices are at reasonable levels. f) Financial services: The banking system still serves only the top 40 per cent of the population. Life insurance penetration is low, and capital market risks are taken only by a small minority. All this will change, aided by the advent of aggressive players in the private sector, like the ICICI Bank, which are grabbing market share from the legacy of public sector giants. Greater domestic inclusion (one of the key issues addressed in the report of the Raghuram Rajan! Committee) and operations in the international world of finance (an area of opportunity as spelt out by the Percy Mistry'' Committee on making Mumbai an international financial centre) are the two broad thrusts required to raise the share of financial services' contribution to GDP. g) Media and Entertainment: It has also emerged as a rapid growth sector: the growing corporatization of the Mumbai film industry, the financial muscle of the entertainment TV business (born in 1992 with the advent of satellite TV), and ambitious plans, like the Anil Dhirubhai Ambani Group's proposed investment of $ 1billion to make movies with Steven Spielberg, are all symptomatic of this changing reality. h) Modern retail: Modern retail, which is in early stages, is set to capture 16 per cent of the total retail market by 2013, and 25 per cent by 2018, compared to just 3 per cent today. In fact, in urban areas, it already accounts for 8 per cent of retail spending. [For more details refer the lecture note titled Organised Retailing in India: A Blessing or a Curse?]

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i) Education: According to the 2009 Netscribes report on H ) g 9 Higher Educa ation in India the a, education industry in India has been grow n i s wing strong with ma gly ajor contribu ution from K-12 (pronoun nced "k twel lve"/"k to tw welve" is a designation for the sum of primar and secon n m ry ndary education and highe education segments. T education industry was valued at INR 50 b in n) er n The bn 2008 and is expected to grow at a 12% CAG to INR 80 bn by 2012 d d GR 0 2. The T Indian education ind dustry is in its developm ment stage. T number of junior basic The rs schools a highest in the country and there i a strong ne to set up higher seco are n y is eed p ondary schoo as ols well as colleges with a focus on IT education The Gove h n. ernment has set up many ICT school but y ls still more than fifty percent of t market i untapped which show an opport e the is ws tunity for pr rivate players. I respect to the country populatio and num In o y's on mber of stude ents, trained teacher's ra is atio low whic emphasizes the need o training in ch of nstitutes. Th growing IT industry in India is dr he n riving IT educa ation and has enhanced the need for training market as well as en d g nhanced teac ching technique es. The T Indian education sys stem comprises of form and infor mal rmal networ of educat rk tional institutes (see Figure With economic grow and enhan s e). wth nced technol logy it has b become nece essary to develo the structure of the In op ndian educat tion sector. F Funds are a major conce in the m ern market though the government has taken many initiatives for the developmen of educ y nt cation infrastruc cture which can be fulfil by priva players. T governm has ope lled ate The ment ened the door for rs foreign u universities which will help in sha aping the ed ducation ind dustry struct ture. The cu urrent private education ma arket of US$ 38 billion is expected t grow to U 108 billi in the ne 10 $ to US$ ion ext years.

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With W over 50% of the pop pulation falli in the ag group of 1 ing ge 15-64 years, with a medi ian age betw ween 20-30 years, India presents an attractive market for the higher education s a n sector according to the 2009 Ernst & Y g Young EDGE E2009 repor on Private Enterprise in Indian H rt e Higher Educatio The repo also ident on. ort tifies variou other econ us nomic trigge which fu ers urther expan the nd market fo higher ed or ducation. The include g ey growing shar of service sector in G re es GDP, shorta of age skilled m manpower, hi igher househ hold expend diture on edu ucation (see Table), and easy availa d ability of studen education. Public priv Partners nt vate ship (PPP) m model can p provide much needed fin h nance to the hig gher educati sector w ion while serving as an effici g ient operatin model. It is estimated that ng d higher ed ducation acro the spec oss ctrum can be a profitable business w (a) profi after tax (P e e with it PAT) of 5-20% and (b) ret % turn on capit employed (ROCE) of 12-50%. H tal d However, lac of cooper ck ration between government and private sector entiti has hamp t ies pered PPP.

