India’s services exports to buck recession fears; see 25-30% growth

Even as merchandise export growth fell to single digits in three months, services exports continued to remain robust and witnessed 25-30 per cent growth since the beginning of the current fiscal year (July-September), reveals official government data.

Notwithstanding the threat of a recession looming ahead for the developed economies, exporters say they expect a similar trend to continue in the second half of the year.

Growth will be driven by sectors such as information technology (IT), accounting, engineering services, as India will have the advantage of low-cost services from skilled professionals it offers.

“Recession in the developed economies will only help increase services exports. In a bid to save cost, countries like the US have started outsourcing their work, especially in sectors such as accounting, auditing, and legal services,” says Sunil H Talati, chairman, Services Export Promotion Council.

Talat expects IT exports to grow, regardless of recession fears, as certain services are required for systems to operate. Apart from IT, sectors such as hospitality, tourism, accounting, auditing, legal services, engineering, and architectural services are expected to witness vigorous growth.

After sustained rise in merchandise exports, the external demand for Indian goods has started decelerating. The International Monetary Fund last month said more than a third of the global economy is headed for contraction this year or the next, and the three biggest economies — US, European Union (EU), and China — will continue to stall.

Based on the current macroeconomics and global trends, the Department of Commerce on a conservative basis is looking at the overall export target to cross $750 billion in 2022-23 (FY23), compared with $676 billion in 2021-22. As far merchandise exports go, a target of $450 billion has been set, the rest will be met by services exports.

Talati hopes services exports will grow at a similar rate — of about 30 per cent — during the second half of FY23 and reach $350 billion in the current fiscal year.

Notwithstanding Talati’s optimism, economists warned that with imminent threat, the impact on IT services — which constitutes more than half of India’s services exports — can be seen only in the next fiscal year (2023-24).

“As recession hits the developed economies, there will be further slowdown in both merchandise and services exports. Of the total exports, software (services) is a major component. For FY23, we may see stable growth, but there could be a threat of slowdown sometime next year,” says Madan Sabnavis, chief economist, Bank of Baroda.

According to Arpita Mukherjee, professor, Indian Council for Research on International Economic Relations, since India’s key services export markets — EU and the US — are headed towards a recession, there is palpable anxiety.

“India offers low-cost knowledge-based services. Even if companies consider cutting costs, the services from India may turn out to be lucrative for them,” she says, pointing out that in order to reach the ambitious $1-trillion target by 2030, there is a need for a shift in services export strategy.

“Towards this, de-risking, as well as diversifying our export basket, will be crucial,” she observes.