Manufacturing is key, but don’t snub services

The services sector’s contribution to the country’s GDP often gets eclipsed by the focus on rejuvenating the manufacturing sector. The argument favouring a robust manufacturing sector is that it creates many low-skill jobs required for weaning workers off agriculture and construction. But we forget that every year, record numbers of engineers, MBAs, other graduates and postgraduates enter the market. Despite quality issues, our education system has produced competent and highly skilled youth in the software industry and finance, legal and other professional fields. For years, the fear that despite being highly educated, some Indians lack soft skills like communication, creativity, etc., and hence are not suited for services sector jobs—may have been overplayed. So, the need is to create an enabling environment for this sector to grow the way the government wants the manufacturing sector to grow.

The services sector accounted for over 56% of gross value addition and 42% of the country’s total exports in FY23. Despite the focus on manufacturing, the services sector has emerged as a big foreign exchange earner for the country. The growth in services exports vis-à-vis merchandise exports is testimony to this fact. In the past decade, the country’s services exports have grown at a CAGR of 8.3% compared to the 3.8% for merchandise exports. Software exports dominated India’s services exports for a long time, but other professional services (legal, auditing, management consultation, engineering services, etc.) have started generating positive net export numbers. A big advantage India has over many developed countries is that higher education is still cheaper, allowing many school passouts to pursue it. This gives a cost advantage to India, which can provide a large pool of low-cost, high-skilled labour to service global businesses.

India has been signing several free trade agreements (FTAs) with developed countries to give Indian merchandise exporters access to larger markets. While doing so, the government should not lose sight of the services exports and must ensure that our exporters get ‘fair’ treatment in these FTAs. Recently, the Bar Council of India allowed foreign legal firms to offer services in India. The rule of reciprocity should ensure that Indian law firms can operate in foreign countries. Similarly, CAs, chefs and other services professionals from banking, finance and insurance must get easier access to other economies.