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PPP and High Education c

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8. WTO and Indian Services Sector The General Agreement on Trade in Services (GATS) was one of the major areas of the General Agreement on Tariffs and Trade (GATT) in the Uruguay Round, which concluded in Geneva on Dec. 15, 1993. The Uruguay Round expanded the scope of the multilateral trading system to cover trade in services through the GATS. The GATS is the first multilateral agreement to provide legally enforceable rights to trade in a wide range of services. The GATS, which came into force on 1 January 1995, was aimed at facilitating trade and investment in services through the progressive liberalisation of restrictions on trade and investment flows in services. One of the important objectives of GATS is to promote trade in services through progressive liberalisation and enhancing the participation of developing countries in it. The GATS is the first and only multilateral framework of principles and rules for governing international trade in services. The developed countries account for major share in service exports (approximately 80 per cent) in contrast to developing countries who despite their advantageous position in producing cheaper services fail to reap the maximum benefits because of a plethora of tariff and non-tariff barriers on trade. In this context, the role of GATS becomes crucial for shaping the future course of world trade as it has brought services sector trade under its ambit. Traditionally speaking, services are considered to be non-tradeable because as compared to goods they are having certain distinct characteristics such as intangibility, non-storability, and also these are embodied in the person or thing in question. Some of them require physical proximity of the provider and the consumer (for example, the doctor and patient) as they have to be consumed as soon as they are produced. Therefore, services were outside the purview of GATT/WTO negotiations for long. However, with the development in technology (advent of internet services, telecommunication revolution, and advent of satellite communication) and reduction in transportation cost it has become possible to overcome many of these constraints associated with trading services. As a result, many of the previously non-tradeable services have become tradeable internationally. In the light of the ongoing `service revolution' in India, naturally it is expected that services sector has vast export growth potential under WTO regime. 8.1. What is the significance of trade in services? (a) Foreign exchange earning potential (b) Both services and manufacturing sectors are inextricably linked through intersectoral linkages. `Splintering' of industrial activity will lead to further push in the growth of services across the world by way of increasing the demand for service inputs for production of manufacturing goods. This may open up vast export opportunity for Indian services. On the other hand, in this modern era of globalisation and competition, the use of quality service inputs is becoming a pre-requirement for making our goods internationally competitive. Therefore, the need for various complementary or producer services whether indigenous or imported, is bound to increase for Indian manufacturing sector in the near future. In a free services trade regime such service requirements can be imported.

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(c) Some of the services are relatively cheaper in some countries than others due to difference in their factor endowments (e.g. cheap labour). WTO regime offers immense opportunities to open up trade in those services. (d) Trade in services can prove to be instrumental in generating additional employment opportunities for the professional and technical personnel by creating a demand for their services (doctors, nurses, teachers, computer experts, etc.) abroad. 8.2. Modes of Service Transaction Available under GATS: GATS defines trade in services as "the supply of a service from the territory of any other member; in the territory of one member to the service consumer of any other member; by a service supplier of one member, through commercial presence in the territory of any other member; and by a service supplier of one member, through presence of natural persons of a member in the territory of any other member. There are four modes specified in the agreement through which trade in services can materialise: Mode 1: Cross-border supply - In this case physical movement of provider or user not required because of usage of information technology. Examples are IT-ITES services, e-banking, telemedicine, distance learning, export of CDs of movies, music concerts, dance performances. Mode 2: Consumption abroad - In this case there will be a movement of user to the provider. Examples are foreign tourist visiting India and utilising hotel services, foreign patients utilising our health services and vice versa. Mode 3: Commercial presence Under this mode, the suppliers of a service of a particular country establish a legal territorial presence in another country to provide their services. This involves setting up of a service establishment like a construction or an engineering firm or bank offering construction or engineering or banking services through FDI mode. Mode 4: Movement of natural persons - In this case, the provider of service goes to the user, but only on temporary basis, i.e. not for entry into the permanent labour market. This mode of services trade involves movement/presence of natural persons. Examples are temporary movement of natural persons such as Indian teachers, doctors visiting foreign universities for teaching and research, engineers, consultants going abroad on short term basis. As per the WTO estimates, Mode 3 accounts for the highest share in world trade in services (57%) followed by Mode 1(about 28%), Mode 2 (14%) and Mode 4 (1%) respectively. 