Service exports: What lies ahead?

D. Sampathkumar

AT LONG last, there is some official confirmation on how much foreign exchange the country has earned through software exports.

The Reserve Bank of India (RBI) has in its annual report for 1999-2000, released recently, given details of country's software exports in the last five years (see Table). This is a welcome development. For long the performance on this count has been tucked away in some miscellaneous grouping within a broader category of `invisible' exports -- an expression best understood as something distinct from merchandise (visible) exports.

One cannot really blame the RBI, though. The fact of the matter is that for all the hype surrounding software exports, it is only in 1999-2000 that the figure reached a respectable level -- $4 billions. In contrast, export of chemicals and engineering goods are slightly ahead of software, notching up exports of $4.5 billions and $5 billions respectively.

Of course, the less glamorous ones -- textiles and gems and jewellery -- are miles ahead. The former, in particular, recorded close to $10 billions in exports in 1999-2000 and, going by current indications, may comfortably exceed that in 2000-01. The RBI was, therefore, justified in dumping software exports along with a host of others, under the category of miscellaneous service exports.

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But this does not square up with the hype surrounding software exports in recent times. The leaders in the software export community have been elevated to the status of cult figures among policy-makers, in much the same way as Ricky Martin, the pop star, is venerated by a generation of hip-swinging youth across the globe.

Leading the charge is the National Association of Software Companies (Nasscom). Whether it is the abolition of Customs duty on import of hardware, or a concession in the interest rate on borrowings, or a waiver of income-tax on export earnings, or such concessions, the Association is quick to brandish some astronomical number such as $50-100 billions. The managing consulting firm, McKinsey, and Harvard University professors on roving commissions with various State governments have all lent their weight to these projections.

One hopes these predictions come good, if for nothing else, for the sake of the Indian economy. There are storm clouds gathering on the horizon. The international petroleum crude prices are showing no signs of softening. As the Indian economy continues to post 5.5-6.5 per cent growth it must add to the pressure on the growth in demand for petroleum products, the current sluggishness in diesel offtake notwithstanding.

Coupled with that is the phenomenon of a burgeoning Defence budget with the three services presenting a long wish list for fancy toys. An indication of the burgeoning nature of Defence purchases is available from gap between the RBI figures of trade deficit and the Commerce Ministry figure of deficit in merchandise trade. This figure, in the region of $4 billions in 1998-99, shot up to $7 billions the following year.

So, let us hope that the present rate of growth in software exports, now at roughly 50 per cent per annum, will be maintained. At an annual rate of growth of 50 per cent, India's software exports should touch at least $30 billions by 2004-05, if not quite the dizzy heights promised by the industry experts. That should come in handy in meeting the burgeoning deficit on the trade front, not to speak of the pressure on overall current account deficit.

It would, of course, be folly to attribute the increase in miscellaneous service exports in 1999-2000 entirely to the software industry. While such inflows accounted for only $4 billions last year, the actual inflow by way of miscellaneous receipts is actually a healthy $10 billions. What, then, accounts for the remaining $6 billions? The RBI has not furnished details of the composition of such receipts in its latest Annual Report.

But some indication of their nature are available in an analysis published by it in the RBI Bulletin of April 1999. The study related to an analysis of miscellaneous service exports up to 1996-97. We can safely assume that a similar trend would have prevailed in the latest year as well.

This suggests that earnings from incoming telephone calls and telegraphic messages are a major source of foreign exchange inflow. Judging by the latest performance of Videsh Sanchar Nigam, the public sector enterprise holding a monopoly, for now, on overseas telephony in the country, such inflows last year could easily have amounted to $1-1.5 billions. The company posted a gross turnover of Rs. 7,000 crores and roughly 75-80 per cent of this is by way settlement charges, which works out to the above figure in dollar terms. Indians, after all, make far fewer overseas calls than they receive. So it is no surprise then that VSNL is a big contributor to foreign exchange earnings.

Foreign investment spawns its own revenue (foreign exchange) flows into the economy. Similarly, contribution by way of engineering project services to the total miscellaneous service exports, too, are by no means small. If investment flows continue to maintain their tempo, and if the engineering project services are sustained, fresh inflows could be expected to accrue. The outlook on both these fronts (foreign investment and project exports) seem somewhat uncertain at the moment. Project exports require a boom in construction in West Asia. Despite a boom in oil revenues, there is no evidence of that happening at present.

Similarly, foreign investment in power, roads and telecommunications -- the big-ticket sectors -- are beset with a host of problems. Hence, prospects for growth must necessarily be limited, at least as regards the potential for software exports. Also, none of these sources of inflows have posted the rate of annual growth that software exports have. In the end, therefore, it falls to the IT sector to bail out the economy.