India’s April-February goods exports are up just 7.5 percent while exports in February alone are down 9 percent (YoY). But India’s services exports are up 30 percent for April- February and up a whopping 37 percent for February alone. A study of the data over the past 3 years shows some interesting trends:
1.Slowdown fears and fall in global trade are leading to a fall in goods exports, but it appears to be having the opposite effect on India’’s services exports, probably due to the acceptance of remote working.
2.Withing services exports, software remains the king accounting for 45 percent of the exports
3. However, a fast growing category is business services which accounts for 25 percent of the total services exports. This includes accounting, audit, R&D, quality assurance, after-sales service centres, i.e., many services other than software.
4. An indication of the growth in business services is the fact that in April-December 2022, software services grew by 21 percent, as per Reserve Bank of India (RBI) data, where as business services grew by 38 percent.
5. However, this category of business services also sees a lot of imports by India, probably accounted for by technology and R&D imports, even consultation for medical and financial services. Hence in 2020-21, although business services exports were good at $49.2 billion, business services imports were even higher at $49.5 billion, leading to a net outflow under this head of $330 million. In contrast, India’s software imports are negligible at $10 billion a year and hence at a net level, software exports contribute much more to the trade balance, than business services.
6. Finally, another key takeaway from data of the last 3 years is that while business services exports have been rising at a fast clip of 45 percent in the 9 months ended December 31, 2022, versus the comparable period in the previous year, business services imports have been rising more slowly and hence, in the current year, this category of exports is a big contributor at a net level (see table)
As one can see from the table, at a net level, business services exports have risen from minus $0.3 billion in 20-21 to $7.3 billion in 21-22 to $14.7 billion in just the first nine months of 22-23. This mind-boggling trebling of exports under this category has made macro economists sit up and ask what’s going right here.
Unfortunately, neither the commerce ministry nor the RBI data releases give us much insights into the composition of business services or why the exports are rising and why imports are high but not rising much.
Economists Samiran Chakraborty of Citi India and Pranjul Bhandari of HSBC India have both pointed out that the rise in non-software services is partly explained by more GCCs or Global Capability centres being set up by multinational companies in India.
Nasscom data shows that 65 GCCs were set up in India 2022 alone. However all the output from GCCs cannot be classified under non-software. In fact, quite the opposite. A Nasscom overview of GCCs published in February 2023 points out that out of 11 GCCs set up in Q4 of CY2022, five were for software and internet services, The balance 6 were one each for Chemicals, Travel & Hospitality, Semiconductors,Construction & Heavy Engineering and 2 centres for electrical and electronics development. In short GCCs do account for non-software exports but at least 50 percent of their earnings would be classified as software, and indeed not all they earn are even “services” exports. Some are even manufacturing.
Another rising contributor to software and non-software services exports are the big six consultancies – Deloitte, EY, KPMG, PWC, Grant Thronton and BDO. Termed “Managed Services,” these consultancies hire a large number of professionals, entirely to service foreign companies. The Partner in charge of these so-called “Managed Services” at KPMG, Bala Chandran, says typically 60 percent of the managed services revenue would be accounted for by technology services, i.e., largely IT He adds that services exports grew sharply for KPMG in 2022 – technology by 46 percent and non-tech by 30 percent.
Speaking to more leaders in the Big Four, it emerges that next to IT, a fast growing service exports is accountancy and audit. The big four, all of whom have audit arms, do a lot of accountancy outsourcing for foreign companies. But they aren’t the only ones. Rajiv Arya, CEO of chartered accountancy firm ASA Associates says his firm works with a bunch of CPAs (certified public auditors ) of US companies, providing accountancy and audit services for these companies
Arya says, about 30 percent of ASA’s income is in foreign currency; this segment has doubled in the past 18 months and Arya expects it to double in 2023 as well.
“I estimated to hire 30 people for new clients in 22-23, and ended up hiring 70; in 23-24, I expect the count to go to 150” he said. Arya says he is optimistic of growth in this segment because as per CPAs he works with there is a growing shortage of chartered accountants in the US Many existing CPAs have diversified into other pursuits with Covid offering the luxury of remote working. More compelling is the cost advantage , he says. “A good fresh chartered accountant would be paid Rs10-15 lakh per annum in India, while a fresher in the U.S. would cost $10,000 or Rs 8 lakh a month”
Such accountancy firms, servicing foreign companies are big business in Ahmedabad, and Jaipur, and growing in Lucknow, Indore, Bhubaneswar, Mysore, and Kochi, he said.
And this is only accounting. As the Nasscom GCC report shows, outsourcing by MNCs is extending in a big way to, R&D , sales support centres, Quality Assurance (QA) Centres and engineering back offices.
India with its waves of engineering and accountancy graduates each year may be able to provide these services to ageing US and European countries for the foreseeable future. Watch this space. Services exports may be the most used word by macro-economists, politicians and India Inc in coming years.