8.3. What are the Potential Areas of Services Trade for India? India has a clear cut Revealed Comparative Advantage (RCA) in the exports of commercial services and this is mainly due to the advantage we have in other commercial services than transport and travel services (Table). RCA is the ratio of two different ratios. The numerator is the ratio of export of commercial services (CS) of the region/country to its total exports (merchandise + CS). The denominator is the ratio of world export of CS to world exports. In case of components of CS, the numerator is the ratio of export of a component of commercial services (TS/TRS/OS) of the region/country to its total exports of CS. The denominator remains the same for each region/country and is the ratio of world export of that particular component to world exports of
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CS. RCA>1 implies comparative advantage RCA<1 implies absence of comparative advantage. Revealed Comparative Advantage in Services (2003-2005) Commercial Transport Travel Services Othere Services Services (TRS) Services (TS) (OS) India 0.5 0.5 1.8 1.5 High Income Countries 1.1 1 0.9 1.1 Low and Middle Income Countries 0.7 1 1.6 0.6 Commercial services comprise of transport, travel, other commercial services. Other commercial services include such activities as insurance and financial services, international telecommunications, and postal and courier services, computer data, news-related service, transactions between residents and non-residents, construction services, royalities and license fees, miscellaneous business, professional, and technical services, and personal, cultural, and recreational services. Through a give and take approach India can gain out of GATS. For example, India can get access to US health services market by way of export of medical professionals (doctors) by giving access to her financial services market (banking and insurance) to US firms. 8.4. Indias negotiating moves in GATS Major Outcomes: India's communication proposals and submissions before GATS negotiation have mainly focused on Mode 1 and Mode 4, where India has comparative advantage and thus an offensive interest. On Mode 1 India, along with its coalition members (friends group), has focused on ensuring a predictable market environment, mainly aimed at pre-empting protectionism with regard to the global outsourcing of services following the emergence of anti-outsourcing sentiment in developed countries. On Mode 2, India has focused on the need to enhance transparency in Mode 4 commitments, to reduce discretionary scope in the application of restrictions such as economic needs test and lack of recognition of qualifications, which affect Mode 4. In response to Indias submission of initial requests (relating to Mode 1 &4) for sector specific commitments to 62 member countries, in return, India received requests from 27 member countries. India's requests centred around the removal of sectoral and cross sectoral restrictions in Modes 1 and 4, while the requests it received centred around the expansion of India's commitments to include more service sectors and to liberalise its commitments across all modes, and especially in commercial presence, or Mode 3 (e.g. FDI in retail and banking). In response to these requests, India submitted its initial offer in January 2004. This offer, however, did not substantially improve upon its earlier Uruguay Round commitment, mainly because there was little progress in the commitments by other member countries in the modes and sectors of interest to India.
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In August 2005, India submitted a revised offer in which it not only showed a willingness to expand the scope of its Uruguay Round commitments by tabling several new service sectors and subsectors for negotiations, but also signalled that it was willing to remove commercial presence restrictions in some key areas that it had already committed. Eleven sectors and 94 subsectors were covered in the revised offer as opposed to seven sectors and 47 sub-sectors in the initial conditional offer. The change in stance reflected a new strategy on the part of India, of being more forthcoming in the services negotiations, by tabling more sectors, including some domestically sensitive sectors, and by offering to bind its commitments at higher levels of liberalisation in areas where India had been a recipient of many requests, in the hope of receiving improved revised offers in modes 1 and 4, where there had been little progress.

