Introduction
India has solidified its position as the 'services factory' of the world, with its services exports undergoing a remarkable transformation over the past 18 years. According to a report by Goldman Sachs titled "India's rise as the emerging services factory of the world," the country's services exports have more than doubled during this period, reaching a staggering $340 billion in 2023. This impressive growth trajectory is expected to continue, with projections indicating that India's services exports could reach $800 billion by 2030, comprising 11% of the nation's GDP.
The Unstoppable Growth of Services Exports
The Goldman Sachs report highlights the impressive growth of India's services exports, which grew at a compound annual growth rate (CAGR) of around 11% from 2005 to 2023, nearly double the global growth rate. This remarkable expansion has outpaced the country's goods export growth, with India's share in global services exports rising from under 2% in 2005 to 4.6% in 2023. In contrast, India's share of goods exports only increased from 1% in 2005 to 1.8% in 2023.
The Pivotal Role of Global Capability Centers
A significant factor driving this growth has been the emergence of Global Capability Centers (GCCs) in India.
The report states, "India's services exports grew to nearly $340 billion in 2023 at a compound annual growth rate (CAGR) of around 11 per cent from 2005-2023 (nearly double global growth) outpacing goods export growth. As a result, India's share in global services exports rose from under 2 per cent in 2005 to 4.6 per cent in 2023, while India's share of goods exports only increased from 1.0 per cent in 2005 to 1.8 per cent in 2023."
These GCCs, which employ 1.7 million people, have seen their revenues quadruple over the past 13 years, reaching $46 billion in the fiscal year 2023.
The report further states, "Professional consulting exports have been the fastest growing sector at 17 per cent CAGR from 2005-2023 to 18 per cent share of India's services exports. This has mainly been driven by the rise of GCCs in India, where revenues have grown four times over 13 years to $46 billion in FY23, employing 1.7 million people."
Computer Services: The Backbone of India's Services Exports
Computer services have been the backbone of India's services exports, comprising almost half of the total services exports in 2023. The report states, "Computer services comprised almost half of India's services exports in 2023."
The Indian information technology (IT) industry has experienced remarkable growth, with revenues reaching $245 billion (approximately 7% of nominal GDP) by the fiscal year 2023, up from $132 billion in 2015 (about 6.5% of nominal GDP).
The report mentions, "Over the last eight years, the revenue of the Indian information technology (IT) industry has grown at a CAGR of 8 per cent. This growth rate accelerated during the pandemic period (FY21-FY23) to 12 per cent, driven by the urgent need for technology and digital services adoption."
According to the National Association of Software and Service Companies (Nasscom), the IT industry's revenue reached $245 billion (around 7% of nominal GDP) by FY23, up from $132 billion in 2015 (about 6.5% of nominal GDP). Over the same period, the industry has seen an addition of around 1.9 million employees (at a CAGR of 5.6%), bringing the total employee count to around 5.4 million by FY23.
The Domestic Impact
The report states, "There will be robust growth in high-value services over the years, helping increase demand for top-tier discretionary spending and driving commercial and residential real estate activity in the domestic market."
Challenges and Considerations
While the report highlights India's impressive achievements in the services exports sector, it also warns against complacency. The report flags domestic constraints, such as the lack of a sufficiently skilled workforce and environmental stress in key services export hubs like Bengaluru, which is facing a water crisis due to the growth in these sectors.
The report states, "In terms of domestic constraints, training technology graduates as fit for the job market has been cited as a challenge in some cases. From an environmental perspective, the growth in these sectors is putting pressure on the natural resources of cities – the city of Bengaluru, which has the largest share of IT companies and GCCs in India, is facing a water crisis."
Additionally, the report emphasizes that India's services exports are dependent on global demand for information and communications technology (ICT) spending.
It states, "In addition to these domestic constraints, the report also highlighted that the exports are dependent on global demand for information and communications technology (ICT) spending and rising protectionism in destination countries could hurt export prospects."
Ambitious Targets and Sustained Growth
The projected growth of India's services exports, while impressive, still falls short of the government's ambitious target of $1 trillion in services exports by 2030, as outlined in India's foreign trade policy unveiled in 2023.
The report states, "The projected growth of the services exports would still fall short of the government's target. In India's foreign trade policy unveiled in 20230, the government had set the target of $1 trillion for services exports by 2030."
However, the report's baseline scenario suggests that services exports could reach around 11% of GDP by 2030, amounting to approximately $800 billion, compared to $340 billion in 2023.
The report states, "Our baseline scenario suggests that services exports could reach around 11 percent of GDP by 2030 (versus 9.7 percent of GDP in 2023), which amounts to around $800 billion (compared to around $340 billion in 2023)."
Furthermore, the report projects that the current account deficit could likely stay around 1% of GDP on average from 2024 to 2030, assuming no significant moves in commodity prices and the goods trade balance beyond 2024.
It states, "For India, our baseline forecast is for services exports to reach around 11 per cent of the GDP by 2030, compared to 9.7 per cent of GDP in 2023. In this scenario, assuming no significant moves in commodity prices and goods trade balance beyond 2024, the current account deficit could likely stay around 1 percent of GDP on average from 2024-2030."
Conclusion
India's rise as the 'services factory' of the world is a testament to the country's resilience, innovation, and commitment to embracing the digital age. The impressive growth in services exports, driven by factors such as the emergence of GCCs, the thriving IT industry, and the increasing demand for professional consulting services, has positioned India as a global powerhouse in the services sector.
However, sustaining this growth requires addressing domestic challenges, such as skilled workforce development and environmental sustainability, while also navigating potential external risks like rising protectionism. By addressing these challenges proactively and leveraging its strengths, India can cement its position as a leading services exporter and continue to drive economic growth and development within the country. The future holds immense potential for India's services exports, with ambitious targets and sustained growth projections. As the world becomes increasingly reliant on digital technologies and services, India's role as a services factory will continue to expand, contributing to the nation's economic prosperity and global competitiveness.
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