THE WORLD BANK South Asia Region : India 2004 Table of Contents Executive Summary 3 The Remarkable Dynamism of India's Service Sector 9 Liberalization and Performance of India's Service Sector 15 .DI and Performance of the Service Sector 17 Sustaining India's Services Revolution: External and Domestic Challenges 23 Barriers to Indian Service Providers Abroad 23 Barriers to .oreign Service Providers in India 25 Domestic Constraints and Policy Distortions 29 Regulatory Weaknesses 32 Achieving Social Goals in a Liberalized Environment 34 Harnessing International Negotiations to Obtain Improved Access and 41 Promote Domestic Reform India's Own Commitments under the GATS and its Potential Offer 41 Approaches to International Negotiations 42 Securing Liberal Access for India's Cross-border Exports of Services 45 A .ramework for Negotiating Liberalizing Commitments on Mode 4 46 The Role of the Approaches 49 Bibliography 53 Appendix: Pattern of Trade in Services 57 List of Tables Table 1. Barriers to Mode 4 and the Approach Suggested in the Model Schedule 48 Annex Table 1. GATS Commitments, Current Policy and Planned Liberalization 50 Appendix Tables : A1 - A5 58,61-64 List of .igures .igure 1. India's Services Sector Has Grown Rapidly and 9 So Has the Exports of Services and .DI into Services .igure 2. India's Exports of Goods and Services from a Global Perspective 10 .igure 3. India's Revealed Comparative Advantage 11 .igure 4. Changing Composition of India's Exports of Services 11 .igure 5. Changing Composition and Mode of Delivery of India's Software Exports 12 .igure 6. More Liberalized Sectors Seem To Have Grown .aster During the 1990s 15 .igure 7. India's Overall Productivity in Selected Segments of the Services Sector 17 .igure 8. Positive Association Between .DI and Growth 18 .igure 9. Positive Association Between .DI and exports in IT Sector 18 .igure 10. Exports of Computer-related Services from India 19 .igure 11. Indian Entrepreneurs .ace Significantly Higher Entry Costs While Starting a Business 29 .igure 12. Operating a Business Is Relatively Expensive in India 30 .igure 13. Predominantly State-owned Banking Systems Tend To Be Less Efficient 33 .igure 14. Liberalization of Services Sectors and Employment Growth 34 .igure 15. Business Generated Per Employee in Banking 35 .igure 16. Gross Non-Performing Assets of Banks 36 .igure 17. Employment in Services Sectors 36 Appendix .igures: A1 - A3 59-60 List of Boxes Box 1. Why Do Services Matter for Development? 16 Box 2. Effect of Privacy on Electronic Commerce 25 Box 3. India's Tenth Plan Report on Trade, .DI and WTO 42 Appendix Box : A1 57 Acknowledgments This Report has been prepared by Aaditya Mattoo, Deepak Mishra and Anirudh Shingal. The team was assisted by Vidya Kamath. Sections of this study draw on background research undertaken in collaboration with Sumanta Chaudhuri, Richard Self and Sacha Wunsch. The work was carried out under the direction of Sadiq Ahmed and Michael Carter. Marc Bacchetta, Tercan Baysan, Stephen Howes, Ijaz Nabi and Richard Newfarmer provided insightful comments on the manuscript. The team is grateful to S.N. Menon, R. Gopalan, and B.K. Zutshi for their guidance on the project. Valuable advice on different aspects of the study was provided by P.K. Srivastava, Sripriya Ranganathan and Bhuvanesvari Ravindran. The study benefited greatly from the contributions of, and discussions with, Manmohan Lal Aggarwal, Anil Baijal, G. N. Bajpai, Sunil Bhargava, Rupa Chanda, Bibek Debroy, Anwarul Hoda, Narendra Jadhav, Veena Jha, Matthew Joseph, Kiran Karnik, Rajiv Mehrishi, Arpita Mukerhjee, P.S. Narotra, Sanjay Nayar, Rupa Rege Nitsure, Andy Raheja, S.V. Ramachandran, Ajit Ranade, Ajay Shah, B.P Sharma, V.K. Sharma, Harsha Vardhan Singh, Jayanth Varma, and R.S. Vishwanathan. The team would like to thank Macro Graphics Private Limited for the design of the cover page, layout of the inside pages, and editing and printing the study. pg1 Executive Summary Executive Summary The Remarkable Dynamism of galvanized other parts of the Indian economy. On India's Services Sector the other hand, services sectors like retail and certain professional services, that have not been exposed to The emergence of India as one of the fastest sufficient domestic and foreign competition and growing economies in the world during the 1990s where the regulatory framework is weak, have failed is attributable in significant part to the rapid growth to create income or employment opportunities for of its services sector. During the 1990s, the Indian the economy. service sector grew at an average annual rate of 9 percent, contributing to nearly sixty percent of the overall Sustaining India's Services Revolution: growth rate of the economy. At the same time, India's External and Domestic Challenges exports of services displayed one of the fastest rates of growth in the world - over 17 percent per annum in the In order to sustain the dynamism of the services 1990s - and grew two and a half times faster than the sector, India must address two critical challenges: domestically focused part of the services sector. While externally, the problem of actual and potential the most visible growth has been in information protectionism; and domestically, the persistence of technology and business process outsourcing services, restrictions on trade and investment as well as other sectors, including telecommunications, financial weaknesses in the regulatory framework. services, community services and hotels and restaurants, have also grown considerably faster than GDP India needs to secure access to foreign markets over time. and counter current and potential protection. Cross border supply (GATS mode 1) and the presence of Access to external markets and domestic reform natural persons (GATS mode 4) are the two key modes have played an important role in this success. A of service delivery in which India has a comparative large part of the dynamism in the services sectors is advantage. Securing access to foreign markets through attributable to factors such as the high income these two modes presents contrasting challenges. The elasticity of demand for services, cost-reducing and presence of providers in foreign markets is highly variety-enhancing technological advances, and restricted, facing a range of barriers, including changes in the method of organizing production burdensome visa formalities, stringent quotas, and favoring increased outsourcing. But two other discriminatory taxes and standards. Cross-border factors have also played a significant role, namely supply faces few explicit restrictions. But the dramatic access to a growing external market for services and expansion of Indian exports and the perceived exodus of the gradual, though partial, liberalization of the white-collar jobs from importing countries is beginning domestic economy. Our analysis shows that to provoke protection. Measures proposed so far have liberalized services sectors like information sought only to prevent governments from procuring technology and telecommunications services have Indian services. But as the pain of adjustment grows, so attracted significant .DI, witnessed faster growth, will the temptation to introduce barriers in larger non- created more employment opportunities and government markets. 4 SUSTAINING INDIAS SERVICES REVOLUTION India must continue the process of trade and construction services and overlapping investment liberalization and eliminate the barriers responsibilities with regard to multimodal transport it still maintains in a number of service sectors. As have contributed to creating a fragmented and far as barriers to foreign providers are concerned, India's uncompetitive industry structure. Domestic service services sectors can be divided into three broad providers have thus been denied the opportunity to categories. A number of services sectors have seen attain economies of size and scope, and function substantial liberalization and are subject to few explicit efficiently. barriers, including software and other computer-related services, telecommunication services (though foreign Institutional and regulatory reforms would not only provide benefits to domestic consumers ownership is still restricted), tourism and maritime but also help India deal with regulatory transport (though cross-border trade is not completely impediments in foreign markets. While free). Sectors like banking, insurance, construction and significant efforts have been made to improve related engineering services and health are examples of regulation in services like telecommunications, services where the policy regime is moderately liberal ports, banking, insurance, and securities, in sectors with some explicit barriers. Services that have like education and healthcare services, weak experienced little reform and remain formally closed to regulatory regimes and inadequate enforcement of foreigners include many professional services like regulations have resulted in a huge disparity in the accountancy, the legal profession, and other services quality of services and the abilities of domestic sectors like retail distribution, postal and rail transport. service providers. In these sectors, successful The benefits already realized in the liberalized sectors liberalization requires strengthened regulation, to constitute a powerful argument for further liberalization. protect the interests of Indian consumers and to But eliminating barriers to foreign participation alone is help Indian service providers make a credible case not likely to be enough. that their qualifications and licenses should be In order to realize the full benefits of external recognized by foreign governments and regulators liberalization, Indian policy-makers must - which is vital to securing effective access to implement a number of significant domestic foreign markets for regulated services. reforms. Steps need to be taken to ensure that the .irst of all, it is vital to improve the overall benefits of liberalization also accrue to the investment climate by removing policy distortions poor and weaker sections of the society. There that affect all sectors of the economy, e.g., is concern that liberalization could lead to reduced excessive regulation, discretion in the allocation of access of the poor and disadvantaged groups to licenses and permits, burdensome bureaucratic services at an affordable price, and have negative and legal procedures, and corruption. These employment implications because adjustment takes inadequacies erode the gains from external time. The denial or neglect of these concerns could liberalization because they impede the efficient lead to social costs and undermine the support for operation of firms and the internal movement of reform. Supporters of liberalization often argue that capital and labor to areas where they would be the poor would be better off in liberalized markets most productive. than they are currently because incumbents have done so little to meet their needs. Even where this Restrictions on the operation of domestic firms is true, there is a strong case for instituting still maintained in a number of services sectors complementary policies to ensure that the efficiency must be eliminated. .or example, outdated laws gains from liberalized markets translate into more in road transport, quantitative restrictions in effective attainment of social goals. The challenge financial and accountancy services, excessive is to devise and implement efficient instruments to administrative and regulatory burdens in attain social goals rather than pursue them through EXECUTIVE SUMMARY 5 elaborate restrictions that involve large efficiency Stronger rules would enable Indian exporters to losses without commensurate gain in equity and challenge regulatory barriers in foreign markets, access. .or example, to ensure universal access to while helping promote and consolidate domestic banking services, the Government requires regulatory reform. compulsory bank branches in underprovided areas as well as compulsory lending to priority sectors. India can take a far more aggressive position in These polices have made some contribution to services negotiations thanks to its significant poverty alleviation, but may have been more unilateral liberalization. India's current policy in a appropriate when the sector was completely number of sectors is significantly more liberal than the government-owned. With the entry of domestic and access commitments made in the Uruguay Round. The foreign private banks, there is a need to look for challenge is to ensure that future commitments reflect alternative mechanisms that could help achieve the good economic policy rather than the dictates of universal access objective without sacrificing domestic political economy or international negotiating efficiency or becoming implicit barriers to entry. pressure. An informed judgment will require a thorough The relative success of the universal service analysis of the implications of, and rationale for, the funding mechanism in the telecommunications existing barriers to trade in services in India. In particular, sector should encourage the search for more it is essential to distinguish between the areas where efficient instruments. liberalization is prevented solely by the political power of vested interests - to which the WTO's reciprocal market Furthering India's Development Goals opening is an antidote - and the areas where regulatory or other problems need to be remedied to ensure that Through International Negotiations the full benefits of liberalization can be reaped. Even in While many of the policy challenges identified the latter case, if the time frame for reform could be above are purely domestic, and much can be predicted, the Government would be in a position to achieved unilaterally, international negotiations on decide whether to pre-commit in the WTO to future services trade, under the WTO's General Agreement liberalization, in order to lend credibility to the reform on Trade in Services, can help. Until recently, program and/or to obtain a negotiating benefit. according to India's Tenth .ive Year Plan Report (T.YPR), Demonstrating a willingness to open its own market - India's strategy in trade negotiations has been largely immediately or gradually - would strengthen Indian defensive. The T.YPR argues that such a status-quoist proposals designed to secure access to foreign markets position, while consistent with an inward looking for its own exports. development strategy, is less appropriate to the current Bold and innovative approaches are needed to context where India seeks to exploit the opportunities secure access to foreign markets. As India seeks offered by the international economy. Evidence suggests improved access for its exports, it must determine the that this proposed shift in India's basic negotiating stance appropriate approach to international negotiations, and is indeed an urgent requirement, and could help India's choose in particular between two alternatives. One is development and transformation prospects in three ways: the traditional bilateral request-and-offer approach, The process of reciprocal opening could deliver whereby it must separately induce each trading partner improved access to foreign markets and more to make commitments in each sector of export interest. rapid liberalization at home than can be The other approach is the use of generally applicable accomplished unilaterally. negotiating formulae or model schedules that would lead to all Members making comprehensive Legally binding commitments by India's trading commitments. In the past, India, and many other partners would lock-in access to foreign markets countries, have supported the request-and-offer while India's own commitments would lend approach because it allows considerable freedom to credibility to domestic reform. decide on how much to liberalize. There might, 6 SUSTAINING INDIAS SERVICES REVOLUTION however, be a case for a more aggressive approach in restrictive immigration regimes greater scope GATS modes 1 and 4 where India has a comparative for service delivery per se. The experience of advantage, and it is not confined to a closed list of past negotiations does not provide cause for sectors but is evolving to span the whole breadth of optimism, but it may be possible to take services sectors. This paper identifies options in the advantage of the growing coincidence of interest GATS framework that could at the very least provide a with foreign multinationals, who also seek greater framework for negotiations and may well serve as a mobility of their personnel. The mode 4 option basis for liberalizing commitments by all or a critical would seek liberal access for the strictly temporary mass of WTO Members: (for at most one year) movement of skilled With regard to cross-border trade, India must professionals as intra-corporate transferees and to seek to pre-empt potential protectionism by fulfill services contracts. .or these classes of locking in the current open international trade providers, movement would be facilitated by the regime. The most ambitious mode 1 option would creation of a service provider visa with streamlined require all WTO Members to commit under the and transparent procedures, as well as a GATS to maintain liberal cross-border trade in commitment by countries not to impose services, except in the narrow set of financial and burdensome qualifications or licensing transport services where such trade is already requirements. restricted. Such a departure from the GATS India's developmental aspirations depend to a tradition of flexibility and gradualism is necessary considerable extent on its ability to sustain the because there is no clear gain but an obvious rapid growth of its services sectors. Such growth in protectionist danger if countries retain the freedom turn depends on its ability to secure improved access to to restrict cross-border trade. A commitment to foreign markets, create a more competitive liberalized free trade would in no way deprive India and other domestic economy and develop appropriate regulatory countries of the right to regulate in a non- institutions. With a concerted effort, involving discriminatory manner. aggressive reform at home and proactive engagement With regard to the presence of natural in international negotiations, India can sustain its persons, the task is to carve out of highly services revolution. Pg7 The Remarkable Dynamism of The Remarkable Dynamism of IndiasIndias Services Sector Services Sector T he emergence of India as one of the fastest in the 1990s - and grew two and a half times faster than growing economies in the world during the 1990s the domestically focused part of the services sector. The is attributable in significant part to the rapid foreign direct investment (.DI) in services also grew growth of its services sector. During the 1990s, the significantly faster than in goods (.igure-1). While the Indian service sector grew at an average annual rate of most visible growth has been in information technology 9 percent, contributing to nearly sixty percent of the and business process outsourcing services, other sectors, overall growth rate of the economy.1 At the same time, including telecommunications, financial services, India's exports of services displayed one of the fastest community services and hotels and restaurants, have rates of growth in the world - over 17 percent per annum also grown considerably faster than GDP over time. .igure 1: India's services sector has grown rapidly and so have the exports of services and .DI into services Source: World Development Indicator, Balance of Payments Statistics Year Book (2002). 1 Unless explicitly stated, all the economic data in this report are expressed in current US dollar to facilitate inter-country comparisons. .or example, the 9 percent growth rate of the services sector during the 1990s is based on GDP in US dollar. 