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APPENDIX:InterviewwithProfessorJagdishBhagwati Quidproquoinservicessectornegotiationsisneeded.Butsoarerulesonhiringandfiring. ProfessorBhagwatiistheUniversityProfessoratColumbiaUniversityandSeniorFellowinInternational EconomicsattheCouncilonForeignRelations.Heisregardedasoneoftheforemostinternationaltrade economistsofhisgeneration.HehasbeenEconomicPolicyAdvisertoArthurDunkel,DirectorGeneralof GATT (199193), Special Adviser to the UN on Globalization, and External Adviser to the WTO. In this interviewtoTheHinduinChennai,ProfessorBhagwatioutlinedsomeofthekeychallengesthatremain forIndiaintheupcomingnegotiationsontheDohaRound.Thefollowingistheeditedinterview: OnWTOlegality Q: Recent reports have indicated that 83 new measures that go against free trade principles have beenenactedacrosscountries.Areyounotworriedthatthesewillbedifficulttorollback,especially because such moves often represent governments responding to pressures from their domestic constituencies? A: Most of the actions reported are safeguard actions, antidumping actions and so on. Those are actionswhereyouareexercisingyourrights.Onewishestheywerenotdoingso,butyoucannotreally objecttothemassuchexitstrategiesarebuiltintoWTOrules,atleastonatemporarybasis.Especially whenthingsgetroughandrightnowtheyaretheabilitytotoethelineisbeingstrainedinmany democraticcountries.Sothatpartdoesnotreallybothermethatmuch.Butifyougobeyondthatand look at protectionist interventions where you are violating your obligations, by doing things that you agreednottodo,thatissomethingthatisstillnotonascalethatyouneedtoworryabout.Butweinsist ontalkingaboutitsimplybecausetheneverybodywillbecarefulandawarethatitisgoingon. There is one downside risk which people have observed, which is that if you collect all these interventionistactions,whethertheybelongtothefirstgroup(WTOlegal)orthesecondgroup(WTO illegal),itwillbehardertoholdtothelineinsomecountriesbecausepeoplewillsay,TheUnitedStates hasdonethattakentheseactionssowhataboutusdoingit?Soincreasedtransparencymaymakeit more difficult rather than less difficult. This is more a political science kind of reaction and there is somethingtothatbecausealotofpeoplearesimplyunawareofwhatisgoingon,exceptthosewhoare beinghit,thevictimsofthis!Sothiskindofexerciseshouldbeheldinalowkey. Dohastakes Q:Intermsofeffectsontrade,aretheyanydifferentfromactionsthatviolateWTOrules? A:Theeffectwouldbeidentical.Buttheeffectintermsoftheprospectiveimpactmaynot.Whenyou underminerules,peoplefeeltheycandoavarietyofthingsandtheyarenotconstrained.Thereforethe expectationsyousetupareimportant.ThisistheproblemaboutsettlingtheDohatradenegotiations.If youdonotsettleDohaanditdragson,sayevenanotheryearthenpeoplewillfeelthatmultilateralism is dead. Therefore the rules such as we have built in, based on the 1930s experience of freeforall, thoseruleswillgetundermined.Thatiswhatpeopleareworriedabouttheeffectonthesystem.Itis hardtoquantifythatbecausethatisactuallyamatterofhowthesituationwillunfold.Thereisnodoubt thatthetradesystemhasmanagedtodoreasonablywellbecausewehavehadrules.Thisisthereason whytheG20andtheG8keeprepeatingthatwemustsettleDohaandnotletitgo.Eventhoughtheydo not expect to liberalise they hope to at least underline to the public that they believe in the system ratherthanitsroleinfurtherliberalizingtrade.Ithinktheyunderstandthatliberalisationcanbehard. 37

WhatU.S.andIndiamustdo Isuspectwearegoingtomoveinthenextfewmonthsintoamodewherewewilldecidethatsomehow wehavetosettleDoha.Wehavebeensoclosetoanagreement;butnowwecantakethatfinalstep. ButtheonusforthewayithasdevelopedisunfortunatelyjustontheU.S.andIndiarightnow.TheU.S. havingmorecontrolofthemediamakesitseemasthoughitisIndiawhichistheproblem.Wecould equallysaythatitistheU.S.whichistheproblem.Theybothhavetomakeamove,inmyjudgment. Protectionistmoves&Doha Q: Buy American clauses have been associated with the bailout funds and there are similar measuresinothercountries.Giventhatthereisnosinglesupranationalbodytodecideontherules donotyouthinkalltheseprotectionistmovesaregoingtostalltheDohaprocessfurther? A:Ithasnotgonethatfaratall.Idonotthinkso.Ifyoulookatalltheseactions,itisamatterofwhat valueoftradetheycover.Lookatantidumpingactions,whichmostofuseconomistsdeplore,because