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India’s Emerging Services Sector
Matthew Reisman and Isaac WohlServices Division, Office of Industries
October 21, 2010Image Source: Wikimedia Commons
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Agenda
• Study scope• Services in the Indian economy• India’s services trade• Gravity model• Directions for future research
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Study scope
• Services in the Indian economy• International trade in services• Empirical analysis• Industry studies
– IT-BPO, telecom, energy, air transport, education, and finance
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Services’ share of output is relatively large…
0
10
20
30
40
50
60
India LMI Average China Indonesia
Services' Share of GDP, 2008
Source: World Bank
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…and growing
Source: World Bank
8101161058Services
64981553Manufacturing
3360-140Agriculture
CAGR,1985–2008
200820052000199519901985
Growth in value added (% per annum)
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Wholesale and retail trade lead services output…
Services output by industry, 2006-07
Electricity, gas, & w ater supply 3%
Tourism 3%
Banking & insurance 9%
Construction 13%Real estate & business services
13%
Transport, storage, & communication 14%
Community, social, & personal services
22%
Wholesale & retail trade 24%
Source: CSO, National Accounts Statistics 2006–07
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…but other industries are growing quickly
0
20
40
60
80
2004 2005 2006 2007 2008
Revenues (US$ billions)
TelecomIT-BPO
Sources: NASSCOM and Hot Telecom
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Services’ share of employment is lower than its share of output
0102030405060
India Malaysia Philippines
Services' share of GDP and employment, 2005
GDPEmployment
Source: World Bank
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India's Services Exports
020406080
100120
2004
-2005
2005
-2006
2006
-2007
2007
-2008
2008
-2009*
2009
-2010**
USD
bill
ions
Softw are Services
Travel
Business Services
Transportation
Communication Services
Insurance
Financial Services
Government not includedelsew hereOther Services
India's Services Imports
020406080
100120
2004
-2005
2005
-2006
2006
-2007
2007
-2008
2008
-2009*
2009
-2010**
USD
bill
ions
Softw are Services
Travel
Business Services
Transportation
Communication Services
Insurance
Financial Services
Government not includedelsew hereOther Services
Source: RBI
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India's Services Imports
0
1,0002,000
3,0004,0005,0006,000
7,0008,000
9,000
1999 2000 2001 2002 2003 2004 2005 2006
USD
mill
ions
United States
United Kingdom
France
Australia
Japan
Denmark
Netherlands
Hong Kong
Italy
Canada
India's Services Exports
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1999 2000 2001 2002 2003 2004 2005 2006
USD
mill
ions
United StatesUnited KingdomFrance
AustraliaJapanDenmarkNetherlandsHong Kong
ItalyCanada
Source: OECD
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Market Liberalization• GATS commitments in business services, communications,
construction, financial services, health services, tourism
• FTAs with Sri Lanka and Singapore; member of South Asian Free Trade Area; negotiating services agreement with ASEAN
AccountingLegal servicesDistribution
Financial servicesConstructionHealthAir transport
Computer servicesTelecoms
RestrictedModerately liberalized
Significantly liberalized
Source: Mattoo, Mishra and Shingal 2004
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Empirical Analysis: Gravity Models
Image Source: www.bierbower.net
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A basic gravity model
• i = country i• j = country j• IM= imports• Y = GDP• D = distance
lnIMij = β1 + β2 lnYi + β3 lnYj + β4ln Dij +εi j
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Our additional variables
• A = adjacency• CL = common language• SFDIR = services FDI restrictiveness
index• REM = remoteness
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Services FDI Restrictiveness IndexForeign Ownership
No foreign equity allowed 1 1–19% foreign equity allowed 0.6 20–34% foreign equity allowed 0.5 35–49% foreign equity allowed 0.4 50–74% foreign equity allowed 0.2 75–99% foreign equity allowed 0.1
Screening and approval
Investor must show economic benefits 0.2 Approval unless contrary to national interest 0.1 Notification (pre- or post-establishment) 0.05
Operational Restrictions
Board of directors/managers majority must be nationals or residents 0.1 at least one must be national or resident 0.05
Duration of work permit for expatriates less than one year 0.1 one to two years 0.05 three to four years 0.025
Other operational restrictions up to 0.1 Total (capped at 1.0) Between 0 and 1 Source: Golub, “Openness to Foreign Direct Investment in Services,” 2009.
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Remoteness
Source: http://www.anzacday.org.au/education/childhood/part1.htm
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REMi=Σdim/ym
• dim = country i’s distance from all trading partners
• yim = GDP of i’s trading partners
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Our models
lnIMjit = β1 + β2 lnYit + β3 lnYjt + β4 lnDij + β5 Aij + β6 CLij +β7 SFDIRi + β8lnREMit+
β9lnREMjt+ β10Y01+ β11Y02+ β12Y03+ β1 3Y04+ β14Y05+ β15Y06+εij
Panel regression (random effects), 2000-06
Ordinary Least Squares (OLS), 2004
lnIMji = β1 + β2 lnYi + β3 lnYj + β4 lnDij + β5 Aij + β6 CLij +β7 SFDIRi + β8lnREMi+
β9lnREMj +εij
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Dependent variable— ln(Services Imports)
Random
effects OLS Services FDI restrictiveness -1.373 ‡ -1.314 ‡ (-3.85) (-3.41) ln (importer's GDP) 0.914 ‡ 0.850 ‡ (29.62) (25.73) ln (exporter's GDP) 1.809 ‡ 0.987 ‡ (16.64) (25.51) ln (distance) -1.214 ‡ -0.996 ‡ (-16.9) (-12.44) ln (importer's remoteness) 0.186 † 0.012 (2.03) (0.12) ln (exporter's remoteness) 0.746 ‡ 0.121 (6.94) (1.43) Adjacency 0.096 0.272 (0.61) (1.26) Common language 1.177 ‡ 1.163 ‡ (7.3) (6.84) Constant -45.664 ‡ -33.396 ‡ (-19.66) (-14.46) Number of observations 4,455 858 R-squared 0.737 0.700 ‡ significant at the 1 percent level † significant at the 5 percent level
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Potential effects of liberalization
Liberalization to mean SFDIR score(0.24)
Liberalization to minimum SFDIR score(0.04)
Increase in imports (percent) Increase in imports (percent)
Random effects
19.2 46.7
OLS 18.4 44.7
India’s SFDIR score: 0.38
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Directions for Future Research
• In-depth examination of other industries• Political economy of protectionism and
liberalization• Other trade effects• Welfare effects
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Thank you
Image Source: www.indif.com