Restructuring the Indian Economy

What is the issue?

While the IT sector aided the phenomenal growth of the past decade, cultivating new segments is needed currently to generate more jobs and returns.

What is the significance of IT sector?

• India’s services sector has proven to be more resilient than the goods sector both on export earnings and contribution to the Gross Value Added.
• Of this, IT alone contributes for about 75% of India’s exports earnings in services, and employs nearly 12 million.
• With the IT sector reaching maturity, and increasing protectionism in major markets like US, even retaining the current market share is a challenge.
• Handling this challenge demands economic restructuring and two parameters developed by “Organization of Economic Cooperation and Development” (OECD) to identify new potential sectors could aid this process.

What is the first tool?

• The first tool rates significant services sectors on 3 vital parameters namely –
  1. Share of domestic employment embodied in foreign demand
  2. Percentage of value added per person employed.
  3. The nature of employment.
• Consequently, based on their ratings, two significant categories were identified in India. These are:
• R&D and allied businesses - These have the highest component of domestic employment embodied in the final foreign demand.
• Hence jobs in this sector would expand jobs for the top skill labour force and impact the expansion of the production frontier.
• Local Services - Services such as real estate, renting, transport and storage, posts and telecommunication, wholesale and retail trade, and repairs.
• These have a good domestic employment component and the potential to employ an expanding workforce of semi-skilled or unskilled labourers.

What is the second tool?

• This is an evidence-based “Services Trade Restrictiveness Indices” (STRI), which identifies services trade restrictions across significant services sectors in five areas namely:
  1. Restrictions on foreign entry
  2. Restrictions on movement of people
  3. Barriers to competition
  4. Regulatory transparency
  5. Other discriminatory measures
• While a high STRI score indicates more restrictions, in India’s case, scores are high for legal, commercial banking and insurance services.
• STRI is also high for professional services where the requirements for obtaining a license and practice are challenging.
• It is hence nearly impossible for a foreign supplier to satisfy the conditions for services such as legal and auditing services.

What is the way forward?

• Simplifying domestic regulation across sectors is necessary to reduce STRI.
• Additionally, reforms in the communications and distribution sectors are needed to drive manufacturing and subsequent exports.
• India is pushing for greater market access in services through its FTA engagements which would help in expanding the market for its services.
• Also, India’s push for the establishment of the global standards on services trade at the WTO is a significant one.  
• If adopted, this will make the visa regimes of developed countries more transparent and open for skilled professionals.

Sources: Business Line