Export Services, not Goods

Bharat Jhunjhunwala

The three sectors of the economy are services, manufacturing and agriculture. Presently services account for about 90 percent of the GDP of developed countries like United States, manufacturing about 9 percent and agriculture a meagre 1 percent. Indian situation is similar with services at about 60 percent, manufacturing at about 25 percent and agriculture at about 15 percent. It is clear that the share of services increases with economic development. Thus, prima facie one should promote the services sector. More so in view of the Corona virus pandemic.

An article in the journal “Finance and Development” published by the International Monetary Fund has suggested that countries will withdraw from globalisation because economies deeply integrated with the global economy have suffered more during the Corona crisis. Many could not get raw materials from other countries leading to huge losses. The theory of free trade says that every country should focus on those goods that it can produce the cheapest. The landed price of Vietnamese coffee in India after adding the cost of transport is less than the cost of production in India. In that case, it would be profitable for India to import coffee from Vietnam rather than producing it domestically. Conversely, the landed price of Indian tea in Vietnam after adding the cost of transport is less than the cost of production of tea in that country. In such a case, it would be profitable for India to import coffee from Vietnam and for Vietnam to import tea from India. Such trade is beneficial for both the countries. However, the same logic does not apply to raw materials.

There is a long waiting list for purchase of cars because the supply of certain imported semiconductor parts has been hit because of Corona-induced lockdown. Cars are assembled and are ready to be dispatch but this cannot be done in absence of one small part. Similarly, it is reported that Indian drug companies have suffered lately because the supply of certain raw materials from China has been hit. In view of this countries are rethinking globalisation because they have to account for costs incurred due to such uncertainties. An insurance premium for the purchase of goods from foreign countries has to be added to protect against such situations. The landed price of a drug intermediate supplied from China is Rs 1,000 per kg while the cost of production in India is Rs 1,100 per kg. Indian drug manufacturers import the intermediate from China because it is cheaper. However, the manufacturer has suffered due to the interruption of supply from China. He has to insure himself against such interruption. Therefore, he has to add an insurance premium for such interruption just as one adds an insurance premium when he/she buys a car. Similarly, one must add a risk premium for both imports and exports.

The situation with services is different. Another article in the same journal “Finance and Development” says that there will take place deeper globalisation in the trade of services such as in online tuition, telemedi-cine, translations, movies, software and the like. The supply of these services through the internet is not likely to be affected by a crisis like the Corona pandemic.

In this background it is time that reconsiders the strategy of increasing exports of manufactured goods. Many benefits are to be obtained if one develops the exports of services instead. First, as said above, the export of services is less likely to be affected by problems such as Corona pandemic. Second, the services sector employs large numbers of educated workers and pays relatively higher wages. A person providing online tuition in mathematics can earn up to Rs 1,000 per hour. India has a large force of educated youth who are also English speaking. These youth can get jobs in exports of services. Third, India has a scarcity of natural resources. India must change its approach to education in order to capture the world market in services. The new education policy lays considerable stress on mother and regional languages. That is fine but it should not be pursued at the expense of English, French, Chinese and Japanese. There is a need to focus more on English and other foreign languages. This does not have to come at the cost of India culture, of course. The people of Indus Valley formed their culture in the Indus language that remains undeciphered till date. They then transmitted their culture to Prakrit language and then to Devanagari language. The languages changed but the culture remains vibrant and continuous. Similarly, can jump Sanskrit, Telugu, Devanagari and other Indian languages into English. That will also help globalise Indian culture.

[Formerly Professor of Economics at IIM Bengaluru]

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Frontier
Vol 54, No. 26, Dec 26, 2021 - Jan 1, 2022