theyaresupposedtobefairtradeactionsbuteverybodyknowstheyareunfairtradeandtheyareused asawayofinterferingwithfreetrade.Theyarealreadyinthesystemand thereforethey arepartof your rights, but these are rights that you would rather not see, having been built in. But you find, typicallyintheliterature,theargumentthatIndiaistheworstuserofantidumpingactions,nottheU.S. ortheEU.Butwhenyouactuallylookatthevalueoftradeyoudiscoverthatitisminusculecompared withwhattheU.S.andtheEUaredoing.Soyouhavetoputitintosomeperspectivelikethat.Idonot thinkinthevalueofthetradecoveredortheintimationintermsofwhatfutureactionsmightbreakout amountstoanythingverysubstantial.WithpolicieslikeBuyAmerican,theyaregoingtorealisethatas soonastheyareoutoftrouble,thisisnotreallywhattheywanttodobecausetherehasbeensomuch criticism of it. Even Obama, because of all these criticisms coming particularly from people who are worriedaboutexportmarkets,likeCaterpillarandGEandsoon,putinariderorqualifiersayingithas tobeconsistentwithourWTOobligations. Ofcourse,thedevilisinthedetailanddespitethatprovisionyoucanactuallyhaveerosionoftheWTO obligation. But it will not last forever. As soon as the pressure eases, assuming we do not make the mistake of reversing too soon, that will tend to disappear. What I find lacking in the G20 and G8 statements is any awareness of these kinds of problems remaining endemic after we pull out of the recession.Wewillhavetohaveagameplanalsothatsays,Whereverthereisambiguity,weneedtobe absolutely toughminded and say we should light a bonfire under these things, but by collaborative action. Noneedforsupranationalauthority Butthereisnosupranationalauthoritywhichisrequiredforthis;itisjustamatterofthemainplayers makingsuretheycomply.Infacttheprotectionisinalotofotherareas,wheretherearenorules.For exampleifyouwanttolookatlabourmarketsandimmigrationissues,whicharerelated,younowhave inmanycountriesagreatdemand,includinginEnglandandintheU.S.,tohiredomesticworkersfirst andtofireforeignworkersfirstaswell.ThereisnoruleintheWTOonthat.Thereisnoruleonforeign investment.Thereisnoruleonservices.Sowhatworriesmeisnottradeprotection,becausetherewe dohaveasystemandrulesinplace.Itisamatterofrecoveringsanityonthepoliticalfeasibility. Obama&Sarkozy But there are a whole lot of things, including foreign investment, where President Obama says value shouldnotflowtoBangalorebutshouldstayinBuffalo.Nowthatisakindofprotectionism.AndSarkozy goes even further and he actually said that French firms should not invest abroad, like in Prague for RenaultandCitroen;theyshouldcomeback.Nowthatiscarryingittoofarintermsofprotectionism. 38

So for trade protection we fortunately have the WTO and the whole history of that and we have the rulesandwehavethesystem,suchasitis.Buttherearewholeareaswhereyoudonothavethat.Inthe bankingsectorinparticular,marketsaregettingsegmented.IftheRoyalBankofScotlandcanhaveno access to American funds and the same way over there in the UK, that is a massive issue. So I had writtentoPrimeMinisterGordonBrownbeforethelastG20meetingthatwhatheshouldtalkaboutis notjustcontainingtradeprotectionismandtheadvantagesofafreertradesystem,buttotalkaboutthe advantagesofanopenworldeconomybecausethatisamuchbroadertheme. Essenceofopenworldeconomy Q:Whatwouldbetheelementsoftheopenworldeconomy?Youmentionedtradeandinvestment andthemovementofnaturalpersons. A: What we are talking about is temporary immigration. We should be able to export services, but embodiedinpeople.Thatiswhatwecallthemovementofnaturalpersons.Wearetalkingaboutservice transactions.SothesecondlegisGATS,theGeneralAgreementonTradeandServices.Lookatmedical reform.Ihavebeenwritingrepeatedlyonhowyoucouldreducecosts.Takecomprehensivecoverage. Therearetwoproblems.SchwarzeneggerinCaliforniaranintoproblemsonthecostsideitwasvery expensive. Where do you draw the line on what people would be able to get access to? Where you could not contain the costs, comprehensive coverage was seriously handicapped. Take the Massachusetts case where costs were more reasonably contained and that was Mitt Romney and a democratic majority state legislature. That programme ran into the problem of scarcity of medical personnel.Ifyouarenowinsuredandyouareindigentotherwise,wheredoyougetadoctor?Doctors