10 SUSTAINING INDIAS SERVICES REVOLUTION .igure 2: India's exports of goods and services from a global perspective Source: IM.'s Balance of Payments Statistics Year Book (2002), NASSCOM Unlike its experience in trade in goods, India, in a short percent (figure -3, left panel). This increase in the RCA span of time, has emerged as one of the most dynamic index in services is on account of the category called suppliers of services in the world. As shown in figure-2, 'other business services,' which includes software India today accounts for 1.4 percent of global exports in exports, finance, communication, management and services, compared to 0.7 percent in goods. In recent consultancy services amongst others.3 Between 1996 years, services exports have increased at an annual and 2000, while the RCA of other business services average rate of 23 percent compared to only 5.4 increased by 327 percent, it fell by 19 and 32 percent percent in the case of goods, while world exports of in travel and transportation services respectively (figure goods and services have grown at an average annual - 3, right panel). It is however, important to point out rate of 3.9 and 3.7 percent, respectively. India's position that these estimates must be interpreted with caution of strength in trade in services vis-à-vis goods is also because the RCA index is in many ways a crude apparent when export performance of individual items measure of comparative advantage. It does not within the two sectors is compared: textile and apparel, account for intra-industry trade, nor does it take into one of India's leading export items in goods, and consideration the presence of trade barriers. Moreover, software, a major service export (figure-2). since the index is based on balance of payments (BOP) India exhibits a strong revealed comparative advantage data, it does not give any indication of India's (RCA) in services relative to goods.2 Between 1996 and comparative (dis)advantage in supplying services 2000, while the RCA index for services increased by 74 through commercial establishments or the movement of percent, the RCA index for goods declined by 15 individual service suppliers. 2 An RCA index for a sector is calculated by taking the share of a particular sector's exports in that country's total exports of goods and services, and dividing this by the ratio of global exports in this sector to the total global exports of goods and services. An RCA index with value greater than unity indicates a comparative advantage in the concerned sector, while a value less than unity indicates a comparative disadvantage. 3 The term 'software exports' is used here in a generic sense to include exports of all information technology services (ITS) and business process outsourcing (BPO). THE REMARKABLE DYNAMISM O. INDIAS SERVICES SECTOR 11 .igure 3: India's Revealed Comparative Advantage Change Change in RCA in RCA =+74% =327% Change in RCA =-15% Note: 1. Other business services include software exports, communication, management and consultancy services, financial services, construction, news agency services etc 2. Other services include insurance and government services. Source: IM.'s Balance of Payments Statistics Year Book (2002) The increased specialization of India's exports of services exports have expanded from $1.8 billion in 1997/98 to in a selected set of sub-sectors within the services sector over $7 billion in 2001/02 - at an average annual rate is also reflected in the changing composition of its of 46.3 percent per year - and now account for almost exports. Between 1995-2002, the relative shares of half of miscellaneous business, professional, and travel and transportation services have fallen from 31 technical services. and 19 percent to 14 and 10 percent, respectively, while There appears to be a major shift underway in the the share of software exports increased from 19 percent exports of IT and business process outsourcing (BPO) to 34 percent (.igure 4). In dollar terms, software services in terms of the composition and mode of .igure 4: Changing composition of India's Exports of Services Source: RBI Bulletins. 12 SUSTAINING INDIAS SERVICES REVOLUTION .igure 5: Changing composition and mode of delivery of India's software exports Source: NASSCOM, World Bank Staff delivery of exports.4 As recently as 1997/98, nearly 96 clients' location, i.e. "on-site." Only one out of every five percent of all software exports from India were in the dollars of export orders were carried out within India, i.e. form of information technology services (ITS), like "off-shore". By 2002/03, off-shoring became the custom application development, application dominant mode of delivery of software exports, outsourcing, packaged software installation and accounting for almost 58 percent of total exports5 support, network infrastructure management, IT training (figure - 6, right panel). The rising share of BPO services and education, network consulting and integration, and in total exports and the off-shore delivery model have hardware installation and support (figure - 5, left panel). led to increased employment opportunities in India and On the other hand, BPO services, comprising data entry, have also raised the prospects of sustaining the high data conversions, medical transcriptions, insurance growth rate of software exports in the future. claims, call centers, database services, etc., were only 4 There are no signs that this growth will slow down. percent of total exports. In a short-span of four years, the According to a report by NASSCOM and McKinsey, BPO services category has grown to 24 percent of total exports of information technology related services software exports, registering an average annual growth from India are expected to increase from US$ 7.9 rate of more than 100 percent in the last five years. billion in 2001/02 to US$ 57 billion by 2008/09, As the bulk of BPO services are processed in India, growing at an average annual rate of 38 percent.6 A unlike ITS which involve some visits to clients' sites, this study by Deloitte Research shows that the global has had a major impact on the mode of delivery of market in off-shore financial services could be as software exports. In 1993/94, nearly 62 percent of all large as US$ 356 billion by 2008/09 of which a large software exports from India were carried out at the share would go to India. 4 IT-enabled services are not shown as a separate category in the IM. BOP statistics. The data here is based on NASSCOM estimates. 5 The "off-shore" delivery model (or "off-shoring") refers to the relocation of business functions and processes to a lower-cost location on a long- term basis. Off-shoring, as will be used here, includes, both the decision of foreign firms to establish subsidiaries in India and/or to engage a third-party company to operate and administer the activities (also called "out-sourcing"). 6 This includes both information technology services, ITS, and business process outsourcing (BPO) services. pg 13 Liberalization and Performance of Liberalization and Performance of India'sIndia's Services Sector Services Sector A ccess to external markets and domestic reform created more employment opportunities and galvanized have played an important role in creating a other parts of the Indian economy. On the other hand, dynamic services sector in India. While factors services sectors like retail and certain professional such as the high income elasticity of demand for services, services that have not been exposed to sufficient domestic cost-reducing and variety-enhancing technological and foreign competition and where the regulatory advances, and changes in the method of organizing framework is weak have failed to create income or production favoring increased outsourcing have played a employment opportunities for the economy. vital role, two other factors have played an equally critical Over the past decade, India has made considerable role in sustaining this dynamism, namely access to a advances in reducing the role of the state in the growing external market for services and the gradual, provision of key infrastructure services and opening though partial, liberalization of the domestic economy.7 service industries to domestic and foreign competition in Our analysis shows that liberalized services sectors like telecommunications, banking, insurance, business and information technology and telecommunications services health services. Although the gains are hard to quantify, have attracted significant .DI, witnessed faster growth, these reforms have undoubtedly produced economy- .igure 6: More liberalized sectors seem to have grown faster during the 1990s than the less liberalized ones Source: CSO, World Bank Staff Estimates. 7 See Gordon and Gupta (2003). 16 SUSTAINING INDIAS SERVICES REVOLUTION wide benefits, both in terms of sectoral efficiency and technological externalities - knowledge spillovers or growth performance (Box -1). There is some evidence to technology diffusion - for the local economy. It is, suggest that the reforms, combined with access to the however, difficult to estimate productivity precisely, global market, seem to have played a role in raising the particularly in the services sector, where differences in growth rates of a number of services sectors (figure - 6). the quality of output and the skill intensity of inputs tend On the other hand, sectors that have witnessed limited to vary considerably more than in the case of goods. opening, like air transport, legal services, real estate, dwellings, railways, post, and storage, have grown less Despite these difficulties in measurement, there is slowly than the rest of the services sector.8 But these evidence of wide disparity in the productivity levels observations should be treated with caution because we across various segments of the services sector in India. A are at this stage not in a position to control the other report by McKinsey & Co., which analyzed six services determinants of growth in these sectors. sectors - telecommunications, software, retail banking, housing construction, energy distribution (electricity) and The above findings are corroborated by the evidence on retail distribution - found that India's software industry productivity changes. .irst of all, in the case of India, has the highest productivity levels amongst all segments studies have shown that the overall productivity of the of the services sector in India (figure-7). The McKinsey Indian economy increased considerably after the report found that even in 1998, the labor productivity of 1990/91 reforms. Productivity is affected by, among Indian software services companies was at 50 percent of other things, the inflow of foreign direct investment and US levels and the best practice companies in India had international trade, both of which can create already matched the average productivity of US firms.9 Box 1: Why Do Services Matter for Development? In developing countries, the average share of services in GDP increased from around 40 percent in 1965 to around 50 percent in 1999, while in the OECD countries the average share increased over the same period from 54 percent to over 60 percent. Among the fastest growing sectors in many countries are services such as telecommunications, software, and finance. Efficient services not only provide a direct benefit to consumers, but also help shape overall economic performance. An efficient and well-regulated financial sector leads to the efficient transformation of savings to investment, ensuring that resources are deployed wherever they have the highest returns; and facilitates better risk-sharing in the economy. Improved efficiency in telecommunications generates economy-wide benefits, because this service is a vital intermediate input and also crucial to the dissemination and diffusion of knowledge. The spread of the Internet and the dynamism that it has lent to economies around the world is telling testimony to the importance of telecommunications services. Similarly, transport services contribute to the efficient distribution of goods within a country, and are particularly important in influencing a country's ability to participate in global trade. Although these are the more prominent services, others are also crucial. Business services such as accounting and legal services are important in reducing transaction costs - the high level of which is considered one of the most significant impediments to economic growth in Africa. Education and health services are necessary in building up the stock of human capital. Retail and wholesale services are a vital link between producers and consumers, and influence the efficiency with which resources are allocated to meet consumer needs. Software development is the foundation of the modern knowledge-based economy. Environmental services contribute to sustainable development by helping alleviate the negative impact of economic activity in the environment. Source: World Bank staff. 8 Some of these sectors have only been liberalized recently and growth may respond after a lag. 9 There is however a large disparity in the productivity levels within the Indian software sector. While the service companies had labor productivity of 50 percent of US levels, the product companies had achieved only 12 percent of US productivity levels. The labor productivity of the Indian software sector was therefore only 44 percent of the US average. LIBERALIZATION AND PER.ORMANCE O. INDIA'S SERVICES SECTOR 17 .igure 7: India's overall productivity in selected segments of the services sector relative to US Source: McKinsey Report, August 2001. The telecommunications sector, where the ownership The distribution sector is India's largest services sector structure has changed considerably in a very short and is also among its most fragmented and protected period of time from government owned incumbents sectors. India has one of the highest retail outlet to a competitive market structure with presence of densities in the world, with nearly 12 outlets per 1,000 both domestic and foreign private firms (joint persons, compared to 5 and 4 outlets per 1,000 ventures), has also achieved significantly high persons in Europe and US, respectively. The productivity levels. Its overall productivity is supermarkets, hypermarkets, department stores, and estimated to be 48 percent of US levels. Like specialty chains account for only 2 percent of retail telecommunications, retail banking services in India sales in India compared to 85, 55, 40, 36, and 30 were also heavily regulated in the past. But unlike percent in US, Malaysia, Thailand, Brazil, and telecommunications, the liberalization of the banking Indonesia, respectively. Given that India's retail format sector has been rather slow. Large government is heavily skewed towards counter stores and street ownership, historical legacies in the form of high vendors and away from supermarkets, and the latter non-performing assets (NPAs) and a bloated work being more productive than the former, India's force, low competition due to restrictions on licenses productivity in retail distribution is low at 6 percent of for new banks, etc., have affected the productivity US levels. level of the sector. According to the McKinsey report, the productivity level of retail banking is 12 percent FDI and performance of the services of that of US (figure-7). sector .rom a global perspective, India's construction sector is Large inflows of foreign direct investment (.DI), apart small, fragmented, and characterized by low levels of from greater market access and significant domestic productivity. The productivity levels of India's reforms, also seem to have contributed to the high construction sector is only 8 percent of US levels. While growth rate of the services sector. India has been the sector itself is not highly regulated, it is subject to a cautiously, but steadily, liberalizing .DI in the services number of external constraints and regulatory sector since 1990/91. While the inflows of .DI have not impediments, e.g. cumbersome land registration been uniform across all segments due to various external procedures, regulations on land ceiling, complex factors and sector-specific barriers, the segments that tenancy laws, rent control, stringent regulations on hiring have received higher .DI have grown more rapidly than of contract labor, high stamp duties, and poor those that have received less .DI (figure-8). The three enforcement of building codes and byelaws. fastest growing segments in the services sector, namely 18 SUSTAINING INDIAS SERVICES REVOLUTION .igure 8: Positive Association Between .DI and Growth Source: Report of the Steering Group on .DI, CSO Note: Size of the bubble represents the size of the GDP of that sector business services, telecommunication, and hotels and of GDP to 2.5 percent by the end of the plan period, if restaurants, are also the three highest recipients of .DI India is to achieve the targeted 8 percent growth rate in the services sector. On the other hand, distribution, during the 2002-07 period. the largest segment of the services sector in terms of GDP, where .DI has been restricted at the retail segment, Higher inflows of .DI have also been associated with has been one of the slowest growing segments in the more exports in the services sector. Within the services sector. Although a scatter plot like the one individual segments of the services sector, there below does not conclusively demonstrate that higher .DI appears to be a strong association between .DI, inflows are the cause of higher growth in these services growth, and exports. The IT sector is an illustration in sub-sectors, it does suggest that there is a strong positive this regard. Among the states that are the largest co-movement between the two. India's tenth plan report exporters of IT services10 in India, the states with higher envisages that .DI as a percent to GDP would have to .DI are also the ones with higher exports (figure -9). increase from the current low level of less than 1 percent Karnataka, by far the leader in exports of IT services in .igure 9: Positive association between .DI and exports in IT sector - - Source: NASSCOM 10 Here IT services include BPO services. LIBERALIZATION AND PER.ORMANCE O. INDIA'S SERVICES SECTOR 19 .igure 10: Exports of computer-related services from India: Share of foreign versus domestic firms Source: NASSCOM India, is also the state with the largest foreign firms accounted for as much as 27 percent of total presence, followed by Maharashtra, Tamil Nadu, Uttar software exports from India. The share of foreign Pradesh and Andhra Pradesh.11 firms is considerably larger in the BPO services, In sectors like IT, the share of foreign firms in total which is the fastest growing segment of the IT sector exports is large and growing. In 2001/02, foreign (figure -10). 11 Such a positive association between .DI and exports is well documented in the literature. .oreign investment in China is found to account for as much as 45 percent of China's exports of goods. Nearly 68 percent of trade between China and Hong Kong, China, is also found to have been related to foreign direct investment between the two (.ung, 1996). Similarly, studies have shown that .DI from Japan to South East Asian countries significantly increased bilateral trade between the two. pg21 Sustaining India's Services Revolution: Sustaining India's Services Revolution: External and Domestic Challenges External and Domestic Challenges I n order to sustain the dynamism of the services sector restrictions. But the dramatic expansion of Indian exports and to achieve the Tenth Plan target of 8 percent and the perceived exodus of white-collar jobs from average annual growth rate of GDP, India must address importing countries is beginning to provoke protection. at least the following critical challenges12: (i) Barriers to Measures proposed so far have sought only to prevent Indian service providers abroad; (ii) Barriers to foreign governments from procuring Indian services. But as the service providers in India; (iii) Domestic constraints pain of adjustment grows, so will the temptation to and policy distortions (iv) Weaknesses in the regulatory introduce barriers in larger non-government markets. framework; (v) Achieving social objectives in a liberalized environment. Cross border supply In a world where technology increasingly allows the spatial Barriers to Indian Service Providers fragmentation of goods and services production and where Abroad off-shoring to operational units abroad or even outsourcing India needs to secure access to foreign markets and to foreign third party service providers is increasingly counter current and potential protection. Cross border popular with multinational enterprises, India has managed supply (GATS mode 1) and the presence of natural to secure a leading position in the export of a number of persons (GATS mode 4) are the two key modes of services. As we saw in Section I, in addition to being a service delivery in which India has a comparative leading supplier of IT Services, India is now witnessing advantage. In these modes, it is natural to think of striking growth of exports of so-called Business Process India's interest on a horizontal basis because exports are Outsourcing (BPO) services. The latter service activity arises not confined to a closed list of sectors but span the from the outsourcing (or out-location) of non-core business whole breadth of services sectors, especially if we take a processes throughout the value chains of both dynamic view of India's evolving comparative manufacturing and services industries. Even within BPO advantage. This is not to deny the significance of other activities, India has moved from providing only low-end modes: consumption abroad (GATS mode 2) is relevant back-office services (data entry, etc.) to more integrated and for certain services like education and health, and higher-end service bundles in fields like customer care, commercial presence (GATS mode 3) is increasingly human resource management and product development. important in IT and banking services. Every day the boundary between hitherto non-tradable and currently tradable services shifts somewhat. There are no Securing access to foreign markets through modes 1 obvious limits to the range of services (and not just BPO and 4 presents contrasting challenges. The presence of services) that could be exported by India. It is not unrealistic providers in foreign markets is highly restricted, facing a to assume that technology, the Indian skill set and business range of barriers, including burdensome visa formalities, practices will evolve further to make possible and profitable stringent quotas, and discriminatory taxes and cross-border trade in ever more sophisticated services (R&D, standards. Cross-border supply faces few explicit engineering services, etc.). 