Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's services sector growth, key players, Manufacturing sector Potential and Future Prospects

What’s the news?

In a major economic development, India’s service exports surged by $60 billion over three years, with diversification beyond IT services. Additionally, domestic tech startups are poised to expand into manufacturing, potentially revitalizing the sector and bolstering job creation.

Central idea

Two significant transformations are reshaping India’s services sector, potentially defining the nation’s growth trajectory. These changes involve the rapid evolution of service exports and the transformation of domestic services. As both of these sectors modernize, they are not only changing in form but also venturing into manufacturing, offering exciting prospects for India’s economic future.

In recent years, India’s service exports have undergone a remarkable expansion, delivering an additional $60 billion in annual revenues compared to just three years ago.
The catalyst behind this surge was the COVID-19 pandemic, which spurred a surge in demand for IT services due to the widespread adoption of remote work arrangements.
However, India’s service exports have transcended their traditional roles, shedding their identity as merely call centers or software solution providers.
Instead, India now proudly offers an extensive array of professional services, encompassing accounting, legal, HR, business development, design, and cutting-edge R&D.

Large IT Firms: Large information technology (IT) companies have traditionally been prominent players in India’s services export sector. They continue to play a significant role in providing IT services, software solutions, and technology-related services to clients worldwide.
Mid-sized IT Firms: While large IT firms remain influential, mid-sized IT companies have been gaining market share in the services export sector. These mid-sized firms have demonstrated their ability to compete and thrive in the global market, contributing to the sector’s growth.
Consulting Firms: Consulting firms are another crucial category of key players. They have expanded their service export portfolios to include a wide range of advisory and consulting services, catering to the needs of global clients.
Global Capability Centers (GCCs): India boasts the world’s largest share of Global Capability Centers (GCCs). These entities, initially focused on providing tech support to multinational parent companies, have evolved into offering higher-value-added services such as legal, audit, design, and research and development (R&D). GCCs have become integral to India’s service export landscape.

The GCCs are specialized centers or units established by multinational corporations (MNCs) in India to provide a wide range of services to their parent companies and global operations.
Originally, GCCs primarily focused on offering technical and IT support services to their parent MNCs.
However, over time, they have evolved and expanded their service offerings to include higher-value-added functions and services.
In 2022–23, around 1,600 GCCs made up a market of $46 billion, employing 1.7 million.
Although professional and consulting services exports account for only a quarter of India’s services exports when compared to IT services, they have experienced the fastest growth with a compounded annual growth rate (CAGR) of 31% over the last four years. This is followed by computer services with a 16% CAGR and R&D services with a 13% CAGR.

Permanent Shift Towards Remote Work: The enduring trend of remote work is expected to drive ongoing demand for IT services.
India’s Diverse Skill Portfolio: India’s workforce boasts a wide range of skills, from engineering to design, catering to a broad spectrum of services. This diversity positions India as a versatile service provider capable of meeting evolving global demands.
Cost Competitiveness: India’s cost-competitive advantage in providing high-quality IT services is likely to endure. As businesses seek cost-effective solutions without compromising on quality, India remains an attractive destination for outsourcing IT services.
Tipping Point for Stronger Growth Trends: India is at a crucial juncture where the growth trends in services exports are expected to become even more robust.
Government Support and Policy Initiatives: The Indian government’s initiatives to promote the IT and services sector, such as the Digital India campaign and the development of technology parks, will likely continue to foster an enabling environment for growth.
Comparison with Other Economies: India’s growth trajectory resembles that of countries like the US, the UK, Germany, and Ireland, which saw rapid acceleration in services exports once they reached a certain size. This suggests the potential for even higher growth.

Digital infrastructure can alleviate common challenges faced by small manufacturers.
Start-ups can facilitate access to formal credit, cheaper raw materials, larger markets, improved warehousing and logistics, and enhanced quality control for small manufacturers.
Evidence shows that domestic services sector companies, particularly in transport services, procurement support, and e-commerce, are venturing into manufacturing.

India’s services sector is at an exciting crossroads, with both services exports and domestic services undergoing transformation. Embracing this potential requires proactive policy measures and continued innovation in the services sector to propel India toward higher economic prosperity.