Services trade restrictiveness: Greater objectivity means better decisions

• India exported services worth US$ 205 billion and its services imports amounted to US$ 176 billion in 2018. The largest services exports categories were other business and computer services and the largest import categories were transport and other commercial services.
• The world economy has witnessed the rise of new services such as outsourcing, rise of BPO, KPO and many retail services. Amidst the fast pace of globalization and busy lifestyles, consumerism in services is noticing a buoyant trend.
• Air transport, engineering services and sound recording are the three sectors with the lowest score relative to the STRI across all countries for India.
• India has contested the methodology of the OECD, and is developing an index of its own to measure restrictiveness of trade partners on mobility of professionals.  

Services sector has become a key growth imperative for many economies in the world and especially for India. Trade in services in recent years has emerged as one of the key drivers of the world economy. Rapid growth in trade in services especially in the late 1990s and 2000s has inspired, particularly many emerging economies such as India and some of the developing economies to adopt and implement liberalised and complementary policies to take advantage of available opportunities.

The world economy has witnessed new trends of services such as outsourcing, rise of BPO, KPO and many retail services. In the fast pace of globalization and busy lifestyles, consumerism in services is noticing a buoyant trend.

As progress of trade in goods sector is largely determined by tariff reduction and non-tariff barriers, the services sector is largely controlled through regulation. It is important to note that even if regulation is a key determinant of rise in trade in services, deregulation is required at some stage to provide a boost to the sector.

While India’s integration with the global services market happened largely through the US and EU markets, slowdown in India’s trade was also felt as these markets experienced effects of global financial crisis and protectionist tendencies of the US. This led India to explore other markets such as East and Southeast Asia to find a foothold in services.

Earlier on account of the language barrier and other cultural factors, Indian companies were doing business transactions mainly with Western companies, but now they have started diversifying their market presence.

India exported services worth US$ 205 billion and its services imports amounted to US$ 176 billion in 2018. The largest services export categories were other business and computer services and the largest import categories were transport and other commercial services. India’s score on the STRI index in 22 sectors is presented below along with the average and the lowest scores among the 45 countries included in the STRI database for each sector.

Source: ITC Trade Map

Creation of an energetic and competitive services sector is fast becoming a key characteristic of modern economies. In 2015, services’ value added accounted for 74% of GDP in high-income countries as compared to 69% in 1997. The transition from agriculture through manufacturing to a services economy has been the hallmark of economic development for many countries.  In line with this trend, it is noticed that many emerging markets are currently undertaking serious efforts to support and develop services industries, and to put in place the regulatory structures required for more integrated international services markets.

The STRI helps to identify which policy measures restrict trade. It provides policy makers and negotiators with information and measurement tools to improve domestic policy environment, negotiate international agreements and open up international trade in services. It can also help governments identify best practice and then focus their domestic reform efforts on priority sectors and measures.

The STRI database is based on regulations currently in force. STRI indices take the value from 0 to 1, where 0 is completely open and 1 is completely closed. They are calculated on the basis of information provided in the STRI database.

India has an above average STRI score in all sectors. Sectors are categorised into two groups: prohibited sectors and permitted sectors. In the permitted sectors, investment can take place either through the government route where prior approval is needed, or the automatic route where no approval is required. In some sectors, the automatic route applies up to a certain threshold beyond which approval is needed.

Additional horizontal measures affecting all sectors are regulations on transfers of shares between residents and non-residents, which are subject to pricing guidelines, and regulations on mergers and acquisitions; which usually take place through the establishment of a holding company in India. India applies labour market tests for natural persons seeking to provide services in the country on a temporary basis as inter-corporate transferees, contractual services suppliers or independent services suppliers. These categories may stay in the country for up to 24 months on their first entry permit. However, multiple entry business visas are awarded for up to five years with each stay limited to six months. At least one of the board members and the managers in corporations must be residents of India. Finally, there are preferences for local suppliers in public procurement.

Services Trade Restrictiveness Index for India

Source: OECD Database

Air transport, engineering services and sound recording have the lowest STRI score across all countries. In all three sectors, however, the scores are still higher than the mean. Engineering is not a regulated profession at the national level and the sector is subject to the general policy framework. The sector-specific trade restricting regulations in sound recording are a statutory monopoly on copyrights management. Air transport is the sector with the highest average score among all sectors.

Unlike most other countries in the STRI database, India allows 100% foreign owned airlines except in the state-owned Air India. Up to 49% can be invested following the automatic route and the government route applies for taking a majority share in airline. However, foreign airlines are not allowed to buy equities in Indian airlines offering passenger transport. A majority of the board of directors must be Indian nationals and foreign nationals involved in airline operations need security clearance. Wet lease of aircraft is not permitted, and slot allocation gives priority to historic slots.

Rail freight transport, architecture and accounting services, are the three sectors with the highest score relative to the average STRI across all countries. Railway operations are on the list of prohibited sectors and are reserved for Indian Railways, a state-owned enterprise. This together with no significant transit rights for foreign suppliers closes the market for international trade. Nevertheless, 100% foreign equity is permitted through the automatic route for construction, operation and maintenance of railway infrastructure.

Architecture is a regulated profession and reserved for licensed architects. Only locally licensed architects may own shares, sit on the board or manage architecture firms. Indian nationality is required to obtain a license, but foreign architects may provide services through a temporary license. Accounting and auditing are reserved for licensed accountants and auditors. Only Indian nationals are eligible for obtaining a license and corporations are not allowed in this sector. Accounting and auditing firms or professionals can only access the Indian market through a limited license for a specific project or time period.

The OECD metrics seem to classify India as among the most restrictive countries in services trade, especially on entry of foreign professionals. However, the reality is quite contradictory, as India has liberalised a number of services sectors to FDI since 1991. India has contested the methodology of the OECD index, alleging that it has a developed economy bias. Little research has been done to measure services restrictiveness as compared to restrictiveness in goods. India is developing an index of its own to measure restrictiveness of its trade partners to mobility of professionals. This is is of particular relevance in agreements like RCEP as well, where other member countries have opposed India’s demand for mobility of professionals. Since this area is of particular interest to India, it is a step in the right direction, and India must drive a hard bargain on this parameter in its future trade agreements.