foreign trade policy: With $200 billion in exports, this sector deserves a special focus in the upcoming Foreign Trade Policy – The Economic Times

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SynopsisIndia wants to do $1 trillion in exports by 2025 and the services sector can be a huge contributor to this target. But we need a conducive policy framework, and the upcoming Foreign Trade Policy 2021-2026 has an opportunity to carve one.

The services sector has, despite its intangible nature, played a tangible role in making the nation a global economy to be reckoned with.

The sector contributes over 40% to India’s exports and accounts for about 54% of the economy, notes the Economic Survey 2020-21. This is certainly significant as the other leading driver of the economy — industry and infrastructure — is estimated to contribute 25-29% to the nation’s GDP. The country, home to one of the largest pools of services and IT professionals, exports over $200 billion worth of services annually, which contributes to 7% of India’s GDP.

Given the critical role of the services sector in the Indian economy, it is imperative this segment gets adequate support measures.

One set of policy tools primarily aimed at enhancing India’s share of global trade is the foreign trade policy framework. Naturally, the exporting community is eagerly waiting for the government to unveil the Foreign Trade Policy (FTP) 2021-2026. The key policy document is expected to offer an institutional framework of the finer details of the support measures exporters will get for five years.

The existing policy, FTP 2015-2020, was to expire on March 31, 2020. However, in view of the pandemic, the government had extended it till March 31, 2021. The policy was further extended till September 30 this year. The FTP 2015-20 aimed at increasing exports of merchandise and services from $465 billion in 2013-14 to approximately $900 billion by 2019-20. The policy also targeted raising India’s share in world exports from 2% to 3.5%. While these goals are yet to be achieved, one thing that stood out in these years is the fact that the nation’s services sector has fared better than manufacturing.

Under the current economic conditions, what do the services sector exporters want from the upcoming FTP?

Many industry observers say the country’s FTP focuses mainly on merchandise exports, though services have become India’s key USP. They assert we must rectify this anomaly in the new policy. “FTP has traditionally been skewed towards the merchandising sector. Only SEIS (Service Exports from India Scheme) gives export incentives as duty scrips in the existing FTP. The upcoming FTP should exclusively cover services. This sector’s exports have unique characteristics,” asserts Maneck Davar, Chairman, Services Export Promotion Council (SEPC), an apex body set up by the Ministry of Commerce & Industry.

Exports Performance of India's Major Services@2xFINAL

Given that the FTP defines how and where the economy will be steered regarding exports, experts point out it is crucial to focus on merchandise and services exports equally. However, considering the unique requirements of the services sector, the sector needs certain specific policy measures to remain competitive globally.

To rationalise the incentive infrastructure, the government has done away with many schemes and introduced two comprehensive ones — the Merchandise Export from India Scheme (MEIS) and the Service Exports from India Scheme (SEIS).

MEIS gave several incentives. In 2021, the scheme was replaced by the upgraded Remission of Duties and Taxes on Export Products, But, Davar points out, services exporters are still waiting for the SEIS benefits due to them for 2019-20. This is worrying exporters, especially as some of them are struggling for survival.

“The SEPC has suggested that the government consider releasing the SEIS benefits by capping the amount. A ceiling of Rs 5 crore may be introduced for 2019-2020 for services exporters. Sectors like travel and tourism, healthcare, education, aviation, which have been going through their worst phase, can be exempted from this ceiling,” Davar suggests.

The government had capped the benefits under MEIS at Rs 2 crore per exporter on outbound shipments made from September 1 to December 31, 2020.

The industry wants SEIS — which promises eligible exporters a 5-7% incentive on net foreign income as duty credit scrips — to be a part of FTP 2021-2026. Services exporters say it will encourage them to deal with issues related to access and cost of credit, high power costs, infrastructure bottlenecks, employees’ skill levels and regulatory bottlenecks.

If the government doesn’t want to do that, the Services Export Promotion Council has recommended another framework — the Duty Remission on Export of Services Scheme (DRESS). The duty remission scheme covers multiple services exported from India. Further, the DRESS proposes remission rates of 7%, 5% and 4% for micro and small, medium and large exporting firms, respectively. This scheme is expected to be a big help to the Covid-battered MSME sector. The council insists the proposed scheme can help India grow its services exports by $50 billion.