12 This is not meant to be an exhaustive list of challenges facing India's services sector. 24 SUSTAINING INDIAS SERVICES REVOLUTION The effects of this increased integration into the global education rise, developed countries will face an economy will have a profound impact on India's increasing scarcity, in particular, of moderately and less economic growth, its labor market and its occupational skilled labor. Given that there is really no substitute for structure. The development potential of cross-border trade human labor, at least in some occupations (e.g., the in services is not limited to India. Other developing caring occupations, personal services, and a range of countries will also enter the BPO and other services professional services), the demand for mode 4 is likely to markets in parallel with increasing Indian wages and a increase over time. move of Indian service suppliers to a higher position on But mode 4 faces a range of barriers in all countries. A the value chain. major problem is that the temporary movement of Unfortunately, the well-publicized creation of jobs in service providers invariably comes under the purview, India's service economy, and the potentially broader not of international trade policy, but of immigration emergence of developing countries as offshore service legislation and labor market policy. Visa formalities are providers for the industrialized world, has created fears in themselves a significant obstacle, and the conditions in the North that may translate into protectionism. attached are used to implement a range of restrictions. Because the job creation process in countries like India These include prohibitions and quotas either explicitly is perceived as an exodus of white-collar jobs by or through a variety of economic needs tests. Wage- industrialized countries, labor unions and politicians, parity conditions tend to erode the cost advantage of concerns have increasingly been voiced about this hiring foreigners and have the same restrictive impact as relocation of work. Much attention has been given to the quotas. Discriminatory treatment is implemented fact that in several U.S. states, for example, legislation is through a variety of fiscal and regulatory means. Non- pending that will introduce an outsourcing ban with recognition of professional qualifications poses a respect to government contracts. But there are many particular challenge because of the difficulty in more less blatant measures that could be introduced to distinguishing between legitimate and protectionist create barriers to the cross-border trade in services. In denial of recognition. Europe, for example, legal norms designed to protect The elimination of impediments would generate gains not workers in outsourced deals, known as TUPE (Transfer of just for India and other exporting countries but also for the Undertakings and Protection of Employees), as well as importing countries. Recent estimates suggest that there recent privacy directives, could have an inhibiting effect are huge returns to even relatively small movements of on trade. India and other developing countries must, labor. .or example, it is estimated that an increase in therefore, address the question of how liberal cross- developed countries' quotas on the inward movements of border trade of services can be secured. both skilled and unskilled temporary workers equivalent to 3 percent of their work forces would generate an increase Presence of natural persons in world welfare of over US$150 billion a year. Both There is little doubt that despite the dramatic developed and developing countries would share in these development in technologies for electronic delivery, gains, and they would be largest if both high-skilled mode 4 will remain important for a range of services. As mobility and low-skilled mobility were permitted. However, we saw above, the movement of service-supplying it is also true that fears about cultural identity, problems of personnel remains a crucial means of delivery even for assimilation, and the drain on the public purse, are much the Indian software industry - with close to half of Indian more acute with regard to the movement of less skilled exports still supplied through the temporary movement workers than the movement of skilled professionals. of programmers to the client's site overseas. Given its Consumption abroad current and potential endowments of both professionals and less skilled service providers, India has an interest in India has an interest in the export of health services by mode 4 well beyond IT-related services. In fact, as their attracting foreign patients to domestic hospitals and populations age and their average levels of training and doctors. Cost savings for patients and health insurers SUSTAINING INDIA'S SERVICES REVOLUTION: EXTERNAL AND DOMESTIC CHALLENGES 25 can be significant. .or example, the cost of coronary developing countries, they would bring with them possibly bypass surgery could be as low as Rs 70,000 to 100, US$30 to 50 billion annually in personal consumption and 000 in India, about 5% of the cost in developed $10 to 15 billion in medical expenditures (UNCTAD and countries. Similarly, the cost of a liver transplant is WHO, 1998). one-tenth of that in the United States (UNCTAD and WHO, 1998). Impediments created by domestic regulations in foreign markets for all modes But a major barrier to consumption abroad (mode 2) of medical services is the lack of portability of health Domestic regulations to deal with market failure can in insurance. .or example, US federal or state government themselves be impediments to competition and trade, reimbursement of medical expenses is limited to licensed, as a result of differences across jurisdictions in certified facilities in the United States or in a specific U.S. technical standards, qualification and licensing state. In EU countries also, public insurance does not cover requirements in professional, health, education and elective care received abroad, and Canada only makes an numerous other services. In many cases, the impact on exception for cancer treatment in some neighboring US trade is an incidental consequence of the pursuit of a states.13 The lack of long-term portability of health coverage legitimate objective, but in some cases regulation is a for retirees from OECD countries is also one of the major particularly attractive means of protecting domestic constraints to trade. In the United States for instance, suppliers from foreign competition. Domestic Medicare covers virtually no services delivered abroad. regulations affect India's trade through all modes, and Other nations may extend coverage abroad, but only for are the main challenge to ensuring open conditions for limited periods such as two or three months. This constraint electronic delivery of services. is significant because it tends to deter some elderly persons from traveling or retiring abroad. Those who do retire Barriers to Foreign Service Providers abroad are often forced to return home to obtain affordable in India medical care. The potential impact of permitting portability could be substantial. If only 3 percent of the 100 million As far as barriers to foreign providers are concerned, elderly persons living in OECD countries retired to India's services sectors can be divided into three broad Box -2: Effect of Privacy on Electronic Commerce An issue that could have a profound effect on electronic commerce is privacy. In late 1998, the European Union issued a wide-ranging directive that aims to safeguard the privacy of personal data of EU citizens and prevent its misuse worldwide. It is backed by the power to cut off data flows to countries that the EU judges not to have adequate data protection rules and enforcement. The directive caused frictions with the US, which accused the EU of trying to impose laws beyond its own frontiers. A compromise was reached under which the US agreed to set up arrangements for the processing by companies of personal data from the EU, but the issue has not been fully resolved. The issue could have an impact on India's exports of data processing services and poses a difficult choice. If it chooses not to enact laws deemed adequate, they could be shut off from participation in this growing market. In the absence of such laws and cumbersomeness of legal systems, it might be difficult for private firms to emulate United States firms like Microsoft and credibly commit to meet the required high standards. If it does enact stringent laws, they should be made specific to trade with particular jurisdictions, otherwise the result could be an economy-wide increase in the costs of doing business.14 Source: World Bank Staff 13 European citizens are covered for emergency and elective care within the European Economic Area (EEA). However, for elective care, they have to receive prior authorization from their local/national authority; the criteria for authorization vary, but can be very strict. 14 .or instance, if private sector estimates generated in the United States are to be believed, information sharing saves the customers of 90 financial institutions (accounting for 30 percent of industry revenues), $17 billion a year ($195 per average customer household) and 320 million hours annually (4 hours per average customer household) (Glassman, 2000). 26 SUSTAINING INDIAS SERVICES REVOLUTION categories. A number of services sectors have seen 1991-2002, i.e. 6.4 percent of all .DI approvals in this substantial liberalization and are subject to few explicit period.17 barriers; these include software and other computer- related services, telecommunication services (though In telecommunications, the extent of India's foreign ownership is still restricted), tourism and autonomous relaxation of foreign ownership restrictions maritime transport (though cross-border trade is not - ranging from 49 percent to 100 percent across completely free). Sectors like banking, insurance, different segments - far exceeds its commitments under construction and related engineering services and health GATS, which is 25 percent in wire-based and cellular are examples of services where the policy regime is services and 51 percent in data and message moderately liberal with some explicit barriers. Services transmission services. In value-added services like that have experienced little reform and remain formally electronic mail, voice mail, electronic data interchange, closed to foreigners include many professional services on-line information and data processing, and in internet like accountancy, legal, and other services sectors like service providers without gateways, 100 percent .DI is retail distribution, postal and rail transport. The benefits allowed, subject to a 26 percent disinvestment condition already realized in the liberalized sectors constitute a and .IPB approval beyond 49 percent. In other powerful argument for further liberalization.15 segments of telecommunications services, barring telegraph services, .DI up to 49 percent is allowed via Significantly liberalized sectors the automatic route. .or internet service providers with gateways, .DI is capped at 74 percent, with .DI beyond Two of the most liberalized services sectors in India today 49 percent subject to .IPB approval. are software (computer-related) services and telecommunication services. While India has committed Encouraged by these liberal policies, a large number of under the GATS to allow .DI up to 51 percent in foreign companies have entered this sector. The sector computer-related services, it has autonomously has seen $5.6 billion worth of .DI approvals between liberalized this sector almost completely with very few 1991-2002 (19.7 percent share of all .DI approvals), explicit barriers. Today 100 percent .DI via the making it the largest recipient of .DI among all automatic route16 is permitted in almost all segments of segments of the services sector. Domestic and external the software sector including consultancy services liberalization have combined with technological related to installation of computer hardware, software developments to produce dramatic improvements in implementation, data processing, data base and other sectoral performance. Teledensity has increased from services. The only explicit restriction is in case of the the extremely low 4 per 1000 in 1986 to 45 per 1000 business to business (B2B) e-commerce, which is subject persons in January 2002. Calling prices have also to approval by the .IPB and where the foreign promoters declined significantly. .or example, the average price of are subject to a 26 percent disinvestment condition. a one-minute call to the United States was around Rs. Most software companies in the .ortune 100 list have 75 in 1995 and now it is less than Rs. 20. The average taken advantage of the liberal policies and have set-up price of a one-minute wireless call within the same wholly owned subsidiaries in India (e.g. IBM, Microsoft, circle has fallen from around Rs. 12 in 2000 to Rs. 3 in Sun Microsystems, Oracle, Dell, Texas Instrument, and 2003. Notwithstanding these achievements, the sector Hewlett Packard). Computer related services accounted faces substantial challenges, in the form of policy for as much $1.8 billion worth of .DI approvals between uncertainty on tariff, inter-connection regimes, and 15 A few caveats are in order. In our discussion, more emphasis is placed on the sectors for which reliable information could be collected in the limited time available for this study. These sectors are telecommunications, software, financial services, accountancy, legal, construction, and certain segments of transportation services. Second, the discussion here is primarily based on the existing literature and a number of personal interviews with industry experts. Much more detailed research is essential to identify the rationale for existing policies and chart a possible course for reform. 16 The alternative to automatic approval is obtaining the approval of the .oreign Investment Promotion Board (.IPB). 17 Source for all data on .DI approvals over 1991-2002 is the SIA Newsletter, January 2003. SUSTAINING INDIA'S SERVICES REVOLUTION: EXTERNAL AND DOMESTIC CHALLENGES 27 unmet universal service obligations (USOs). While an period. As of now, there are 18 foreign banks operating independent regulator in the form of the Telecom in India, but this number has declined from 39 in 1997. Regulatory Authority of India (TRAI) has been Moreover, the concentration ratios in the Indian established through a Statutory Act, some "teething banking sector have remained virtually stagnant over problems" on the regulatory front continue to affect the the 1990s. The share in total deposits of the top five performance of the service providers. banks, all of which are public sector banks, has changed from 50.2 in 1993 to 48.1 in 2000. The Moderately liberalized sectors with a few continued dominant position of public sector banks in explicit barriers the Indian banking system is also revealed by the fact Sectors like financial services, construction and related that public sector banks account for over 85 percent of engineering services, health, and air transport services, the employment and 81 percent of the deposit base of are examples of services where the policy regime is India's commercial banks. The old private banks have a moderately liberal with some explicit barriers. market share of 8.5 percent; foreign bank branches have increased from 130 in 1969 to only 175 in 1999, .DI up to 49 percent has been permitted in banking and they have seen their market share fall from 7.5 and other financial services except insurance, subject percent in 1994 to 6.5 percent in 1999; the remaining to approval by the RBI. The Union Budget for 1993-94 4 percent of the market is accounted for by the new calls for this limit to be extended to 74 percent. .oreign private banks that were allowed to enter after 1993. banks, however, can only operate through licensed branches and as subsidiaries. There is a cap on the .oreign sector participation in the insurance sector is number of licenses for branches at 12 per annum for restricted to 26 percent but is via the automatic route. both new and existing banks. Unlike domestic banks, While Indian firms can independently set up firms, foreign banks operating through licensed branches are foreign firms are allowed entry only through partnerships not obliged to open offices in rural areas. But if they or joint ventures.18 The IRDA Act stipulates that the funds enter as subsidiaries, then they must meet the rural of policyholders be retained within the country and that branching requirement, i.e. at least one-quarter of the there be compulsory exposure to the rural and social total branches need to be opened in rural centers and sector and the backward classes, including crop semi-urban areas. They also have to ensure that a insurance, as fixed by the IRDA. Most financial sector certain proportion of their overall credit disbursals (32 experts believe that foreign insurance providers will find percent for licensed branches and 40 percent for it more difficult to meet these social sector obligations. subsidiaries) goes to the priority sector comprising credit The insurance sector has witnessed entry of 21 new to small-scale industries and credit for export. Moreover, private service providers between April 2000 and the share of foreign bank assets in total banking assets August 2002, with 12 of them in the life insurance should not exceed 15 percent. .DI and portfolio segment and the remaining 9 in the general investment in nationalized banks are also subject to an insurance segment. Of these, four in life-insurance overall 20 percent statutory limit. .inally, voting rights for and five in general insurance are joint ventures shareholders of foreign banks are restricted to 10 involving foreign firms including New York Life, percent, but the Union Budget for this year calls for a Prudential Insurance, Allianz, AIG and ING, for relaxation of this restriction. Most of these stipulations instance. Insurance services have witnessed .DI are part of the Indian Banking Regulation Act, 1970. approvals worth US$ 0.4 billion in just two years Total .DI approvals in banking and finance have been since the opening up of this sector. to the tune of US$ 1.25 billion between 1991-2002, Within the construction and related engineering accounting for 4.4 percent of all .DI approvals in this services, .DI is not permitted in the real estate sector, 18 Apart from limit on .DI, there is a minimum capitalization requirement for life and general insurance companies at Rs. 1 billion and at Rs. 2 billion for reinsurance companies. 28 SUSTAINING INDIAS SERVICES REVOLUTION but there is no cap on .DI in the other sub-sectors of participation. We discuss here only the explicit barriers to the construction sector and is through the automatic foreign service providers in the accountancy and legal route. There is a stipulation that the minimum area services and in retail distribution. developed by a foreign company be 100 acres. There .DI is not allowed in the accountancy sector and are minimum capitalization norms at US $10 million foreign service providers are not allowed to undertake for wholly-owned subsidiaries and at US $5 million for statutory audit of companies as per the provisions of the joint ventures with Indian partners. .inally, there is a Institute of Chartered Accountants of India, the Institute minimum lock-in period of three years from the of Cost and Works Accountants of India and the Institute completion of minimum capitalization before original of Company Secretaries of India Acts. There are also investment can be repatriated. Only US $0.3 billion restrictions on advertising and the use of international worth of .DI has been approved in this sector between brand names is not allowed. 