Caught In The Doldrums

The economists analysing global trade figures from 2015 are coming to the realisation that last year’s trade contraction was much worse than previously assumed. A Holland-based trade monitor estimates that world trade fell by nearly 14 per cent — the worst single-year performance since the Great Recession of 2009. Against this backdrop, it is not surprising that the government’s latest Economic Survey reports that India’s exports declined 18 per cent in the first three quarters of 2015. More worrisome, however, is the flat-lining of India’s high-performing services trade which, unlike the goods export sector, should not have been the victim of a commodity market collapse.

This emerging weakness in India’s information technology (IT) and business processing sector is even more surprising in light of the global trend of exponential growth in digital commerce and information flow. A recent McKinsey Global Institute report notes that “while flows of goods and finance have lost momentum, used cross-border bandwidth has grown 45 times larger since 2005”. The report projects that such flow will “grow by another nine times in the next five years as digital flows of commerce, information, searches, video, communication, and intracompany traffic continue to surge”.

India should be well positioned to take advantage of such trends, given the influential role that IT and business process management (BPM) already play — amounting to 9.5 per cent of GDP and 45 per cent of total services exports in 2015. The sector’s annual value is expected to touch $143 billion. E-commerce too is expected to grow 21.4 per cent to $17 billion in 2015. Data presented by the Economic Survey, though, shows a disturbing trend: India’s services exports have “changed in the most significant, and perhaps alarming, way”. After a period of sharp growth in the mid-2000s, the services sector has in the past two years flattened out.

An important reason is new protectionism in the West where import of skill is being resisted as job-killing immigration by populist US politicians. The tightening of visa rules and the imposition of additional fees for certain categories of H1B and L1 visas (often used by technology workers) threaten to raise the annual cost of Indian IT service providers by some $400 million. While India hopes to resolve such issues through quiet diplomacy, the realities of election year politics in the US make that an unlikely prospect. Even if the Republican front-runner Donald Trump, who has been agitating against job losses through visa programmes, does not make it to the White House, the sour electoral mood that he has so deftly exploited could hurt Indian IT and BPM providers later.

Given such realities, Indian IT services would be better advised to focus on R&D and innovation and developing high-end software and apps for domestic use, rather than continuing to emphasise ‘body shopping’ through US visa programmes. The Economic Survey says there has been sizable growth in R&D services — up 25.5 per cent over 2013-14. Yet, the Survey also points to the weakness of the R&D effort. It quotes the Global Competitiveness Report 2015-16 to state that India’s capacity for innovation remains lower than that of countries like the US, the UK, South Korea, and even South Africa. Perhaps unsurprisingly, given the Human Resource Development Ministry’s current focus on fighting “anti-national” students on university campuses, India scores lower than the members of BRICS like China and South Africa in terms of the quality of its scientific research institutions and university–industry collaboration on R&D.

The warning by the Economic Survey could not have come at a more appropriate time for culture warrior HRD ministry.