availabilitybecameabigissuebecausemanydoctorswereunwillingtosignontopatientslikethat. Medicallobbiesagainstcompetition Since I know international trade and GATS I said many years ago in an article: export patients and importdoctors(exportingpatientsiswhatwecallmedicaltourismnow)andthecostsavingswouldbe enormous.Ifsomethinglike40%oftheprocedurescouldbedoneonthisbasis,itwouldsavesomething like $6070 billion per annum far in excess of what the President was talking about in terms of computerisation of patient records and so on. In terms of also finding medical personnel, foreign doctors on visitor visas are required to go back; under former U.S. President Lyndon B Johnson they wereallowedtostayoniftheywenttoAppalachiaandsoon,wheredoctorswerenotavailable.SoI recalledthatandtalkedaboutthatandsaidyoucouldattackbothproblems.Butnotonepersoninthis administrationhaseverpickeduptheidea,includingPaulKrugman,towhomIwrote. Intheenditisthemedicallobbiesthattheyareworriedaboutbecausethedoctors,likeanybodyelse, donotlikecompetition.Thisiscompetition.Itisactuallyhelpingthepoorwhoaregoingtobeinsured.If anybodysuffersitwillbethedoctors.Butthatistheelite,evenifyoucontrolfortheirpayments.Sothis ispartlyamovementofnaturalpersons.Therearefourmodesoftransactionsforservices:theprovider goestotheuser,theusergoestotheprovider,online,andbyestablishingservicesinalocalarea.So those are the things we wrote about, which are a part of GATS. While the administration talks about lobbiesandinsurancecompanies,itisneverreallyaddressingtheseissues.Thesearesomeoftheissues thatcanbeputintotheDohaRoundbutsofarwehavenorealconcessionsontheseissues. Goforquidproquo Butwecouldactuallyhavesomequidproquoonthisanditisanareawherewecouldgainquitealotin myview.ItissomethingwhichcouldbetakenupbytheIndianadministration.Thesearesomeofthe issuesthatcouldbeputintotheDohaRoundbutsofarwehavegotnorealconcessionsonthatissue either.Butagainstthatyouhavetogivesomethingintheservicessector.Whatwouldwegive?Inareas 39

likebankingandinsurancewearesufficientlydevelopedandresilienttobeabletooffersomething.Itis difficulttooffer,inmyview,anyentrysubjecttoagivenlevelofprotectionsimplybecausewedonot haveasafeguardclauseintheservicessector. Indiaandservicesectornegotiations Q:Whyisnotthereasafeguardclause? A:Supposingyouopenupbankingand10bankscomeintotheeconomy.Thenourbanksareintrouble. Inthiscaseasafeguardcomesintheformofamarketdisruptionclause.Whatdoyoudo?Doyouget threebankstogoback?Itisverydifficultforthatreasonandtheyhaveneverbeenabletonegotiate something.Withgoodsentryyoucanjustshutofftradebyputtingonatariffandthatwillreduceit.So theyhavenotbeenabletonegotiatethis.MyviewisEuropeanscertainly,Japaneseyes,Americansless willing, but they would all come on board we just say they accept more commitments, quantity commitments.Notrulecommitments.Thenweallowacertainnumberofbankstoopenperyear.Sowe canoffersomething,justastheyarenevergoingtosaySubjecttotheserules,anynumberofdoctors cancomein.Sotheyaregoingtoputinautomaticcapsorsomething. So this is what we could do but we could have a service sector quid pro quo, where both countries wouldbebetteroff.Actuallywemightwanttoofferthat.Thefreetradeareaisverydifferentandthey would never agree to that and they would impose all kinds of other conditions on us, which are not doable.Butthatcouldbepartofanewparadigm:wecouldjustsaywearegoingtotransactinthisway andgiveeachothermutualconcessions.Thatwouldbeintheservicessectorsoservicepeoplemight also be a bit happy. But we need to go in that direction and we need rules also on hiring and firing becausethatiswhereeverybodyisgoingnow.EveninIndiathereisgreatpressure.Isnotthatwhatthe recent trouble in the airline industry is about? Everybody is facing that everywhere: why should we dischargeourownpeoplewheninfactparticularextraneousmoneyisinvolved. Dontbeggarthyneighbour Butifwewanttogetprotectionforourlabour,theFrencharegoingtoaskforprotection,onthesame grounds.Someoneelseisgoingtoaskforprotection,saytheU.S.Thisisexactlythestoryofthe1930s:I divertworldcardemandtomeusingprotection.Youdothatinturnandyouaredivertingmydemand back to you, and so on. So this was called beggarthyneighbour policy. It is much better to have a subsidy on the