1991 to 2002, which is less than one percent of total .DI approvals in this period. The Advocates Act and the Bar Council of India Rules that regulate the practice of law in the country, There is no cap on .DI in health services and it can impose many restrictions on foreign service providers take place via the automatic route. However, foreign in legal services. In India, legal services can be individuals are prohibited from providing services for provided only by natural persons who are citizens of profit and their movement is subject to registration by India, who are commercially present in the place of the Medical/Dental/Nursing Council of India. Since the service and who are on the rolls of the advocates in health sector is on the concurrent list, i.e., both the the State where the service is being provided. The Central and State Governments have jurisdiction over service providers can be part of a sole proprietorship this sector, a number of regulations are imposed by or a partnership consisting of persons similarly state governments. .or example, to improve access of qualified to practice law. The service can be provided the poor to healthcare facilities, some states reserve a only by a natural person and not a firm. In order to certain percentage of total hospital beds for low income be eligible for enrolment as an advocate, a foreign families. There are also state-specific regulations of the service provider has to be from a country which town and planning departments on the design and allows Indian nationals to practice, has to hold a construction of healthcare infrastructure. Around US$ degree in law from an institution/university 0.1 billion worth of .DI has been approved in this recognized by the Bar Council of India (BCI) and sector from 1991 to 2002, a figure that accounts for a needs to be enrolled with the respective State Bar meager 0.4% of total .DI approvals in this period. Council and/or the BCI. .urther, .DI is not permitted In air transport services, there is a 49 percent limit on in the sector at all. International law firms are not .DI in passenger transportation and a 40 percent limit allowed to establish in India. Indian advocates are on .DI in rental of aircraft with crew (and 100 percent not permitted to enter into profit-sharing for Non-Resident Indians and Overseas Corporate arrangements with persons other than Indian Bodies), subject to .IPB approval, with no .DI being advocates. .oreign service providers may be engaged allowed from foreign airlines. As indicated in the Tenth as employees or consultants of local law firms but .ive Year Plan Report (page 984), this policy prevents they can neither be appointed as partners nor can those with experience from operating in this sector, they sign legal documents and represent clients. while actually inviting participation from those who Within distribution services, .DI is not allowed in the might have no experience in civil aviation. retail segment but there are no limits in other areas, except the requirement of RBI approval for commission Closed sectors agents and franchising services and .IPB approval for Professional services like accountancy, legal, and other wholesale trade. Wholesale trade is also affected by services sectors like retail distribution, postal and rail restrictions on the foreign provision of related services transport services are formally closed to foreign like transportation and warehousing. This sector, on the SUSTAINING INDIA'S SERVICES REVOLUTION: EXTERNAL AND DOMESTIC CHALLENGES 29 whole, has attracted US $0.3 billion worth of .DI liberalization at home and abroad. Macroeconomic approvals between 1991-2002, amounting to 0.9 policies like high tariff rates, large fiscal deficits, rigid percent of total .DI approvals in this period. labor regulations and restrictions on entry of foreign service providers (as discussed in Section III.2) can Domestic Constraints and Policy adversely affect the competitiveness of the services Distortions sector as much as they affect the commodity producing sectors. At the microeconomic level, excessive Obtaining greater access to foreign markets and regulation, discretion in the allocation of licenses and eliminating protection in the domestic market is only half permits, burdensome bureaucratic and legal the battle, the other half is preparing the domestic procedures, corruption and poor quality of infrastructure economy to take advantage of liberalization. In fact, could stem the growth of the services sector. While many country experience shows that failure to address of these distortions have been extensively discussed, it is domestic policy distortions and regulatory weakness can not widely known how poorly India fares vis-à-vis its erode the benefits of liberalization (World Bank, 2002). trading partners in these areas. It is revealing to The efficiency-enhancing reforms that Indian compare India with other countries in terms of certain policymakers need to pursue to complement external indicators of investment climate, like costs of starting, liberalization can be divided into two broad types: (i) operating and closing a business, labor regulations, Removing distortions created by policies that affect all enforcing contracts and so on. services sectors and worsen the overall investment climate; and (ii) Addressing policy-induced distortions Starting a business is much more onerous in India than that affect specific sectors. in many other countries. .or example, according to the World Bank's 'Doing Business' Database, it takes around Economy-wide distortions 88 days for an Indian entrepreneur to comply with official procedures to obtain all necessary permits and to Eliminating policy distortions is not only desirable in itself notify all the requisite authorities in order to legally but also necessary to reap the full gains from operate a business (figure-11, left panel). The .igure 11: Indian entrepreneurs face significantly higher entry cost while starting a business compared to their counterparts in other emerging markets Source: Doing Business Database, The World Bank 30 SUSTAINING INDIAS SERVICES REVOLUTION corresponding number for China is 46 days and for including inordinate delays in getting new connections Malaysia it is 31 days. While the number of procedures from public sector utilities, frequent visits by government involved in India are not unduly large - there are 10 inspectors, bureaucratic and excessively burdensome procedures involved in India compared to 7 for Mexico compliance procedures, and payment of bribes to get - completing the required inscriptions, verifications and things done. Some of the Indian states however are obtaining the permits tends to be a considerably more taking steps to deal with these regulatory barriers, by protracted process in India than in many other creating a single-window clearance systems for developing countries. Consequently, the cost of starting approval of new projects, self-certification facilities for a business as a percentage of the country's per capita selected statutes, designing more transparent inspection Gross National Income (GNI) is around 50 in India, one regimes, and developing electronic systems to comply of the highest among developing countries (figure 11, with regulatory procedures. right panel). Similarly, labor market restrictions on the hiring and Recent studies have also found that the regulatory and firing of workers are identified as one of the important administrative burden in India is considerably higher challenges in doing business in India according to the than that in many other developing and developed World Economic .orum's Global Competitiveness countries in the world (Dollar and Goswami, 2002). Report. As per the World Bank's Doing Business While the 'license raj' has been substantially reduced at Database (2003), India ranks considerably below most the center during the 1990s, it still survives at the state- East Asian countries when it comes to flexibility involved level, along with a pervasive 'inspector raj.' The World in firing a worker (figure-12, left panel). India also has Bank's World Business Environment Survey 2000 shows less efficient legal institutions that enforce contracts that the amount of management time spent dealing with between debtors and creditors, and suppliers and government officials, which provides a direct measure customers - it takes as much as 365 days to enforce a of the regulatory burden faced by entrepreneurs, is contract, compared to 210 days in Thailand, 180 days considerably higher in India than in countries like in China and only 75 days in South Korea (figure-12, China. This regulatory burden could take many forms, right panel). .igure 12: Operating a business is relatively expensive in India given its rigid labor laws and inefficient legal system Source: Doing Business Database, The World Bank SUSTAINING INDIA'S SERVICES REVOLUTION: EXTERNAL AND DOMESTIC CHALLENGES 31 These distortions affect not only the manufacturing sector, competition. To address problems that affect domestic but also firms operating in the services sector. .or firms disproportionately, must therefore be made an example, Indian labor laws do not permit women to work integral part of the reform program. at night, while most BPO outfits that need to operate at night (given the time difference between India and US) Many Indian services sectors are highly fragmented by have a large number of women employees. Only a few international standards. .or example, there are 100,000 states, e.g. Andhra Pradesh, Haryana, Karnataka, chartered accountants in India and 43,000 audit firms, Maharashtra, Tamil Nadu, have changed their state with an average of two chartered accountants per firm labor regulations to allow women employees to work at compared to an average of between 350 and 1500 night, and even in these cases, the changes have been chartered accountants in the "big four" accounting firms done through a Government Order and not through a in India.20 Nearly ninety percent of housing construction legislative amendment.19 Similarly, according to 'The companies in India are single owner proprietorships and Employment Exchanges (Compulsory Notifications of ninety-five percent of all trucks in India are owned by Vacancies) Act, 1959, all establishments (including small fleet operators.21 In retail distribution, the services sector firms) are required to notify the local penetration of supermarkets in India is only 2 percent employment exchange of: (i) any vacancy before filling it; compared to 55 percent in Malaysia and 36 percent in and (ii) results of selection of candidates within 15 days Brazil. In many instances, statutory policies have played of selection /interview. Given that employment exchanges a role in preventing consolidation, as discussed below. have become defunct in India and that BPO firms tend to Accounting Services. The accountancy service have turnovers exceeding 40% a year, these rules are providers in India are self-regulated through a clearly outdated and need to be reviewed. So while combination of legal and professional bodies like the opinion may be divided on whether these distortions Institute of Chartered Accountants of India (ICAI) and affect the competitiveness of the services sector as much the Institute of Cost and Work Accountants of India. The as they impact the industrial sector, there is little accountancy professionals are only allowed to operate disagreement that a streamlined entry and exit either as a partnership firm or as a sole proprietorship procedures, a flexible labor market, more efficient legal firm. Since the Partnership Act of India permits only 20 system, and less corruption will contribute to a more or less professionals under one firm, this de facto efficient and dynamic services sector. means that the number of partners in Indian accounting firms are limited to 20 or less. .urther, the number of Sector specific policy distortions statutory audits of companies per partner are restricted In India, reforms at the sectoral level have often evolved to 20. Indian regulations also proscribe inter- in an ad-hoc way rather than as part of a coherent disciplinary professional models, i.e. accounting firms overall strategy. Consequently, the depth and the pace are not allowed to hire management professionals to of reforms lacks uniformity across sectors. The less perform consulting / management services.22 As a reformed sectors are characterized by domestic firms consequence of the above restrictions, less than 200 that are sub-optimal in size, operate in a weakened firms (or 0.5% of total accountancy firms) have more regulatory environment and under outdated conventions than 10 partners. Due to their small size, domestic firms and are consequently ill-equipped to face global have been less successful in competing with 19 Policy reversal tends to be much more difficult, if the changes are carried out through a legislative amendment than through a Government Order (GO). 20 These are approximate figures obtained in interviews with industry experts. It is important to clarify that, .DI is not allowed in accountancy services. The 'big four' accounting firms have set-up offices in India as management / consulting firms and it is alleged that they are actually providing accountancy services by partnering with domestic accounting firms (which has created considerable controversy in recent months). Since there is no statutory limit on the number of professional hired by consulting firm, the 'big fours' have more accountants on their rolls than the domestic firms. 21 Transport Study on India, The World Bank, 2002. 22 "Birla seeks level playing field for CAs," Business Standard, December 19, 2003. 32 SUSTAINING INDIAS SERVICES REVOLUTION international firms in the lucrative consultancy/advisory ten percentage points decline in the public sector and non-statutory work markets. ownership in the banking sector, the interest spreads Construction Services. One reason why construction could fall by 39 basis points and the ratio of private services firms in India operate at a small scale, and sector credit to GDP could increase by as much as 7 cannot exploit economies of scale, is the legal percent. A recent study by Banerjee, Cole and Duflo framework governing the sale and acquisition of land as (2003) also finds evidence of sub-optimal lending to the outlined in the Urban Land (Ceiling and Regulation) Act, private sector by commercial banks in India. 1976. According to the ULCRA,23 no person is entitled Regulatory Weaknesses to hold any vacant land, in excess of the ceiling limit stated by the Act. This law in effect prevents anyone from Services sector performance suffers because of both buying a large tract of land to construct houses. The law excessive and inadequate regulation. Weaknesses in the also vests discretionary powers in state governments to institutional and regulatory regimes have resulted in grant exemptions, leading to corruption in the exercise disparities in the quality of services and the abilities of of these powers. .urther, the government has the power professionals. The need for regulation in services arises to acquire the entire ceiling-surplus vacant land at a primarily from market failures attributable to natural nominal price, leading to lengthy disputes and litigation. monopoly and inadequate consumer information. In this Consequently, competition in housing construction is not part, we take a brief look at the principle regulatory based on costs but on securing access to lands and measures implemented by India, in order to assess how circumventing the regulatory impediments. these measures may support increased openness. It is Banking Services. The predominance of government beyond the scope of this overview to provide a ownership in the banking sector has led to insufficient comprehensive evaluation of the adequacy of existing competition in the Indian banking system. This lack of regulatory instruments, but this is clearly a priority for competition in turn has increased the cost of future research. intermediation (figure-13, top panel), lowered the Protection of consumers where there are efficiency of capital allocation and led to under-lending informational problems: In many intermediation and to the private sector (figure-13, bottom panel). While the knowledge-based services consumers have difficulty market share of public sector banks in total assets has securing full information about the quality of the service declined by 10 percentage points between 1991 and they are buying. Consumers cannot easily assess the 2001, at the present 80 percent share, the public sector competence of professionals such as doctors and ownership of the Indian banking system remains one of lawyers, the safety of transport services or the soundness the highest in the world. The relationship between of banks and insurance companies. Preliminary ownership structure and indicators of banking sector discussions with firms and regulators suggest that the key efficiency and development, namely interest rate spreads financial services regulators, the Reserve Bank of India and private sector credit to GDP ratio, across 37 for banking services, IRDA for insurance and SEBI for developed and developing countries are shown below. securities, are adequately equipped to deal with more These show a positive and statistically significant liberal domestic and foreign entry. In India, while there relationship between state ownership of the banking are no independent regulators for most professional system and the interest rate spreads and a strong services, de facto regulation takes place through a negative and significant relationship with private sector combination of statutes provided in law and by credit. Specifically the figures below show that, for every professional all-India and State Councils. These include 23 The objective of this Act is "....to provide for the imposition of a ceiling on vacant land urban agglomerations; for the acquisition of such land in excess of the ceiling limit; to regulate the construction of buildings on such land and matters connected therewith; with a view to prevent the concentration of urban land in the hands of a few persons and speculation and profiteering therein; and with a view to bringing about an equitable distribution of land in urban agglomerations to serve the common good." The ULCRA has been repealed by the Center but not by all the States. SUSTAINING INDIA'S SERVICES REVOLUTION: EXTERNAL AND DOMESTIC CHALLENGES 33 .igure 13: Recent evidence suggests that banking systems which are predominantly government owned tend to be less efficient and less aggressive in lending to the private sector Source: .inancial Structure and Economic Development Database, The World Bank. the Institute of Chartered Accountants of India and the inadequacies cannot be quickly remedied raises the Institute of Cost and Works Accountants of India, the issue of how different elements of reform - particularly Council of Architecture, the Bar Council of India and the prudential strengthening and trade and investment State Bar Councils and the Medical, Dental and Nursing liberalization - are best sequenced. Councils of India. Initial discussions suggest that Promotion of competition in intermediate or final unevenness of standards in professional, educational, service market: The existence of natural monopoly or financial and health services are not only a problem oligopoly is a feature of the so-called "locational domestically but also legitimize foreign restrictions, and services" which require specialized distribution need to be addressed in order to make a credible case networks: roads and rails for land transport, cables for obtaining foreign recognition. One suggestion is the and satellites for communications, and pipes for creation of a credible, all-India accreditation system that energy distribution. India has instituted regulators for a could grade different attributes in terms of training and range of services (telecommunications and ports) to experience in these services. But the fact that regulatory ensure that monopolistic suppliers do not exploit 34 SUSTAINING INDIAS SERVICES REVOLUTION consumers or undermine market access by charging liberalized markets translate into more effective prohibitive rates for access to the essential facilities that attainment