New Dynamics
The Electronics and Computer Software Export Promotion Council (ESC India) — the apex trade body promoting exports of electronics, telecom and computer software — wants the new FTA to have a specialised thrust on the services sector. “It is ESC’s consistent view that services exports, particularly IT and IT-enabled services (ITeS), need a lot of support from the government,” says Sandeep Narula, chairman of the body.

Computer software and solutions units, particularly in the MSME sector, need urgent support on the lines of the Production Linked Incentives announced for electronics hardware, design, component and mobile telephones, he insists.

Leading exporters in commercial _services, 2019 @2xFINAL

The radical changes happening in the hardware sector will soon ensure many manufacturing units are set up in India, according to the ESC. Some global supply chains, contract manufacturers and domestic companies will set up units in India to leverage innovative technologies such as 5G, robotics and cloud. To cater to the needs of these growing trends, each industry will need a lot of software solutions. Hence, the council suggests, supply to domestic sources should be deemed as exports and the units should be able to avail all incentives given to exports.

“We also demand a reintroduction of income-tax incentives to software firms, irrespective of their area of operations,” says Narula. “A McKinsey report envisages that India’s ICT segment would touch $1 trillion by 2025. That will be possible only when the software sector grows at a faster rate.”

Key Forex Earner
Another flag-bearer of the nation’s services sector is the IT-BPM (information technology and business process management) industry. This $194-billion sector remains the largest private sector employer.

India’s next five-year foreign trade policy should focus on services and ecommerce, says Ashish Aggarwal, Vice-President of Public Policy at NASSCOM. IT consulting services and ER&D (engineering and R&D) services should also be included in the scope of services, says the representative of the apex body of the IT BPM industry.

The industry body expects the SEIS scheme to be continued in some form, perhaps with a more focussed target. So they have suggested the inclusion of emerging technology areas — like augmented reality (AR), virtual reality (VR), artificial intelligence (AI), machine learning (ML) and software engineering — in it. “With Covid-19 disrupting traditional supply chains, we expect the policy to further modernise trade practices through digitisation and e-commerce,” says Aggarwal. “Initiatives around making common import-export processes paperless, focus on e-commerce export under the Niryat Bandhu scheme, promoting e-commerce export and establishing e-commerce export zones to promote MSMEs should also be part of the FTP.”

Untapped Potential
Futuristic technologies such as AR, VR, AI and ML hold considerable promise for exports. As enterprises around the world go digital and adopt embedded and intelligent systems, there will be more focus on India, which has a lot of talent in these fields. Besides, Aggarwal says, accelerated tech adoption can also give a boost to allied and upcoming sectors such as fintech, edtech and healthtech. This will result in additional opportunities for the IT-BPM industry in India, he adds.


iStockIndia is a major exporter of business services, most notably in the Information, Communication and Technology (ICT) sector.India should also brace for stiff competition from leading services exporters. The ESC’s Narula says almost all countries give export incentives in one form or the other. Referring to the US, he says institutions there help exporters get affordable finance and insurance. “On similar lines, there are incentives in the UK, France, Italy, Germany and Australia, too. China also gives such incentives but most of these are hidden,” says Narula.

The advantage India has is that it can show an enviable growth trajectory in ITeS and BPM. Aggarwal points out that the idea of a BPO in India has evolved. “If by BPO one refers to plain vanilla voice-based call centre work, that is not correct, as India has moved up the value chain, and the focus is on BPM.”

In 2008, customer integration services represented almost 70% of the segment’s operations in India. This has now come down to 33%, says Aggarwal. The major shift was made possible because of the increased adoption of mail, chat, and social media as the segment’s critical drivers, instead of predominantly voice-based services. NASSCOM says analytics, knowledge process outsourcing and integrated digital services, among others, presently dominated the remaining 77% of the stake.

The $30-billion Indian BPM industry alone — which has 37-38% of the global market — is poised to grow to $50 billion by 2025. It is a leader in digital operations, analytics and other accounting processes. Most Indian ER&D companies are increasingly evolving as software innovation factories for global customers by focusing on platform-based systems for cloud and embedded tech. ER&D’s export revenue can reach $100 billion by 2028 from $31.1 billion now, estimates NASSCOM.

The services sector remains a key foreign exchange earner, and it is clear this business will leapfrog growth orbits. All it needs is a springboard with the right set of support. Naturally, all eyes are on the upcoming FTP. Will it give services a northbound trajectory?

Editing by Ram Mohan. Illustrations by Manali Ghosh)

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