Global slowdown, protectionism start affecting services exports from India

After impacting merchandise exports, global slowdown and inward-looking policies have also started affecting services sales abroad.

This was substantiated by just a 7.5 per cent rise in services exports at $25.84 billion from India in April, 7.7 per cent at $27.06 billion in May and a mere 3.5 per cent at $27.86 billion in June in the current financial year.

On the other hand, services exports rose 33.2 per cent at $24.05 billion, 40.7 per cent at $25.13 billion and 32.6 per cent at $26.92 billion in these months of the previous financial year, respectively.

In fact, none of the months in 2022-23 reported a single-digit growth. The lowest growth was witnessed in March when these exports rose 13 per cent at $30.44 billion. The highest growth was recorded in May when services exports went up by 40.7 per cent at $25.13 billion, mainly due to the low base of Covid second wave-induced lockdowns in the same month of 2021-22.

Along with exports, services imports were affected by the slowdown in demand. These fell 3.1 per cent at $13.62 billion in April, grew a mere two per cent at $15.50 billion in May and again declined by 3.4 per cent at $15.25 billion in June of the current financial year.

There was no month in 2022-23 when services imports fell. However, their growth came down to a single digit -- 5.7 per cent -- in December, the only exception in this regard that year.

May witnessed the peak growth rate in imports at 52.8 per cent, even as the absolute amount was a mere $15.28 billion due to the previous year's low base of the same month.

Since imports fell or their growth decelerated faster than exports, the services trade surplus widened in the first three months of the current financial year.

For instance, the surplus was more at $12.2 billion in April this financial year than $9.99 billion in the same months of the previous year, at $11.56 billion in May versus $9.93 billion a year ago and $12.61 billion in June compared to $11.5 billion in the third month of 2022-23.

The services trade surplus widened to $36.39 billion in the first three months of the current financial year against $31.07 billion in the first quarter of the previous year.

This will likely take away some stress in the current financial year's account balance in the first quarter.

As merchandise exports decelerated much faster than services exports, the gap between the two has also come down in the first three months of the current financial year. For instance, the gap between the two stood at just $8.82 billion in April this year against $15.65 in the same month last year, $7.92 billion in May, FY'24 versus $13.87 billion in May, FY'23 and $5.11 billion in June against $15.36 in the same month of the previous year.

Official data released on Monday also showed that services trade rose by around 12 per cent at $27.17 billion in July this year, over $24.26 billion a year ago. However, this was an estimated value of exports for July this year.

While India exports services ranging from IT to transport, travel, construction, financial, telecommunications, etc, the importance of other business services, including legal, auditing, accounting, bookkeeping, tax consulting, public relations, advertising, etc., have risen recently. Information technology is still the largest service that India exports.

For instance, India exported $152 billion of IT services, constituting 47 per cent of the total at $325 during 2022-23. The share had stood a bit more at 49 per cent in 2022-23. Other business services at $80 billion accounted for another 25 per cent. in 2022-23 against its share of 23 per cent in the previous year.

The rising share of other business services in total services exports is attributed to global capability centres (GCC) in India. GCCs are units set up in India by multinational corporations to aid them with tech services, IT support, research and development and engineering.

Experts attributed the slowdown in services exports to a subdued global environment, protectionist measures by countries and business restructuring by companies.

The International Monetary Fund (IMF) has projected that global economic growth to slow down to three per cent in 2023 from 3.5 per cent in 2022. Among major economies, the US was projected to witness 1.8 per cent growth rate in 2023 compared to 2.1 per cent in the previous year, Germany to see a contraction in its economy by 0.3 per cent from a growth rate of 1.8 per cent, the United Kingdom to clock growth rate of 0.4 per cent from 4.1 per cent over this period. China was projected to grow by 5.2 per cent in 2023 against three per cent in 2022, but recent reports suggested that the economy may grow by four per cent only this year.

Bank of Baroda chief economist Madan Sabnavis said the slowdown in growth in the export of services is more on expected lines as it gets linked with the state of the global economy.

"As the major developed economies slow down, the demand for such services also comes down," he said, adding besides, in such situations, there is also the tendency for countries to look inwards for the provision of such services.

Therefore this trend may continue for some more time, he said.

"GCCs also have their turnover linked with the state of the developed economies, and intuitively the slowdown will lead to lower requirement of back office services. This can be considered to be part of the business cycle, Sabnavis said.

Anil K Sood, professor and co-founder of the Institute of Advanced Studies in Complex Choices, said there has been an all-round restructuring of businesses since 2022, which has resulted in mass lay-offs even in the technology sector.

"We are expecting the US economy to slow down and Europe may take longer to come back to the growth path. We are also observing signs of slowdown in China. In such a situation, the companies always reduce their discretionary expenditure on technology, consulting, advertising etc," he said.

He said this mass restructuring has also impacted the GCCs in India, where many of the large technology firms have slowed down their hiring or laid off employees.

He pointed out that many of the Indian and India-based software services firms have reported a reduction in their employee base in the April-June quarter this year.

To buttress this, he cited examples of Cognizant, Infosys and Wipro, which have reported a reduction of 3,800, 7,205, and 8,812 in their employee base during the last quarter, respectively.

Sood expected software, business and transport services growth for India to be low unless there is a significant acceleration in growth for large economies -- US, China and Europe-- merchandise trade too grow faster than currently expected rates.