of social goals. The challenge is to devise they control. Similar institutions may be needed in a and implement efficient instruments to attain social variety of other network services, including transport goals rather than pursue them through elaborate (terminals and infrastructure), and energy services restrictions that involve large efficiency losses without (distribution networks). commensurate gain in equity and access. In this section, we examine some of the potentially adverse impacts of Achieving Social Goals in a Liberalized liberalization and how they can be addressed in an Environment efficient manner. Liberalization could adversely affect the poor and the Adjustment costs weaker sections of the society. These concerns relate to reduced access of the poor and disadvantaged groups Different modes of supply have different effects on factor to services at an affordable price, and negative markets. Cross-border trade and consumption abroad employment implications because adjustment takes resemble goods trade in their implications. The impact time. The denial or neglect of these concerns could lead of the movement of factors depend critically on whether to substantial social costs and undermine the support for they are substitutes or complements for domestic factor reform. Supporters of liberalization often argue that the services. Given the structure of factor prices in India, one poor would be better off in liberalized markets than they would typically expect liberalization to lead to an inflow are currently because of the poor performance of of capital. Such inflows would tend to be associated with incumbents in meeting their needs. Even where this is increasing employment opportunities and wages. An true, there is a strong case for instituting complementary examination of the employment growth across various policies to ensure that the efficiency gains from segments of the services sector does support such an .igure 14: Liberalization of services sectors and employment growth between 1993/94 & 1999/00 (in %) Source: NSSO, World Bank Staff Estimates Note: Classification of sectors into the above three categories is based on discussion in Section III.1, India's commitments at the GATS and several sectoral studies prepared by the ICRIER. SUSTAINING INDIA'S SERVICES REVOLUTION: EXTERNAL AND DOMESTIC CHALLENGES 35 .igure 15: Business generated per employee (in Rs. thousand): 2001 (Shows only the top eight Banks in each group) Source: Report on Trend and Progress of Banking in India, 2001-02, RBI. argument. The segments that have been aggressively Discussions with banking sector experts suggest that liberalized - telecommunication, computer and related given the handicaps of public sector banks, large services, other business services (management displacements will be an inevitable consequence of consultancy, R&D, advertisement etc) and hotels and liberalization in this sector. These problems help explain restaurants - have experienced higher employment why India has chosen to take a cautious approach to growth than sectors which are relatively less liberalized liberalizing its banking sector. The success of such a or closed (figure-14). gradualist approach however hinges on the ability of Given these predictions, why are workers and others in the policymakers to improve the competitiveness of its India sometimes skeptical about the benefits of public sector banks in the coming years through liberalization? One concern is that Indian firms, measures like, voluntary retirement schemes to deal especially those in the public sector, find themselves with excess labor, the creation of asset management disadvantaged by the legacies of historical policies and companies (AMCs) to deal with non-performing assets, are ill-equipped to compete with foreign and new private mergers of weak and healthy banks, and by designing domestic service providers. The classic example of this is a strategy to move gradually from costly quantitative the banking sector where 14 commercial banks were restrictions (such as priority sector lending and rural nationalized in 1969 and another 6 in 1980 and even branch requirement) to more transparent fiscal today the sector is dominated by public sector banks. interventions (like the universal service fund in basic During the nationalization period, India's banking system telecommunications). was subjected to a range of interventions, ranging from The geographical and sectoral concentration of directed lending to priority sectors at subsidized interest employment is also a matter of concern for Indian rates and quantitative restriction on opening new policymakers. Seven out of ten Indians in urban areas branches. While some of these measures had a positive are currently employed in the services sector as impact on equity, they adversely affected the balance compared to only about two out of ten in rural India sheets of these banks. It is therefore not surprising that (figure-17, left panel). Any adjustment costs emanating Indian public sector banks are saddled with excessive from the liberalization of this sector would therefore be labor and higher non-performing assets (NPAs) relative to primarily absorbed by urban India. Since urban India is both new private sector banks and foreign banks on average more affluent than its rural counterpart, (figures 15 and 16). policymakers could at least theoretically give a higher 36 SUSTAINING INDIAS SERVICES REVOLUTION .igure 16: Gross Non-performing Assets (NPAs) as a % of total lending, 1999-2002 Source: Report on Trend and Progress of Banking in India, 2001-02, RBI. weight to efficiency issues than equity considerations in policymakers are concerned about the large-scale services, relative to liberalization of other sectors like displacement effects of opening the sector to foreign agriculture. However, the urban workforce is also better competition. Similar concerns have also inhibited organized and more politically influential and therefore liberalization in construction and road transport services better placed to resist any painful reforms. which together employ 36 percent of the services sector labor force. While such arguments may have some merit The size of the sectoral labor force is probably more in retail and construction sectors, where bulk of the labor important than the geographical distribution of the force is relatively poor and unskilled, they are less relevant services sector employment as a factor influencing the in the case of legal and accountancy services that together pace of services reform. .or example, since more than account for a meager 0.7 percent of India's total services three out of ten services sector employees work in the employment and primarily employ skilled professionals retail distribution sector (figure-17, right panel), and there with relatively high net worth. In these sectors, it could be is a common perception that domestic retail outfits are conjectured that it is not the welfare calculus of impact on more labor intensive than foreign retailers, Indian the poor but the direct political influence of those who .igure 17: Employment in Services Sector - 1999/00 Source: Employment and Unemployment Situation in India, 1999-2000, NSSO. SUSTAINING INDIA'S SERVICES REVOLUTION: EXTERNAL AND DOMESTIC CHALLENGES 37 benefit from protection that impedes reform. In any case, Obligations (USOs) under the New Telecom Policy (NTP) estimating the potential adjustment costs in different 1994, meant "the provision of access to all people for sectors, and devising appropriate instruments to deal with certain basic telecom services at affordable and such costs remains a key area for further work. reasonable prices." The target was to install a village public telephone (VPT) in every village in the country and this was Universal service goals stipulated in the license agreements of service providers. The impact of liberalization on the poor is a central and However, high bids made some projects unviable, while legitimate concern. Where India is a relatively inefficient meeting the target itself apparently proved expensive. This producer of a service, liberalization and the resultant foreign meant that out of 600,000 villages, telephone coverage competition are likely to lead to a decline in domestic prices was provided to only 310,000 villages, mostly by the and improvement in quality. But there is a twist. .requently, Department of Telecommunications. the prices pre-liberalization are not determined by the The failure to achieve the objectives of NTP 1994 and new market but set administratively, and are kept artificially low global developments in telecom and information for certain categories of end-users and/or types of services technology, led to NTP 1999. It broadened the USOs to products. Thus, interest rates for certain borrowers, and include the provision of voice and low speed data service, prices of local telephone calls and public transport have in provision of Internet access and telephone on demand in many cases been kept lower than the costs of their urban and rural areas by 2002. At the same time, the NTP provision.24 This structure of prices has been sustained 1999 stipulated that the resources for meeting these USO be through cross-subsidization within public monopolies or raised through a 'universal access levy' (UAL), which would through government financial support. In principle, be a percentage of the revenue earned by all operators liberalization threatens these arrangements.25 But the under various licensing schemes. The implementation of evidence on the relationship between competitive market USO for rural and remote areas would be undertaken by all structures and wider access to services has been mixed. In fixed service providers (.SP), who would be reimbursed from cases like basic telecommunications, a positive relationship UAL funds. has been observed because initial conditions were so feeble However, meeting these targets has proved more difficult and an effort was made to implement universal service policies. However, in other areas, like financial services, than expected. The private service providers have failed to improved measures may need to be put in place to ensure meet their obligations despite being given a more than two- that liberalization does not have an adverse affect on access year extension. This is partly a result of underestimating the to credit for rural areas and the poor. cost of providing services to rural areas and high license fees paid by service providers and partly due to the ambitious Universal Service Obligations in Telecommunications. targets set-out by the government and lack of a proper The telecommunications experience in India reveals that enforcement mechanism. A number of changes have since while it is possible to devise instruments to ensure universal been made, including altering the mechanism for disbursing access in liberalized markets, their implementation and the subsidy, which are expected to accelerate penetration of enforcement may be difficult. Universal Service telephones in rural India at an affordable price.26 24 Sometimes the object has been to ensure access to all consumers at the same price, irrespective of the cost of provision (e.g. in transport and postal services). At other times, the object has been to ensure cheaper access for certain categories of users (e.g. in financial services). 25 Elimination of restrictions on entry imply an end to cross-subsidization because it is no longer possible for firms to make extra-normal profits in certain market segments. New entrants may focus on the most profitable market segments ("cream-skimming"), such as urban areas, where network costs are lower and incomes higher. And privatization could mean the end of government support. The result is that even though the sector becomes more efficient and average prices decline, the prices for certain end-users may actually increase and/or availability decline. 26 While TRAI recommended that the disbursement of subsidy from US. be undertaken on the basis of Proxy Cost Models, according to recent DoT guidelines, USO shall be implemented through a multi-layered bidding process on the Least Quoted Subsidy support basis. This would involve two rounds of bidding wherein the first round would be amongst the existing fixed and cellular mobile service operators in the concerned circle. In the event that no bids are received or the lowest bid is higher than the benchmark set by DoT, a fresh round of bidding would be conducted which would involve all fixed and cellular mobile service operators in the country, including the ones in the concerned circle as well as their franchisees. The lowest bid, offering the least subsidy would be accepted subject to the benchmark cost ceiling set by DoT. The subsidy would be disbursed based on actual physical performance and on the targets being met, subject to necessary verification. 38 SUSTAINING INDIAS SERVICES REVOLUTION USOs in Banking Services- Rural Branch and Pandey show that a one percent increase in the Requirement and Priority Sector Lending. To provide number of rural locations banked per capita reduced universal access to banking services in India, the rural poverty by 0.39 percent and increased total output authorities have tried several strategies over time by 0.33 percent. Moreover, the output effects were solely ranging from bank nationalization to priority sector accounted for by increases in non-agricultural output, lending and rural branch expansion. These have yielded which suggests that increased financial intermediation in mixed results. While the number of bank branches in rural India aided output and employment diversification rural areas has grown over time, with 70 percent of total out of agriculture. Traditional money-lenders were also branches in rural and semi-urban centers today, this has displaced and during the 1971-1991 period, the also meant large losses for the commercial banks. money-lender share of rural household debt more than To integrate the remote and rural areas into the banking halved from 35 to 15.7 percent while the contribution system, the RBI, following the nationalization of the 14 from commercial banks lending rose from 3 to largest commercial banks in 1969, decided to target 29 percent. unbanked locations in states with population per bank Along with priority sector lending, domestic banks in branch in excess of the national average. To ensure that India are also required to allocate 40% of their total commercial banks expanded into un-banked, rural credit to the priority sector (i.e., agriculture and firms in locations, especially in states where these were remote the small-scale sector); the corresponding requirement and/or unprofitable, the 1:4 licensing rule was introduced for foreign bank branches is 32%. While both these by the RBI on January 1, 1977, which mandated that a policies appear to have played a role in alleviating rural commercial bank could qualify for a license to open a poverty, they have exacted considerable toll on the branch in a banked (urban) location only if it opened four balance sheets of commercial banks. The critics also branches in an un-banked (rural) location. This 1:4 argue that, given the loopholes in the policy and licensing rule led banks to open more rural branches in inadequate supervision, the cost of credit remains high financially less developed Indian states during the period and access to credit rationed under the current regime. 1977-1990, with the result reversing after 1990, after it Therefore, whether the Indian social banking experiment was formally repealed in 1991. is the most efficient means for ensuring universal In a recent paper, 'Do rural banks matter? Evidence from access to banking services, is an issue that merits the Indian social banking experiment' (2003), Burges more research. pg39 HarnessingInternational toHarnessingPromote ObtainInternationalAccess and Negotiations Improved Access and Promote Domestic Reforms Improved Negotiations to Obtain Domestic Reforms R ecognizing that the main priorities for services principle in the GATS context, could help eliminate reform are domestic, and that much has and explicit exemptions to M.N listed by countries, as should continue to be achieved unilaterally, well as potentially more serious implicit international negotiations can nevertheless help, in discrimination through preferential recognition four ways. agreements and allocation of quotas. Reciprocity: The WTO is the natural forum to pit opposition to reform at home and barriers to India's Own Commitments Under the access abroad against each other, constructively, in GATS and its Potential Offer the process of negotiations. Improved access abroad can be used to counter the power of vested WTO Members had agreed to submit their first offers of interests who benefit from protection, and the need domestic liberalization by the end of March 2003. At the to deal with these interests makes India a credible time of writing, first offers had been received from some bargainer for improved access. 40 Members but not yet from India and many other WTO Members. The Indian Government will need to Credibility: Policies that are believed are most decide whether to offer to bind the current regime, and likely to succeed. Not only can the WTO help to more importantly whether to liberalize further, either secure access to markets abroad, it can also unilaterally or as part of the negotiations. In the enhance the credibility of domestic reform. Where negotiating context, trading partners are likely to place there is sufficient clarity about the appropriate greater value on promises to improve actual access, domestic reform path, India can take advantage of either immediately or gradually, than on promises to the GATS to commit to current levels of openness bind prevailing access. The value of the latter type of or to achieve greater levels of future openness. commitment depends on the probability of policy Regulatory rules: Stronger rules can help promote reversal, which is perceived to be particularly low in the and consolidate domestic regulatory reform, as Indian context. happened to some degree in basic As we have seen, India's Uruguay Round commitments telecommunications. But the rules are also needed on services were conservative, reflecting not even the to equip Indian exporters to address regulatory extent of openness that prevailed then, and quite far barriers in foreign markets that take the form of from the liberalization that has taken place in recent burdensome licensing and qualification years. Annex Table 1 on page 50 presents a picture of requirements for professionals or restrictive India's commitments under GATS compared to the standards in electronic commerce. current state of policy restrictions in different sectors, Guarantee against discrimination: The Most and certain expected changes. With the exception of a .avored Nation (M.N) principle can be an few sectors, like accountancy, legal, retail distribution, important defense of the rights of a country like postal services and passenger and freight India that rarely receives privileged access to transportation by rail, actual policy is much more foreign markets. Strengthened application of this liberal than existing commitments. In a number of 42 SUSTAINING INDIAS SERVICES REVOLUTION Box 3 : India's Tenth Plan Report says that India needs to be more proactive in international negotiations According to the Tenth .ive Year Plan report, "the proposed acceleration in the growth rate (set at 8 percent) cannot take place without tapping on the opportunities offered by the international economy in terms of markets, investment and technologies". The Report goes on to say that, "In order to make most of the opportunities available, it is essential that India evolve a positive agenda for its future negotiations at the WTO. Passive acceptance of and reactive adjustments to decisions made elsewhere and on other considerations will not suffice." It adds, "Until recently, the strategy has been largely defensive. Such defensive and status-quoist position, while appropriate for an inward looking development strategy, is not so now, and so has to give way to a more aggressive and proactive position. This cannot be done without a closer interaction between the agencies concerned with trade and investment, including those in the private sector, and those in charge of India's external relations. The Indian interventions at the Doha Ministerial demonstrate the much more active and aggressive position that is being taken by India". Source: Tenth .ive Year Plan (2002-07), Volume I - Volume and Dimensions, Pages - 12, 97-98, 119-121. sectors, India has made no commitments but time frame for reform could be predicted, the