CASHING IN ON DIGITISATION, INDIA SHOULD NOW PROMOTE SERVICE LED GROWTH A HYBRID MODEL INCLUDING MANUFACTURING MAY BE SUITABLE AT THIS STAGE

At a time when India’s goods exports surged towards $400 billion mark and services exports $250 billion mark this financial year, it is really a welcome development that India has signed a comprehensive Economic Partnership agreement (CEPA) with United Arab Emirates (UAE). This is expected to take India’s two way goods trade with UAE to over $100 billion dollars apart from creating lakhs of additional jobs in the country. This is certainly going to act as a major booster to kick-start the economy after Covid Pandemic.

Economists Montek Singh Ahluwalia, Arvind Panagariha and Arvind Subramaniam, who have held very senior positions in the Indian government, have been advocating more such free trade agreements to move on to a higher growth trajectory. They even went to the extent of urging India to have a relook and sign the China led Asia-Pacific trade agreement, which they say is unavoidable in a globalised era to be competitive. It is also a welcome development that India is now pushing hard Indo-EU free trade agreement and reworking the India-Asean free trade agreement. More free trade agreements are signed the better for the Indian economy.

Apart from pushing goods exports, there is need for India to think out of the box for pushing services exports and promote services led economic growth instead of merely aping the East Asian economies and South East Asian tigers to become yet another global manufacturing hub to promote goods trade led growth. Former RBI governor Raghuram Rajan is right when he says India must play to its strength to pursue services led growth rather than copying east Asian economies. There is some element of political economy involved for succeeding in manufacturing led growth model. For manufacturing to flourish two things are very important – that is easy land acquisition policy and cheap and forced labour.

These two things can happen only in authoritarian regime like China and Vietnam and for that matter in many of the East Asian and miracle economies. India is a large and well entrenched democracy where civil and human rights are very important with strong civil societies and judiciary. Land acquisition is not that easy. We have seen Singur agitation which denied Tatas the requisite land to set up a small car factory in West Bengal. Several highway, railway, port and airport projects are stuck because of some litigation over land in pockets. Also it is not possible to pay labour below minimum wages as this sparks of protests. This does not mean India should not pursue infrastructure development and manufacturing which require large parcels of land.

So how do we grow rapidly? According to Raghuram Rajan its worth looking at services led growth. India’s services sector accounted for 57 per cent of GDP whereas manufacturing accounted for 16-17 per cent of GDP, which at best could be taken up to 25 per cent of GDP in a decade or so. India has already shown its prowess to the world in software development and are at present world leaders. The covid has led to a large scale digitisation globally, which only enhanced India’s opportunity in the services sector. In United States services sector accounted for 70 per cent of GDP and they have already shifted low level and middle level technology manufacturing to emerging markets.

It is therefore time for India to forcefully articulate the need for opening up and liberalisation of trade in services particularly in developed economies in various multilateral fora. To begin with this could be the main agenda, when India hosts the G-20 summit in the coming year. There is lot of scope in medical services, legal services and so on which India can cash-in in the face of the strong base. One important factor in promoting services sector is individual and personal data protection for which laws could be strengthened. With India having strong judicial system, it would be easier for India to win over the confidence of developed economies.

As it is there are global views lately that interventions taken to mitigate the impact of Covid-19 present an important opportunity to identify aspects of existing trade rules that may interfere with appropriate pandemic crisis responses and areas where those rules should be reformed. There is a view that emergency measures taken by several countries including India could contravene the trade rules embodied in World Trade Organisation agreement as well as other free trade and international investment agreements. Now digitisation, which has been promoted widely during Covid also led to the need for tweaking the trade laws and existing free trade agreements. There are some challenges but at the same time some opportunities too have been created to negotiate and promote further trade in services, which can open up new avenues to promote economic growth.

Just production of one car leads to three jobs and that of a commercial vehicle leads to 7 jobs, a high end services job in an IT company leads to a few low end service jobs like driver, cook, house keeper, e-commerce delivery boys and so on. This low end services jobs are done by people moving out of agriculture in rural areas. So as Rajan says it is time for India to now to think out of the box and work out an Indian model of development with more emphasis on services led growth. More appropriately a hybrid model combining more of services and some manufacturing could be the answer in the post covid recovery to high growth path.

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