India in Global Services Value Chain: The Case of IT-BPM.

• Author: Pattnayak, Sanja Samirana

1. Introduction

   The services sector remains the prime driver of India's overall economic growth and one of the most attractive sectors for foreign direct investment (FDI) inflows. This is an interesting development because advancements in transportation and communication have resulted in fragmentation and specialization of production at the global scale. Global value chains (GVCs) provide an opportunity for developing countries to increase their participation in the world economy. Since these countries need to specialize only in certain parts of the manufacturing process, they can integrate into the global economy at lower costs than if required to manufacture the entire product. Moreover, they can move up the value chain as they attain higher levels of efficiency and technology.

   For a rapidly growing country like India, the services sector is an important contributor to the economy in terms of growth and export. In fact, the rate of growth of services is much higher than those of manufacturing and overall GDP. India has witnessed services-driven growth since the early 1990s, after the deregulation and liberalization of the economy. The sector grew at about 8 per cent from 2012 to 2014, and at 10 per cent between 2014 and 2016 (Economic Survey 2015-2016, Government of India).

   The country's growth process has been unique in that, despite substantial reduction in the share of agriculture in GDP, the contribution of the manufacturing sector did not grow as expected. Instead, it was absorbed by services. This convention-defying growth in the tertiary sector has drawn global attention as India managed to leapfrog directly from agriculture to services. Today, the services sector output accounts for more than half of the national GDP. According to the Economic Survey 2015-16, the sector contributed to 69 per cent of the total growth of the economy over the 2011-12 to 2015-16 period. As the sector moves up towards higher value-added activities, GVCs have the potential to accelerate economic growth. As a matter of fact, the growth of value-added (GVA) for the whole economy increased from 4.9 per cent in 2012-13 to 7.5 per cent in 2014-15, which was attributed solely to services since the share of agriculture and manufacturing declined over the same period.

   Concurrently, for some time now, India has been pursuing services-led export growth. While goods trade has shown a net deficit over between 2011 and 2015, services has consistently enjoyed a trade surplus over the same period. Based on the Economic Survey 2015-16, the share of India's services exports in global services exports was 3.2 per cent in 2014, almost twice its share of merchandise exports in global merchandise exports at 1.7 per cent. Comparing the growth rate of merchandise exports to services exports, the former grew at an annual average rate of 2.2 per cent, while the latter grew at a much higher rate of 10.3 per cent between 2011 and 2015.

   Services exports has consistently provided a cushion to finance the current account deficit for the Indian economy as a whole. For example, owing to uncertain global conditions and weak external demand, India's services exports rose marginally to 4.1 per cent in 2014-15 from 4.0 per cent the previous year (Handbook of Statistics on Indian Economy, Reserve Bank of India). In contrast, services imports were valued at US$81.1 billion in 2014-15, recording a growth of 3.3 per cent. Net exports of services, which is a major source of financing India's trade deficit, however, fell from 12.4 per cent from 2013-14 to 5.0 per cent in 2014-15.

   It should also be noted that services remains the country's most attractive sector for FDI inflows. Several of the top ten areas attracting FDI belong to the services sector, including: financial and non-financial services; construction development; computer software and hardware; telecommunications; and trading. The combined share of these five subsectors accounted for 42 per cent of the total cumulative FDI equity inflows into the country between 2000 and 2017 (FDI Statistics, Department of Industrial Policy and Promotion, Government of India).

   This paper examines the development of the services sector in India in terms of the global value chain framework, with a special emphasis on IT-BPM services. Focusing on the backward and forward linkages of the sector, it highlights the contribution of services to manufacturing and overall economic growth. The article is organized as follows. The next section discusses the GVC framework in the context of the Indian economy. The "IT-BPM framework" is developed in the third section. And the final section concludes with policy implications.