liberalized commercial presence either completely, e.g. Government would be in a position to decide whether to in architecture, distribution (barring retail services), pre-commit in the WTO to future liberalization, in order education, environment, management consultancy, to lend credibility to the reform program and/or to and marine and road transport, or with some obtain a negotiating benefit. Demonstrating a limitations, e.g. in insurance and air transport services, willingness to open its own market - immediately or allowing 26 percent and 49 percent .DI, respectively. gradually - would certainly strengthen any Indian Then there are sectors like information technology, proposals designed to secure access to foreign markets banking, construction and related engineering, health for its own exports. and telecommunication, where the extent of autonomous liberalization undertaken far exceeds Approaches to International India's current commitments. Negotiations The challenge is to ensure that future commitments Formulae vs. request-and-offer reflect good economic policy rather than the dictates of political economy or negotiating pressure. An informed As India seeks improved access for its exports, it must judgment will require a thorough analysis of the determine the appropriate approach to international implications of, and rationale for, the existing barriers to negotiations, and choose in particular between two trade in services in India. In particular, it is essential to alternatives. One is a bilateral request-and-offer distinguish between the areas where liberalization is approach, the other is the use of generally applicable prevented solely by the political power of vested interests negotiating formulae or model schedules. In the sphere - to which the WTO's reciprocal market opening is an of trade in goods, governments have sometimes agreed antidote - and the areas where regulatory or other to a formula on the basis of which they cut tariffs across- problems need to be remedied before the full benefits of the-board by a uniform amount.27 With a few notable liberalization can be reaped (which may be the case, exceptions, formulae have proved difficult to design for e.g., in banking services). Even in the latter case, if the services negotiations because many different non- 27 In the Tokyo Round (1973-79) a weighted formula was devised so that higher tariffs would be cut more deeply than lower ones. This approach had the effect of moving the liberalization process ahead on multiple fronts, although exceptions to the formula applied in certain sectors. HARNESSING INTERNATIONAL NEGOTIATIONS TO OBTAIN IMPROVED ACCESS AND PROMOTE DOMESTIC RE.ORMS 43 quantifiable instruments affect access to markets. the unilateral liberalizers - which include India and Moreover, India, and many other countries, have many other developing countries. In contrast, it is supported the request-and-offer approach because it much more difficult to ensure compensation for the allows considerable freedom to decide on how much to loss of negotiating coinage caused by unilateral liberalize. There might, however, be a case for a more liberalization in a bilateral request-and-offer aggressive approach in modes 1, 2 and 4 where India negotiation. and other developing countries have a comparative Nor are these gains merely notional. .rancois and advantage. Specifically, it may be possible to develop Martin (2003) document how previous rounds of formulae or model schedules for concerted or more negotiations that used formula based approaches to coordinated approaches to liberalization, such that goods trade liberalization (such as the Kennedy and Members end up making more far-reaching Tokyo rounds) produced far deeper liberalization than commitments on these modes. There seem to be four other rounds that used less well-defined approaches. broad reasons to favor formulae/model schedules: .irst, in a world of unequal bargaining power, What have we learnt about the design of multilaterally agreed formulae that must be seen to formulae from past services negotiations? be equitable and efficient are likely to produce a more favorable outcome for developing countries The challenge however is to find the right formula, and than bilateral negotiations. this is particularly hard in services, given the difficulty of quantifying the protectionist effect of different Second, such an approach helps reduce the instruments. Instead, three different "models" of a transactions costs of negotiations - avoiding the need concerted approach to liberalization suggest themselves to barter commitments sector-by-sector, country-by- from the experience accumulated so far in the GATS country. Thus, formulae can help overcome the context: model schedules for maritime transport and difficulty in accomplishing an exchange (and telecommunications, the Understanding on financial balance) of concessions between countries that do services and the Reference Paper in basic not necessarily have a reciprocal interest in each telecommunications. In each case, the premise was that other's markets. To use an analogy from the theory of agreement on standardized commitments would secure money, formulae avoid the need for a "double- a higher level of commitment overall than if Members coincidence of wants" with regard to market access devised their liberalization offers independently. We can by creating a multilaterally balanced package. This, think of different elements of these approaches of course, assumes that the negotiation of formulae representing as listed below increasing levels of itself does not involve large negotiating costs. ambition: Third, formulae can help overcome the free-rider Providing a framework for negotiations. This role is problem that arises in negotiations conducted under especially relevant when there is some ambiguity an M.N-based system. The problem arises in about sectoral definition and/or a need for prior bilateral negotiations because each of the consensus between Members on the market access beneficiaries of a concession from a trading partner and regulatory issues that should and can be may be tempted to understate their willingness to addressed in a particular area. The approach is pay for it, hoping that offers of reciprocal also likely to be useful in areas where segmentation concessions from other Members will be sufficient to of sectors is likely to facilitate faster progress in induce the concession. If each Member behaves in certain areas. this way, the result could be that mutually beneficial Creating a focal point for liberalizing commitments deals will not be struck. and regulatory principles. This is accomplished by .inally, the use of multilaterally applied formulae is creating a strong presumption in favour of a certain perhaps the only credible way of granting credit to threshold level of commitments built into the model 44 SUSTAINING INDIAS SERVICES REVOLUTION schedule - shifting the burden on a Member to accepted this approach were willing to do so on an M.N justify its refusal to concede the threshold level basis, thereby ensuring a higher level of openness rather than on other Members to extract the without compromising the basic non-discriminatory minimum concessions. structure of a multilateral agreement. .or such an Representing a formula for liberalizing approach to be feasible, participating Members must be commitments, analogous to "zero-for-zero" goods satisfied by the acceptance of disciplines by a critical mass of Members rather than all of them. The approach formulae, and for harmonizing regulatory has the advantages of the Tokyo Round Codes without principles. How the transition from a focal point to their disadvantages: it would facilitate effective and binding obligations is made depends on whether quick negotiations among like-minded Members, and the aim is to create binding obligations (a) for all create a positive demonstration effect on initially non- Members, in which case ambitions for deeper participating Members, without creating a discriminatory liberalization of some, must accommodate the arrangement. concerns of the most reluctant WTO Member, or (b) a sub-set of WTO Members, in which case the .inally, the reference paper in basic telecommunications depth of liberalization must be traded-off against was concerned, not with market access commitments the extent of participation. per se, but with a set of regulatory commitments entered in the additional commitments column (Article XVIII) of The basic purpose of the model schedules developed in the schedules of the Members that accepted the the maritime and basic telecommunications negotiations disciplines. This instrument attracted many more was to identify a set of sub-sectors and commitments signatories (over 60), than the Understanding in that could reasonably be assumed by all parties to the financial services, and was regarded by many as a sine negotiations. The packages were designed not only to qua non for rendering meaningful the market access guarantee an acceptable degree of reciprocity,28 but and national treatment commitments contained in also define areas for exclusion, and areas where Members' schedules. The reference paper is a good differing degrees of liberalization were feasible. .or example of a cooperative effort around a common set of example, there was agreement to exclude cabotage commitments that led to more effective market opening altogether from the picture. And the separation of bulk than would have otherwise been possible. A similar and liner shipping services permitted Members to offer effort was in the making in the maritime negotiations, more in the former area than they would have been where additional commitments were drawn up to willing to do without this separation. Though the safeguard access to and use of port services. The model maritime negotiations were a failure, the model has is clearly relevant to situations where certain positive survived and is the basis for requests and offers in the regulatory obligations are seen as a necessary current negotiations. complement to market access commitments, and there Second, in financial services, a formula approach was is a fair degree of consensus on the elements of such developed, although only a restricted number of (mostly obligations. developed) countries adopted the formula. The These precedents and principles provide the basis for Understanding on Commitments in .inancial Services possible approaches to the liberalization of Mode 4 and specified the content of market-access commitments, Mode 1, respectively. Even though the focus here is on and in addition contained provisions dealing with India's export interests, there is little doubt that it would procurement, the treatment of new financial services, be easier for India to make credible proposals if they and a standstill commitment - which took participating were backed by a conditional offer of access to its own Members beyond the existing framework of GATS rules market, not only through Modes 1, 2 and 4, but also and commitments. .urthermore, the Members that Mode 3. 28 .or the sub-set of Members with an export interest in the sector. HARNESSING INTERNATIONAL NEGOTIATIONS TO OBTAIN IMPROVED ACCESS AND PROMOTE DOMESTIC RE.ORMS 45 Securing Liberal Access for India's classifications (e.g. commitment on insurance claims Cross-border Exports of Services processing cannot be inferred with certainty from a commitment on non-life insurance services). Creative approaches are necessary to secure free cross- border trade in services.29 In the WTO E-commerce With regard to the level of GATS commitments in the Work Program, WTO Members have so far focused on relevant modes 1 and 2, in key areas like computer and prohibiting the imposition of customs duties on related services or the "Other business-category", there electronically delivered products. It is ironic that is considerable scope for improved commitments. Even considerable negotiation energy has been invested in in the regular business services or computer and related prohibiting the economically superior (and infeasible) services, only around half of the WTO membership instrument of protection whereas little attention has made any commitments (full or partial). In accounting, been devoted to inferior (and possibly more feasible) the majority of the 67 Members who have made instruments such as quotas and discriminatory internal commitments list limitations, while in data processing regulation and taxation. only around two-thirds of the 66 commitments guarantee unrestricted market access. But if we focus In any case, since the bulk of such commerce concerns on the support and BPO services, it is evident that even services, open trading conditions are more effectively very liberal GATS schedules do not make commitments secured through deeper and wider GATS Mode 1 (cross- in many areas that are key to capturing BPO services border supply) and GATS Mode 2 (consumption abroad) (e.g. telephone answering services). The fact that the commitments for full market access (GATS Art. XVI which relevant activities may fall in more than one category would preclude quantitative restrictions) and full national with greatly varying commitment levels also produces treatment (GATS XVII which would preclude all forms of legal uncertainty. discriminatory taxation). The coverage of both modes 1 and 2 is necessary because Members have not yet Alternative options to secure openness of arrived at a satisfactory distinction between the cross-border trade in services respective domains of Mode 1 and Mode 2.30 In order to remedy the inadequate classification and Since GATS commitments are undertaken according to commitment situation, several options are identified a "positive list" approach for specified service activities, that vary in level of ambition. There are two basic it is necessary to ensure adequate coverage of services premises. .irst, it would not be justified to take a static that India exports (or could export) in commitments view of India's evolving comparative advantage, and undertaken by trading partners. We immediately see limit the negotiating focus to a few IT and simple two problems: the inadequacy of the services sector BPOs. Rather, it is in India's interest to obtain full classification and the poverty of Members' commitments on cross-border trade on the widest commitments. The existing GATS Service Sectoral range of services. Secondly, it will be difficult and Classification list (W 120) does not provide an resource-intensive for Indian negotiators to assure full adequate description of the range of services under coverage of BPO and other future Indian services with consideration. Many of the listed "input" or "support a piecemeal approach - e.g. bilateral sector-by-sector services" (for example payroll or customer care services) negotiations. The few initial GATS offers that have do not have fully corresponding entries in the W 120. been tabled so far, confirm that India must formulate .urthermore, it is not possible to "infer" commitments on its own ambitious negotiating strategy to assure input services from commitments on main service unfettered cross-border trade in services. 29 This section draws upon the detailed discussion in the companion paper on this subject. 30 If for instance, a customer from the U.S. is actively seeking support services from an Indian Internet page that offers technical support one can question whether this is an example of cross-border supply or consumption abroad. This problem becomes particularly acute in financial and other regulation-intensive services. 46 SUSTAINING INDIAS SERVICES REVOLUTION Option 1 suggests targeted commitments for cross- maintain and introduce new regulations protecting, inter border trade in IT and BPO services. Under a model alia, consumers, health, safety, national security, the schedule, Members would be expected to make full environment, the financial system, etc. This provision, market access and national treatment commitments on akin to the "prudential carve out" in the GATS Annex on directly identified business services, as well as elements financial services, may help to reassure national of other services, such as bookkeeping and auxiliary regulators that the objective is not to question their financial services, which are increasingly outsourced. judgments but to target only blatantly protectionist Where necessary, Members would also be asked to measures. If this reassurance is not deemed sufficient, update their schedules with commitments on the basis of then it may also be possible to consider a more limited the revised CPC 1.1 classification. This option would option, wherein the liberalizing commitment would only cover the bulk of current trade but would not go far in apply to situations where businesses are consumers. This anticipating new developments. last option would make sense if regulators wish to provide private households with greater legislative Option 2 suggests full horizontal market access and protection than more sophisticated consumers, i.e. firms. national treatment commitment for GATS modes 1 and 2 that apply to all services (not only the scheduled In any case, the thrust of these options is to pre-empt the service activities). This broad forward-looking introduction of explicit barriers to cross-border trade in commitment would allow two exceptions: financial services. A range of complementary initiatives on services that necessarily involve the movement of capital, regulatory transparency, domestic regulation, and and transport services that necessarily involve the clarification of issues like applicable jurisdiction will be movement of freight and people. These exceptions necessary to achieve the broad aim of unfettered cross- would be based on economic considerations - e.g. border trade in services. immediately liberalizing cross-border trade in financial services and the necessary capital mobility may not be A Framework for Negotiating desirable in many countries - as well as the recognition Liberalizing Commitments on Mode 4 that in some services sectors (e.g. transport) cross- border trade is qualitatively different from electronic In the previous GATS negotiations, India and other commerce and negotiating away existing protection developing countries were disappointed by the dearth of cannot be instantaneously accomplished. commitments in their area of comparative advantage - that is, the movement of workers unrelated to a A proposal for comprehensive commitments is bound to commercial presence abroad (foreign direct investment) provoke the concern, within India and outside, that such - and are now seeking greater openness. At the same commitments imply giving up the right to regulate. These time, many multinational firms would like to see more concerns are misplaced. In the GATS framework of scope for international movement of their personnel. rules, even after a country makes full commitments on This shared interest has created an unusual, though still market access and national treatment, it remains free to guarded, sense of optimism about mode 4 negotiations pursue legitimate domestic objectives, provided the in the current round of GATS negotiations. This section regulatory instruments do not discriminate against describes how this coincidence of interest could be foreign providers. Thus, India would be free to prohibit harnessed to deliver greater openness. services from other countries that do not meet its regulatory standards, just as its trading partners would A "model schedule" is suggested that may facilitate an be free to impose restrictions on Indian exports that were exchange of access commitments and define an below the required standard. If deemed necessary, the acceptable set of multilateral rules that lead to more suggested model schedule could reaffirm that these transparent and less burdensome policy.31 It is designed commitments do not deprive a country of the right to to supplement and improve the commitments WTO 31 This section draws on the more detailed treatment in the companion paper on the same subject. HARNESSING INTERNATIONAL NEGOTIATIONS TO OBTAIN IMPROVED ACCESS AND PROMOTE DOMESTIC RE.ORMS 47 Members have undertaken in the previous negotiations. exclude the possibility of sector-specific commitments Depending on the precise design and the extent of specifying deeper levels of liberalization. .or example, in support for the "model schedule", it could serve either as certain sectors of export interest to India, countries may a "formula" for commitments that all Members are to be willing to accept lower skill thresholds, e.g. diplomas assume, or as a focal point designed to generate rather than bachelors degrees for software improved commitments. programmers. A