purchase of cars, if you really want to support that sector. Each country may provide whatever support, say $1500 per car. Then let them compete. But otherwise you are just adding protectionovereachotheranddoingnothingfortheindustryassuch.Themainproblemislackofcar demand.Soatthenationallevel,ifyoulackaggregatedemand,Keyneswasthefirstpersontosayyou shouldusetariffsbecausetariffsdivertagivendemandtoourgoods. Similarlyifyouusedevaluation,thatalsodoesthesamethingontheexportssidebecausetheexports becomecheaperandyouhavedivertedforeignsalestoyourexportmarkets.Inneithercaseisanyone betteroff.Keyneshimselfcameroundtotheviewthatthefirstbestpolicyviewwastoreviveaggregate demand and that is what we are doing right now. If we were not implementing the stimulus package rightnow,wewouldbeseeingmuchmoreprotectionismforsure.Sothatisalsooursafeguard.Each individualindustrialistislookingatitfromhisorherperspectivetheycanonlytakeamicrodecision forthemselvesfortheirownprotection.ButthegovernmentandtheG20andtheG8havetolookat what in fact is the overall policy framework within which this game is to be played. You want to minimisethecompetitivegame,whichisreallynotthewaytoaddresstheissue.Asyouwereasking,to unwindthesepositionsalsotakestimeandthatiswhathappenedinthe 1930sinabigway.Itwas verydifficultandyoureallyhadanuclearwinteratthattime. 40

Note:ThislectureispreparedbytheInstructorforthesolepurposeofstudentlearning.Itisnothingbut properarranging/orderingofrelevantpartsfromthesourcesindicatedattheendofthenote.

Sources used for Preparing this Note Sunil Jain and T.N. Ninan (2010): Servicing Indias GDP Growth in Indias Economy: Performance and Challenges Essays in Honour of Montek Singh Ahluwalia. Edited by Shankar Acharya and Rakesh Mohan, Oxford University Press. Deutsche Bank Research (2005): Outsourcing to India: Crouching tiger set to pounce. October 25. Deutsche Bank Research (2009): Offshoring to China: From Workbench to Backoffice? January 13. Rashmi Banga and Bishwanath Goldar (2007): Contribution of Services to Output Growth and Productivity in Indian Manufacturing Pre- and Post-Reforms, Economic and Political Weekly, June 30. Rashmi Banga (2005): Critical Issues in Indias Service-led Growth, Working Paper No.171, Indian Council for Research on International Economic Relations. Seema Joshi (2004): Tertiary Sector-Driven Growth in India: Impact on Employment and Poverty, Economic and Political Weekly, September 11. James Gordon and Poonam Gupta (2004): Understanding Indias Services Revolution, IMF Working Paper (No. WP/04/171). Dipak Mazumdar, Sandip Sarkar (2007): Growth of Employment and Earnings in Tertiary Sector, 1983-2000, Economic and Political Weekly, March 17. Government of India (2008): Report of the High Level Group on Services Sector, Planning Commission, New Delhi Key Highlights of the NASSCOM-IDC Study on the Domestic Services (IT-ITES) Market Opportunity (http://www.nasscom.in/upload/5216/Domestic%20Services.doc) The Marketing Whitebook 2010-11, Business Standard. Rupa Chanda and Sasidaran G. (2007): GATS and Developments in Indias Services Sector, in Indias Liberalisation Experience: Hostage to the WTO? Edited by Suparna Karmakar, Rajiv Kumar and Bibek Debroy. New Delhi: Sage Publications India Pvt. Ltd. Recommended Readings Ejaz Ghani (2010): The Service Revolution in South Asia; Oxford University Press The Marketing Whitebook 2011-12, Business Standard. S. Ramadorai (2011): Towards Tomorrows India: The Future of Healthcare, in The TCS Story and beyond; Penguin Books India. Government of India (2008): Report of the High Level Group on Services Sector, Planning Commission, New Delhi
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Video Links Services to Growth and Innovation in China and India A Panel Discussion http://www.youtube.com/watch?v=PumPVYCFkMM&feature=related (Part 1) http://www.youtube.com/watch?v=QDnY2RDfW4w (Part 2) http://www.youtube.com/watch?v=vU9BQLvd6g0&feature=related (Part 3) http://www.youtube.com/watch?v=Mjds4tY8HuU&feature=related (Part 4) http://www.youtube.com/watch?v=IiPuXHwp6C0&feature=related (Part 5) http://www.youtube.com/watch?v=v0l5fJu_k-o (Part 6; Question and Answer) ___________________

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