2. Services and Global Value Chain in India

   Countries and sectors can be linked to each other in the GVC through backward, forward or total linkages. Backward linkage of a sector measures the inducement to production in other sectors, which is absorbed as an input to the former. On the other hand, a sector's forward linkage measures the extent to which it provides inputs for utilization by other sectors. The sectors with the highest total linkages are referred to as the key sectors. This study uses the Chenery-Watanabe (1958) and Rasmussen (1956) method to calculate direct and indirect forward and backward linkage coefficients using the technical coefficient matrix (A), allocation co-efficient matrix (B) and Leontief inverse matrix [(I - A).sup.-1], [(I - B).sup.-1], which help to identify the high linkage sectors in the economy. Higher value of linkage coefficient for a sector implies its importance relative to others. The study employs the latest Input-Output Table (IOT) of the Indian economy for 2007-08, published in 2012. The table provides input-output flows for 130 sectors of the Indian economy, but for measuring interlinkages, these have been consolidated to twenty-one sectors.

   It is clear from Table 1 that almost all services have high forward linkage compared to backward linkage, with the exception of the construction sector. One explanation could be that these services are mostly non-tradeable in nature, generating output within the domestic economy without significant import components. In terms of the identification criteria of the key sectors, as proposed by Hirschman (1958), the priority sectors of an economy are the ones that exhibit high backward as well as forward linkages, with coefficients greater than unity.

   2.1 India's GVC Participation

   Data for 2011 shows that exports by the wholesale, retail and hotels industry generated the largest source of domestic value-added for the Indian economy, accounting for 12.6 per cent of the total value-added of the country's exports (Figure 1). The other important industries were business services (11.7 per cent) and transport and telecommunications (10.5 per cent).

   The services content in the share of exports is highest in other manufacturing sector (55 per cent), textiles and apparel (43.7 per cent) and ICT and electronics (39.4 per cent) industries (Figure 2).

   In terms of sectoral participation in GVCs, manufacturing has the highest total participation rate, at 49.5 per cent for 2011; the figure has increased over the years. For the services sector, the total participation in GVCs stands at 17.2 per cent for total services, and 16.9 per cent for total business services (Table 2).

   Within services, it is found that R&D and other businesses have the highest participation rate (20.5 per cent), followed by post and telecommunications (20 per cent), health (12.8 per cent), computer and related activities (7.8 per cent), finance and intermediation (6.02 per cent) and wholesale, trade (4.65 per cent). Higher participation in GVCs, however, may not necessarily imply higher gains. Hence a breakup of forward and backward participation is needed to gain insights into the actual benefits enjoyed by a country through its participation in GVCs. As evident in most sectors, the share of backward participation (upstream component) is higher than forward participation, implying that their participation in GVCs results in proportionately larger Foreign Value-Added (FVA).

3. India's IT-BPM Sector in the Global Value Chain

   India is the world's largest sourcing destination for the information technology (IT) industry, accounting for approximately 67 per cent of the US$124-130 billion market. The industry, directly or indirectly, employs a 10 million-strong workforce and has secured a reputation for spearheading the economic transformation of the economy. While India's cost competitiveness in providing IT services--significantly cheaper than the United States--is well known, it is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centres in India. The industry has generated positive multiplier effects for the rest of the economy, particularly in the education sector by creating demand for disciplines like engineering and computer science.

   The Indian IT and IT-enabled services (ITES) industry is divided into four major segments, including: IT services; business process management (BPM); software products and engineering services; and hardware. According to the Annual Survey on Software and Information Technology-enabled Services Exports conducted by the Reserve Bank of India in 2015, exports of IT services were worth US$88 billion in 2015-16, with annual growth of 6.8 per cent. Canada and the United States remained the top destinations for the country's IT exports with 61.7 per cent of the market share, followed by the EU with 25 per cent share in 2015-16.

   According to the General Agreement on Trade in Services (GATS), trade in international services can be conducted through four different modes: direct trade between countries through cross-border supply (Mode 1); consumption abroad (Mode 2); services provided locally by the affiliates established abroad (Mode 3); and presence of natural persons (Mode...