sector-specific approach may also help The schedule is divided into two parts. The first part certain countries make the domestic case that the deals with market access and national treatment commitments refer to services trade rather than commitments under Part III of GATS. It envisages immigration policy. commitments essentially for natural persons with Assumption 2. Employment-based movement is a less professional skills on short-term, intra-company visits fruitful subject for multilateral trade negotiations than (category 1) and short-term visits to fulfill contracts intra-corporate movement and the presence of natural (categories 2 and 3). Short term is defined in each case persons to fulfill services contracts. as a stay of less than a year. .or these classes of movement the schedule proposes a Service Provider Visa Intra-corporate movement is already one of the most (SPV) in order to separate procedures that affect liberal categories within Mode 4, but most existing temporary and permanent entry and therefore streamline commitments pertain only to managers, executives and those for temporary entry. specialists. Traditionally, this is a form of movement of greatest interest to developed country multinationals. The second part of the model schedule represents a set So the inclusion of this mode may seem to be only a of additional commitments that would be made under concession to their interests. But interestingly the Article XVIII of the GATS - along the lines of the emergence of IT multinationals like Infosys, Satyam, "reference paper" on basic telecommunications. This Wipro and TCS, implies that India also has a strong part encompasses domestic regulatory obligations that interest in intra-corporate movement, especially when would relate to the improvement of transparency of it pertains not just to the category of specialists but a procedures and disciplines on measures such as wider group of professionals. The model schedule qualification requirements and procedures, technical lowers the bar on intra-corporate transferees by standards and licensing requirements. advocating temporary entry of up to a year for a wider category of employees who provide assistance, advice The model schedule is based on three key assumptions. or service to a foreign client, or receive business Assumption 1. The emphasis should be on broad training, irrespective of their place in the horizontal commitments assuring a basic minimum level organizational hierarchy. .urthermore, there is no of access across all sectors, supplemented by sector- requirement of a period of prior employment and the specific commitments where deeper liberalization is proposed intra-corporate route is liberated from possible. quotas, wage-parity and other burdensome requirements. The main reasons for this position are first, (as stated above) the fact that India's export interest in this mode is Contract-based movement is more closely linked to the not confined to a few identifiable sectors but potentially EU's contract-based offer than to the US's H-1B specialty covers the whole gamut of services sectors. Secondly, occupation employment-based offer. There are two main horizontal commitments applying across all sectors reasons why a negotiating focus on contract-based would be easier to administer, especially for immigration approach is to be preferred. authorities; few countries have sectoral categories in Desirability: Contract-based movement is more their immigration laws, and even distinguishing between likely to be temporary than employment-based service providers and others has proved difficult. The movement, and that in itself is likely to be to India's emphasis on horizontal commitments does not, however, advantage. If the movement is temporary, then we 48 SUSTAINING INDIAS SERVICES REVOLUTION Table 1 -: Barriers to Mode 4 and the Approach Suggested in the Model Schedule Type of Barriers Suggested Approach Visa formalities Creation of a streamlined Service Provider Visa (SPV) for intra-corporate and contract-based movement of professionals for a period of less than one year. Quantitative restrictions (explicit or through Prohibited for the above class of providers by full economic needs tests) market access commitments Discrimination through internal measures Prohibited for the above class of providers by (taxes & regulations) national treatment commitments Lack of transparency and predictability in Positive obligations requiring publication in regimes consolidated form of all pertinent measures, and opportunity for prior comment on proposed changes in regimes Burdensome qualification, licensing and Presumption in favor of international standards technical regulations where they exist, and tests of competence where they do not. Only where necessary would a foreign professional be required to make up objectively verifiable deficiencies in education, training and experience can be fairly confident that India will gain. Schemes It may be easier to liberate contract-based like the United States H-1B visa are only notionally movement from economic needs tests (e.g. in the temporary and serve to facilitate selective EU offer) and wage-parity requirements (e.g. in the permanent migration, of which the benefits to India US offer). Hence, the provision in the model are ambiguous: the gains from remittances, schedule to eliminate both for contractual networks, investment, etc. must be weighed against movement. the possible costs of "brain drain." The suggested model schedule represents more liberal .easibility: It may be easier to seek more conditions than the current EU offer in several ways: liberal access on strictly short-term contract- there is no requirement that the contract be tendered or based movement through trade negotiations advertised; the maximum duration of stay is one year than on longer-term employment-based rather than 6 months; the list of professions is not movement. The former is more closely limited; there are no numerical ceilings or economic identified with trade in services per se while the needs test; there is provision for a special visa category latter is seen as a direct entry into the labor and additional regulatory commitments. market and likely to be determined by the needs of host economies and driven by the But there is a wider gap between the suggested model interests of firms based in the host country. schedule and the US's H-1B employment-based offer. The US regime does not provide for contract-based And the second reason implies that: movement. Even in the relatively unthreatening context It may be easier to create a separate fast-track non- of regional agreements with Chile and Singapore, such immigration visa category for strictly temporary movement has not been allowed. The main reason is the contract-based movement than for employment- insistence by the US labor interests that the Labor based movement. Hence, the suggestion for a Condition Application (LCA) - including its wage-parity "service provider visa" in the model schedule. requirement - be an integral part of any international HARNESSING INTERNATIONAL NEGOTIATIONS TO OBTAIN IMPROVED ACCESS AND PROMOTE DOMESTIC RE.ORMS 49 agreement, and their perception that such a condition discrimination through regulatory measures. In can only be effectively policed in the context of an addition, the model schedule would introduce hierarchy employment contract. Dealing with these concerns, and of measures, and the burden of proof would be placed overcoming this resistance, is perhaps the greatest on the regulator to justify the move from a less hurdle to the liberalization of Mode 4 under the GATS. burdensome measure to a more burdensome one. There would be a presumption that administering a test Assumption 3. It will be necessary to have Additional of professional competence and/or educational Commitments on transparency and domestic regulation. attainment to verify the foreign professional's .irst of all, in recognition of the fact that ignorance and competence is the least burdensome measure. Only unpredictability are themselves a major impediment to where it was necessary would a foreign professionals Mode 4 trade, and that existing GATS transparency be required to make up objectively verifiable rules are not adequate, the model schedule would deficiencies in their education, training and experience. require Members to make available, in a consolidated text, all measures that pertain to the temporary The Role of the Approaches admission of natural persons; provide information on The approaches identified here should be seen as the materials or evidence required of an applicant extremely preliminary, seeking primarily to highlight key seeking temporary admission into their territories; and issues. But properly developed, they could serve several grant approval of applications for temporary admission functions. At the very least, they could form the basis for within a defined period of time. .urthermore, interested focused consultations - first internally with key parties (including trading partners) would ideally be stakeholders and then externally with the main trading given an opportunity for comment prior to the partners - on how to secure more liberal conditions for introduction of any new measure or alteration of trade through these modes. They could also form the existing measures pertaining to the temporary basis for an efficient information gathering exercise: e.g. movement under Mode 4. it could be proposed that WTO Members reveal all Domestic regulations such as qualification measures that they maintain are inconsistent with the requirements, licensing requirements and procedures, proposed degree of openness. At best, these and technical regulations are a major impediment to approaches can offer a concrete way forward, and if Mode 4. The promise of national treatment is of there were sufficient domestic and international considerable value because it would insure Indian consensus, their essence could even form the basis for professionals against de jure and de facto specific WTO decisions. 50 SUSTAINING INDIAS SERVICES REVOLUTION (*) of 49% to ubjects restriction from equity rise .DI policy retail in continue. Planned rise 74%. to to .DI Liberalization Equity to to oreign. automatic cap 49%. 100% to approval. Current no trade to a , unds. within and as the sector computer not market chain; tariff remain. backward well are ceiling; area within issues discourages are on norms; exposure and endingl for as that andL value USOs establishing retained land capitalization repatriation. policy dampens laws be structure the sector SUs,P unorganised to inimumm sectors to barriers on Liberalization duty axT sector: responsibilities along property uncertainty regimes, enforced; graduallyis Compulsory requirements of capitalization social priority titles; rgeaL banks. the minimum compliance; Domestic . -holders to tax customs policy andl estrictionr clear Planned connect- and branch preference number country; of owl olicyP High penetration; movement Intellectual effectively Some inter egulatorR policy credibility Minimum of the rural classes. Mandatory rural domestic Price large external unclear restrictions; norm; ackL government; with distortions. and olicyP Current 26% in equity 49% ithw have no subject to is providers except B2B to 74% foreign to portfolio banks 20%. .DI foreign wholesale commercial for allowed voice limited of and no to in Current foreign on firms firms with segments. segmentslla in on onditionc hought continue restrictions limited .DI limits No most equity where closed allowedis barriers foreign foreign nationalized of services limit. providers. restrictive, in equity rights. in of statutory lloweda estate .DI 26% domestic real Commitments, strictionseR explicit owned segments, .DI of foreign voting .DI distribution but No presence disinvestment commerce. ully. overall some telephone 49% number Somewhat limit Private and 10% investment to 100% except permitted. etailR firms, services. TSAG to fo in 1: 51% only of share only with 51%. to branches; on to up estrictedr number and system ableT categories. up Commitments on presence number limit related services equity equity most commitments brokers. ommitment.c Annex TSAG licensed the and banking in on requirements. participation equity TS oreign. allowed. reigno. 25% strictionseR reinsurance total GA providers. Limited on overseas Commercial through Cap licenses of assets oreign. infrastructure construction foreign No or and -related services ervicess ervicess engineering Sector Computer software elecommunicationsT nanciali. (Insurance) nanciali. (banking) Construction related Distribution HARNESSING INTERNATIONAL NEGOTIATIONS TO OBTAIN IMPROVED ACCESS AND PROMOTE DOMESTIC RE.ORMS 51 (*) for 49% DTH services. to in .IPB to foreign in Planned change. up change. Liberalization No Automatic approval courier .DI allowed subject approval. No Allow airlines passenger transportation. . fo the a with USO of 20. of multi-., issues system. to postal between demarcation -linking movement allowed service Up between (e.g responsibilities policy Absence limited state definition divided firms to and state- issues states; accreditation functional barriers. inter distortions. Domestic and partnersfo No on departments regulator Imprecise partnership preferences explicit Overlapping market transport). coordination olicyP esponsibilitiesR Centre standardized Only number Price operators; between provider; Some restrictions. andL strictionseR goods; and government modal to Current foreign and providers providers providers on -4. allowed services restrictive across restrictions but but but commercial service commercial service Mode not services. maritime in foreign on firms, on firms, courier services. estrictionsR audits. on under for picture commercial significant foreign foreign providers significantly .DI postal television on but transport. barriers foreign of on 4. barriers foreign of on 4. 2002-03 statutory open for motion vary providers service and 100% rail strictionseR Mode Mode restricted. on Budget explicit explicit regime closed and radio restrictions transport No presence restrictions under No presence restrictions under Highly service oreign. undertake .DI and Liberal on No presence. estrictionsR air segments. road in Union Plan: - no films. areY of vei. foreign operate. cross to on motion in estrictionsr enthT Commitments quantity 51%. .DI: TSAG owned ommitment.c ommitment.c ommitment.c ommitment.c to commitment. allowed TS TS TS TS trade ithw and investment on TS GA GA GA GA Majority firms No No No No Commitments border pictures quality reigno. GA Group restricted No Steering 1) het of ableT Services Services eportR Annex Social& Services Services -visual The (Contd. Sector Health Services Architectural egalL Accountancy Postal Audio ourismT ransportT :ecruoS (*) Bibliography Bibliography BANERJEE, ABHIJIT, SHAWN COLE AND ESTHER DU.LO (2003): "Bank .inancing in India", Paper presented at the IM. Conference 'A Tale of Two Giants: India's and China's Experience with Reform and Growth,' October 2003. BURGESS, ROBIN & PANDE, ROHINI (2003). "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment." April 2003. CARNEGIE MELLON UNIVERSITY (1998): "The Globalization of Software: The Case of the Indian Software Industry." Software Industry in India Project Team, Pittsburgh. CASSAMAJOR, KAREN (2002): Emerging Issues - CPC 2007 Revision, 17th Voorburg Group Meeting on Service Statistics, United Nations Statistics Division, September 2002, downloaded from www.insee.fr/en/av_service/colloques/pdf/CLASS6.pdf in April 2003. CAVE, WILLIAM (2002): A Contribution for the Session on Classifications: Measuring International Trade in Services and New Demands on the .amily, 17th Voorburg Group Meeting on Service Statistics, Nantes, September 23-27, 2002. CHANDA RUPA (2001): "Trade in Health Services." Indian Council for Research on International Economic Relations, Working Paper (Revised) No. 70. CHANDA, RUPA (2002): "Movement of Natural Persons and the GATS Major Trade Policy Impediments." In Bernard Hoekman, Aaditya Mattoo and Philip English eds., Development, Trade and the WTO. Washington, DC: World Bank. CHANDA, RUPA (2003): "Globalization of Services: India's Opportunities and Constraints." Oxford University Press. CHAUDHURI, SUMANTA, AADITYA MATTOO and RICHARD SEL. (2004): Moving People to Deliver Services: How Can the WTO Help, World Bank Policy Research Working Paper. Deloitte Research (2003): 'The Cusp of a Revolution: How Offshoring Will Transform the .inancial Services Industry.' Deloitte Touche Tohmatsu. Department of Telecommunications (2003).'Guidelines for Implementation of Universal Service Support,' Ministry of Communications and Information Technology, Government of India. DESAI, ASHOK V. (2002): "The Dynamics of the Indian Information Technology Industry." Centre for New and Emerging Markets, London Business School, May 2002. DESAI, MIHIR A., DAVESH KAPUR AND JOHN MCHALE (2001): "Sharing the Spoils :Taxing International Human .lows." Weatherhead Center for International Affairs Working Paper 02-06. Harvard University, Cambridge, Mass. DOLLAR, DAVID AND ONKAR GOSWAMI (2002): " Competitiveness of Indian Manufacturing: Results from a .irm Level Survey," The World Bank, January 2002. 54 SUSTAINING INDIAS SERVICES REVOLUTION GORDON, JAMES AND POONAM GUPTA (2003): "Understanding India's Services Revolution," Paper presented at the IM. Conference 'A Tale of Two Giants: India's and China's Experience with Reform and Growth,' November 2003. HAUSER, HEINZ and SACHA WUNSCH-VINCENT (2002): The Cross-Border Trade in Electronic Services: The Role of the WTO and Challenges to National Policies, Expert Report for the German Parliament, April 2002, available only in German; downloaded from http://www.wtoresearch.ch. HENRY, PAUL (2003): "Mode 4: Through a Canadian Immigration Policy Lens." in Mattoo and Carzaniga. HIRA, RON (2003): "Utilizing Immigration Regulations as a Competitive Advantage : An Additional Explanation for India's Success in Exporting Information Technology Services." CSPO Working Paper, Columbia University. IM. (2002): Balance of Payments Statistics Yearbook. INDIA TENTH PLAN (2002-2007), Planning Commission, Government of India. ITC (2000): Offshore Back Office Operations: Supplying Support Services to Global Markets; Geneva: ITC JOSEPH, K.J. & HARILAL, K.N. (2001): "Structure and Growth of India's IT Exports: Implications of an Export-Oriented Growth Strategy." Economic and Political Weekly, August 2001. JOSEPH, K.J. (2002): "Growth of ICT and ICT for Development: Realities of the Myths of the Indian Experience," Discussion Paper No. 2002/78, UNU/WIDER Conference, 10-11 May 2002, Helsinki. MATTOO, AADITYA and LUDGER SCHUKNECHT (2001): A WTO-.ramework for the New Economy, Paper presented at the Paderborn Konferenz on "Economic Policy in the New Economy", May 15 - 16, 2001. MATTOO, AADITYA, ANTONIA CARZANIGA (2003): "Moving People to Deliver Services." Oxford University Press and World Bank, Washington, D.C. (forthcoming). McKINSEY and Co. (2001): 'India - The Growth Imperative: Understanding the Barriers to Rapid Growth and Employment Creation.' MATTOO, AADITYA, and MISHRA, DEEPAK (2003): "Promoting Exports: The Role of Inward .DI in the Indian IT Sector." World Bank, Bangalore, March 2003. MATTOO, AADITYA AND SACHA WUNSCH (2004): Pre-Empting Protectionism in Services: The WTO and Outsourcing, World Bank Policy Research Working Paper. MUKHERJEE, ARPITA (2001): "Trade in Construction and Consultancy Services: India and the GATS." Indian Council for Research on International Economic Relations, Working Paper No. 75. MUKHERJEE, ARPITA (2002): "Distribution Services: India and the GATS 2000 Negotiations." Indian Council for Research on International Economic Relations, Working Paper No. 80. NASSCOM-McKinsey Report (2002). 'Strategies to Achieve the Indian IT Industry's Aspiration.' NIELSON, JULIA AND CATTANEO (2003): "Labour Mobility in Regional Trade Agreements." in Mattoo and Carzaniga. OECD (2000): Electronic Commerce- Existing GATS Commitments for Online Supply of Services; Paris: Trade Directorate (Trade Committee of the OECD); Report Number TD/TC/WP(99)37/.inal. PAGE, PIERRE E. (2003) : "The Temporary Inflow of Natural Persons for the Swiss IT Market." in Mattoo and Carzaniga. PARIKH, VAIBHAV V. (2003): "Mode 4 and the Software Services Sector: An Indian View." in Mattoo and Carzaniga. BIBLIOGRAPHY 55 PATIBANDLA, MURALI, KAPUR, DEEPAK & PETERSEN, BENT (2000): "Import Substitution with .ree Trade: Case of India's Software Industry." Economic and Political Weekly, April 2000. REDDY, PRASHANTH K. & KUMAR, SAURABH (2002): "Strategic Direction for Indian Software .irms - Services vis-à- vis Products." Indian Institute of Management, Ahmedabad, November 2002. Report of the Committee on Corporate Audit and Governance (Naresh Chandra Committee) (2002). Report of the Steering Group on .oreign Direct Investment (2002): Planning Commission, Government of India. Report on Trade in Accountancy Services (1999). 'Trade in Services: Opportunities and Constraints." Indian Council for Research on International Economic Relations, Coordinator T.C.A. Anant, Chief- Coordinator B.K. Zutshi. Report on Trade in .inancial Services (1999). 'Trade in Services: Opportunities and Constraints." Indian Council for Research on International Economic Relations, Coordinator N. Vaghul, Chief- Coordinator B.K. Zutshi. Report on Trade in Health Services (1999). 'Trade in Services: Opportunities and Constraints." Indian Council for Research on International Economic Relations, Coordinator Yogi Mehrotra, Chief- Coordinator B.K. Zutshi. Report on Trade in Legal Services (1999). 'Trade in Services: Opportunities and Constraints." Indian Council for Research on International Economic Relations, Coordinator N.L. Mitra, Chief- Coordinator B.K. Zutshi. Report on Trade in Software Services (1999). 'Trade in Services: Opportunities and Constraints." Indian Council for Research on International Economic Relations, Coordinator N.R. Narayana Murthy, Chief- Coordinator B.K. Zutshi. Report on Trade in Telecommunication Services (2000). 'Trade in Services: Opportunities and Constraints." Indian Council for Research on International Economic Relations, Coordinator Harsha Vardhan Singh, Chief- Coordinator B.K. Zutshi. RESERVE BANK O. INDIA (2001): 'Invisibles in India's Balance of Payments: 1997-98 to 1999-2000', Reserve Bank of India Bulletin, January 2001. Secretariat for Industrial Assistance. 'Guidelines for .DI in Development of Integrated Township Including Housing and Building Material,' Ministry of Commerce and Industry, Government of India. Secretariat for Industrial Assistance. 'Guidelines for .DI in the Banking Sector,' Ministry of Commerce and Industry, Government of India. Secretariat for Industrial Assistance. 'Telecommunication India,' Ministry of Commerce and Industry, Government of India. Secretariat for Industrial Assistance (2003): Newsletter, January 2003, Ministry of Commerce and Industry, Government of India. SEL., RICHARD J. AND B.K. ZUTSHI (2003): "Mode 4: Negotiating Challenges and Opportunities." in Mattoo and Carzaniga. STEPHENSON, SHERRY M. (2002), Regional Versus Multilateral Liberalization Of Services, World Trade Review 1 (2), pp. 187-209 TELECOM REGULATORY AUTHORITY O. INDIA (2000): 'Consultation Paper on Universal Service Obligations,' Consultation Paper No. 2000/3, July 2000. UNITED NATIONS (1991): Provisional Central Product Classification (CPC); Department of Economic and Social Affairs, Statistical Papers, Series M, No. 77, Ver.1.1, E.91.XVII.7, New York: United Nations. 56 SUSTAINING INDIAS SERVICES REVOLUTION UNITED NATIONS (1998): Central Product Classification (CPC): Version 1.0; Department of Economic and Social Affairs, Statistical Papers, Series M, No. 77, Ver.1.1, E.98.XVII.5, New York: United Nations. UNITED NATIONS (2002): Central Product Classification (CPC): Version 1.1; Department of Economic and Social Affairs, Statistical Papers, Series M No. 77, Ver.1.1, ESA/STAT/SER.M/77/Ver.1.1, New York: United Nations. UNCTAD-WHO Joint Publication (1998): International Trade in Health Services: A Development Perspective; Geneva. WAGHORNE, MIKE (2003): "Mode 4 and Trade Union Concerns." in Mattoo and Carzaniga. WIBULPOLPARSERT, SUWIT (2003): "International Trade and the Migration of Healthcare Workers: Thailand's Experience." in Mattoo and Carzaniga. WINTERS, L. ALAN (2003): "The Economic Implications of Liberalizing Mode 4 Trade." in Mattoo and Carzaniga. WINTERS, L. ALAN, TERRIE L. WALMSLEY, ZHEN KUN WANG AND ROMAN GRYNBERG (2002): "Negotiating the Liberalization of the Temporary Movement of Natural Persons." Economics Discussion Paper 87. University of Sussex, Brighton. WORLD BANK (2002): 'Trade in Services: Using Openness to Grow." Global Economic Prospects, 2002. WORLD BANK (2002): "The Reform of India Post: Transforming a Postal Infrastructure to Deliver Modern Information and .inancial Services." WORLD BANK (2002): "Transport Study of India." WTO (2001): Market Access: Unfinished Business- Post Uruguay Round, Inventory and Issues; Geneva: WTO Economic Research and Analysis Division, Coordinator Marc Bacchetta. WTO (2002): International Trade Statistics, 2002. Appendix: Pattern of Trade in Services Appendix: Pattern of Trade in Services T his annex describes the pattern of India's trade in of work to improve the quality of statistics, and ensure a services, drawing mainly upon balance of closer relationship between the data reported by the Reserve payments statistics from the IM. and data on Bank of India and the sectoral and modal classification invisibles from the RBI. The level of detail and quality of adopted under the GATS. data on international services transactions involving India is in many respects unsatisfactory - as is the case Notwithstanding these difficulties, the various statistical for most countries. Given the "invisibility" of most indicators compiled in this appendix reveal certain services, international transactions often can only be clear trends: recorded indirectly, through exchange records or by While India recorded a negative trade balance in estimates based on complementary data. Moreover, the services throughout the 1990s, the composition of current statistical information on services trade only both imports and exports changed significantly incompletely captures the four modes through which during that time period.32 services are supplied (see Box A1 for a brief review of the four modes of service delivery). The most dynamic component on the credit side has been the exports of computer-related services. The limitations of the existing statistical domains in providing information on trade by different modes of supply On the debit side, imports of financial services, have are listed in Table A1 below. India has initiated a program been one of the fastest growing major components. Box A1: The .our Modes of Trade in Services Services trade encompasses four modes of delivery: Mode 1 or Cross-border supply is analogous to trade in goods. An example is software services produced in one country and supplied through mail or electronic means to consumers in another country. Mode 2 or Consumption abroad occurs when consumers move, e.g. to consume tourism or education services in another country. Mode 3 or Commercial presence involves foreign direct investment, and includes services supplied through any type of foreign business or professional establishment. An example is an insurance company owned by citizens of one country establishing a branch in another country. Mode 4 or Presence of natural persons involves the movement of service-supplying nationals of one country to the territory of another. Examples are a doctor of one country supplying through his physical presence services in another country, or the foreign employees of a foreign bank. Source: World Bank Staff 32 However, as per RBI data, India has registered a surplus in trade balance in services during the late-1990s and the size of this surplus has more than tripled from US $ 1.3 billion in 1997-98 to US $ 4.2 billion in 2001-02. 58 SUSTAINING INDIAS SERVICES REVOLUTION Table A1: Inadequacies of Statistical Domains with regard to Modes of Supply Mode of Supply Relevant Data Source Inadequacies Cross border supply BOP service statistics - BOP does not distinguish among cross border (categories other than travel) supply, commercial presence (firms) and presence of natural persons (individuals) for less than one year Consumption abroad BOP statistics (mainly the - Travel also contains goods, and is not travel category) subdivided into the different categories of services consumed by travelers - Some transactions related to this mode of supply are also in other BOP categories Commercial presence .DI and foreign affiliates - .DI statistics do not provide data on output trade (.AT) statistics (or sales); .DI definition does not match the definition of commercial presence - .AT statistics only exist for the United States. Basic concepts and definitions are in the process of being established internationally. Presence of natural BOP statistics (mostly - BOP do not distinguish between cross border persons (independent) categories other than supply, presence of natural persons (individuals) transport and travel) and commercial presence for less than one year - natural persons who are residents are not covered Presence of natural Employment data from - not yet available Persons (employees) .AT statistics Source: World Bank Staff Composition of Exports. India's exports of services enumerated elsewhere, now accounts for 22.6 amounted to $20.3 billion in 2001/02, representing percent of total services exports, having grown at a 30 percent of India's total exports of goods and rate of 32% per annum in the last five years. services. Not only did the exports of services double over the past four years, starting from a level of $9.5 Composition of Imports. During the last four years, billion in 1997/98, but their composition also imports of services have increased at an equally rapid changed significantly. Over the period 1997-2002, rate, from $8.1 billion in 1997/98 to $16 billion in the relative shares of travel and transportation 2001/02. There has been a considerable growth of services fell from 31 and 19 percent to 14 and 10 imports of 'other services,' which increased their share percent, respectively, while the share of software of total services imports from 21% in 1997/98 to exports increased from 19 percent to 34 percent 28% in 2001/02 (.igure A2). The financial services (.igure A1). In dollar terms, software exports have sub-component expanded from $0.6 billion in 1997- expanded from $1.8 billion in 1997/98 to over $7 98 to over $2.3 billion in 2001-02. The other billion in 2001/02 - at an average annual rate of component that witnessed significant growth includes management services, which contributed 11 percent 46.3 percent per year - and now account for almost of overall services imports and grew at 25% per half of miscellaneous business, professional, and annum in the last five years. technical services. The category "other services," which includes advertising, rentals, office Trade Balance in Services. According to RBI data on maintenance, prizes, exhibitions & other services not trade in services, India recorded a positive trade APPENDIX: PATTERN O. TRADE IN SERVICES 59 .igure A1: Changing composition of India's Exports of Services Communication 2% Source: RBI Bulletins .igure A2: Changing composition of India's Imports of Services Source: RBI Bulletins balance in services throughout the 1990s (barring negative trade balance, with financial services 1995-96), amounting to $4.2 billion or 26 percent of recording the largest deficit. The services trade balance total services imports in the year 2001-02 (.igure A3). would however look very different if one uses the IM. A positive trade balance is to be found in two of the Balance of Payment statistics data during the 1990s, as main services categories in 2001-02 viz. software and there is a significant discrepancy between the two travel services, with software services recording the sources. .or example, in 1999, as per The IM. BOP, greatest surplus. .inancial, management, India registers a negative trade balance of US $ 2762 transportation and construction services exhibit a million, while RBI data for the period 1999-2000 60 SUSTAINING INDIAS SERVICES REVOLUTION .igure A3: India's Trade Balance in Services (US $ million) Source: RBI Bulletins shows a positive trade balance of US $ 4064 million. and/or use of mirror statistics by the IM.. However, There could be several explanations for the these differences have been reconciled in the years discrepancies, including difference in definitions33 2000 and 2001. 33 The IM. Balance of Payments classify data into travel, transportation and "other services" which include services like, communication, computer, construction, financial, government, insurance, personal and recreational, royalties, and "other business services." The RBI, on the other hand, records transactions as travel, transportation, insurance, government and "miscellaneous services," with the latter including communication, computer, construction, financial, management, royalties, and "other services." "Other services" include advertising, rentals, office maintenance, prizes, exhibitions and other services not enumerated elsewhere. APPENDIX: PATTERN O. TRADE IN SERVICES 61 .65 .86 .78 11.2 .06 -0.8 17.0 .05 -1.6 2001-02 .44 .65 .93 .96 .34 .13 6.82 -2.8 .73 .82 .95 4.33 .88 2000-01 .16 0.11 .96 1.21 .09 .97 .70 .39 .15 2.02 .10 5.81 -6.1 .82 .85 3.83 .88 4.51 0.01 2.51 .03 1999-00 .56 .48 .27 13.0 .81 .36 .13 -1.5 .74 19.9 .10 .09 .57 .62 .95 25.8 .32 10.2 21.7 .48 .92 1950-2002 1998-99 (%), .84 .89 .67 .28 .81 .66 -1.0 .84 -5.0 20.8 .44 14.6 50.9 .82 .45 27.8 .32 11.6 35.5 .58 .82 atesR 1997-98 Growth 1990s .16 .97 .18 10.1 .23 .77 .44 .16 .71 15.1 .81 11.8 .66 .14 .94 21.1 .85 .99 16.0 .09 .43 1980s .55 .96 .95 .26 .74 .86 .25 .74 .23 .95 .14 13.6 .57 .38 .53 13.7 .48 .96 .26 .97 .03 Annual and 1970s .43 .74 .05 .05 .83 .85 .86 13.3 12.8 .36 3.7 .87 .87 .03 .14 12.8 .69 .53 .94 .35 .92 Decadal 1960s .33 .64 .54 .44 .24 .26 .74 10.4 .83 .17 .05 .05 .62 .42 -0.7 .50 .77 .08 .06 .30 verageA 1950s .73 4.2 5.0 4.8 5.3 .75 .16 9.7 2.0 6.8 7.7 .77 2.2 3.1 0.5 0.0 .47 7.5 3.8 .40 A2: ableT cost ervicess factorta services services roductp restaurants& services scientific& health& entertainment& transport transport services domestic radeT Hotels ilwaysaR oadR teraW transport estate Air Storage Communication ostalP Banking Insurance Dwellings ealR Business egalL Education esearchR Medical ecreationR Gross Services :ecruoSCSO 62 SUSTAINING INDIAS SERVICES REVOLUTION 24.1 27.2 49.5 28.3 .22 .22 .10 .16 11.8 .21 2001-02 24.2 27.3 48.5 28.1 .12 .32 .10 .64 12.2 .31 .19 .10 .92 .40 2000-01 25.2 26.7 48.1 28.4 .12 .32 .56 .40 .41 .10 .24 13.1 .41 .39 .10 .32 .40 .08 .70 .52 .10 1999-00 26.4 27.0 46.6 29.1 .12 .32 .66 .50 .41 .10 .14 12.4 .61 .99 .10 .91 .40 .67 .70 .42 .10 1998-99 26.5 27.7 45.8 29.4 .02 .42 .76 .50 .51 .10 .73 12.3 .61 10.4 .10 .61 .40 .57 .70 .42 .10 (1950-2002) 1997-98 GDP of 1990s 26.6 32.8 40.6 28.9 .91 .82 .86 .60 .51 .20 .23 11.2 .41 11.5 .10 .31 .50 .76 .50 .22 .10 1980s 27.2 43.9 28.8 30.6 .81 .83 .76 .90 .71 .30 .62 .36 .51 11.3 .10 .70 .50 .27 .50 .32 .20 Distribution 1970s 32.9 40.6 26.5 31.6 .81 .34 .75 .90 .41 .20 .42 .64 .31 11.5 .10 .30 .30 .77 .50 .02 .30 Sectoral 1960s 37.6 37.7 24.7 32.1 .91 .74 .94 .80 .70 .20 .02 .63 .01 13.4 .20 .30 .40 .37 .40 .81 .40 A3: ableT 1950s 55.9 16.0 28.2 30.1 1.8 4.6 .24 .70 0.4 0.3 1.6 3.1 .90 17.0 0.2 0.5 0.6 .45 0.3 1.7 0.6 services of: (%) (%) entertainment& services (%) (%) services restaurants& scientific& health& in transport transport services radeT Hotels ilwaysaR oadR teraW transport estate Air Storage Communication Banking Insurance Dwellings ealR Business egalL Education searcheR Medical ecreationR Agriculture Industry Services Share :ecruoSCSO APPENDIX: PATTERN O. TRADE IN SERVICES 63 2002 77,602 24,859 (32%) 3,013 2,530 19,316 368 306 12 18,630 2002 83,850 18,691 (22%) 3,449 2,537 12,706 311 228 350 11,817 1002 66,285 20,886 (32%) 2,940 1,991 15,955 271 474 85 15,126 1002 74,485 16,253 (22%) 2,306 2,406 11,541 256 274 567 10,444 scitsitatSPOB.MI 0002 64,811 19,175 (30%) 3,219 1,944 14,011 262 669 63 13,018 0002 76,922 16,654 (22%) 2,918 3,222 10,514 125 346 526 9,517 9991 51,386 14,509 (28%) 3,010 1,844 9,656 238 503 23 8,892 9991 62,828 17,271 (27%) 2,010 6,979 8,282 614 227 315 7,126 morfsecivreSdnasdooGfostropmIdnastropxEsaidnI:4AelbaT 8991 45,767 11,691 (26%) 2,949 1,773 6,970 230 624 19 6,096 8991 59,368 14,540 (24%) 1,713 7,093 5,734 628 348 201 4,557 STROPXE 7991 44,812 9,111 (20%) 2,890 1,942 4,279 229 185 12 3,852 6991 95 7 STROPMI 7991 58,173 12,443 (21%) 1,342 6,813 4,288 650 166 150 3,321 40,976 7,238 (18%) 2,831 1,989 2,418 210 2,142 6991 54,960 11,171 (20%) 913 6,447 3,811 587 171 118 2,935 5991 1 38,013 6,775 (18%) 2,582 1,890 2,303 170 11 2,120 5991 48,225 10,268 (21%) 996 5,703 3,569 559 206 90 2,714 0991 1 22,911 4,625 (20%) 1,558 959 2,017 123 51 1,967 0991 29,527 6,090 (21%) 393 ,4183 2,278 344 147 72 1,715 )noillim$SUniserugif(yrogetaC 2002 exports) otalT fees earbookY of of services %a license Services Statistics and as and BOP Services Business Services Business Goods Services (Services avelrT ansportationrT Other Insurance GNIE oyaltiesR Other :ecruoS IM. )noillim$SUniserugif(yrogetaC 2002 exports) otalT fees earbookY services %a license Services Statistics and as and BOP Goods Services (Services avelrT ansportationrT Other Insurance GNIE oyaltiesR Other :ecruoS IM. 64 SUSTAINING INDIAS SERVICES REVOLUTION Table A5: Indias Exports and Imports of Goods and Services from RBI Statistics EXPORTS Category (figures in US $ million) 1997-98 1998-99 1999-00 2000-01 2001-02 Goods and services 45,109 47,484 53,251 63,764 65,201 Services 9,429 13,186 15,709 18,870 20,286 (Services as a % of Total exports) (21%) (28%) (29%) (30%) (31%) Travel 2,914 2,993 3,036 3,168 2,910 Transportation 1,836 1,925 1,707 1,913 1,969 Insurance 240 224 231 257 267 GNIE 276 597 582 657 469 Miscellaneous 4,163 7,447 10,153 12,875 14,671 Communication services 171 601 1,064 1,288 921 Construction services 101 150 389 671 167 .inancial services 296 283 361 696 780 Software services 1,760 2,626 4,016 6,341 7,175 News agency services 156 262 342 114 7 Royalties, copyrights & license fees 21 18 54 62 84 Management services 549 590 643 970 951 Other services 1,109 2,917 3,284 2,733 4,586 Source: RBI Bulletin, May 2003 IMPORTS Category (figures in US $ million) 1997-98 1998-99 1999-00 2000-01 2001-02 Goods and services 59,297 58,565 67,028 75,656 73,705 Services 8,110 11,021 11,645 16,392 16,087 (Services as a % of Total exports) (14%) (19%) (17%) (22%) (22%) Travel 1,437 1,743 2,139 2,874 2,282 Transportation 2,522 2,680 2,410 3,170 2,382 Insurance 183 112 122 122 254 GNIE 160 325 270 341 272 Miscellaneous 3,808 6,161 6,704 9,885 10,897 Communication services 87 103 190 247 571 Construction services 65 98 51 216 517 .inancial services 647 687 1,632 2,003 2,335 Software services 223 348 138 590 672 News agency services 142 104 90 299 317 Royalties, copyrights & license fees 166 250 311 514 561 Management services 841 663 795 1,385 1,752 Other services 1,637 3,908 3,497 4,631 4,172 Source: RBI Bulletin, May 2003 APPENDIX: PATTERN O. TRADE IN SERVICES 65 Persons Consulted During the Preparation of this Study (in alphabetical order) Manmohan Lal Aggarwal, JNU Arpita Mukherjee, ICRIER Vandana Aggarwal, Ministry of Commerce & Industry S.P. Narang, Institute of Company Secretaries of India Anil Baijal, Ministry of Information & Broadcasting P.S. Narotra, Ministry of Communications & G.N. Bajpai, SEBI Information Technology Suman Berry, NCAER Sanjay Nayar, Citibank Sunil Bhargava, S. Bhargava Associates, Chartered Rupa Rege Nitsure, ICICI Accountants J.N. Bhawani Prasad, Ministry of Urban Development Jayant Bhuyan, ASSOCHAM Andy Raheja, Private Consultant Chetan Bijesure, .ICCI Mahendra Raj, Mahendra Raj Consultants Rupa Chanda, IIM Bangalore Pvt. Ltd. Sumanta Chaudhuri, Ministry of Commerce & Industry M. Ramachandran, Ministry of Shipping Bibek Debroy, Rajiv Gandhi .oundation S.V. Ramachandran, NASSCOM G.S. Dutt, DEA Ajit Ranade, ABN Amro Subash C. Garg, DEA Sripriya Ranganathan, Ministry of Commerce & Industry S.N. Menon, Ministry of Commerce & Industry Bhuvaneswari Ravindran, Ministry of Commerce & Industry E.V. Eapen, Ministry of Commerce & Industry R. Gopalan, Ministry of Commerce & Industry K.U.B. Rao, RBI Anwarul Hoda, ICRIER Alok Rawat, Ministry of Road Transport & Highways P.K. Hota, Ministry of Urban Development Ashok Sahoo, RBI Narendra Jadhav, RBI Ajay Shah, Ministry of .inance Veena Jha, UNCTAD Ajay Shankar, Ministry of Power Mathew Joseph, ICICI B.P. Sharma, Ministry of Health & .amily Welfare Asha Kannan, RBI V.K. Sharma, Ministry of Urban Development Suparna Karmakar, ASSOCHAM Harsha Vardhan Singh, TRAI Kiran Karnik, NASSCOM V.P. Sinha, DoT Sunil Mahajan, Construction Industry Development A. K. Srimany, RBI Council P.K. Srivastava, Ministry of Health P.K. Mahapatra, RBI Manab Majumdar, .ICCI Suresh Tendulkar, Delhi School of Economics Rajiv Mehrishi, Ministry of .inance & Company Affairs Jayanth Varma, IIM Ahmedabad Rajesh Mehta, Research & Information System for the R.S. Viswanathan, CII Non-Aligned and other Developing Countries B.K. Zutshi, ICRIER