Moneycontrol Pro Panorama | India's large talent pool is bringing home the dollars 

What is driving the surge in India’s services exports? The answer lies in availability of a large talent pool and cost arbitrage. (Source: Bloomberg)

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India’s large talent pool is rapidly becoming a key asset. The latest trade data tell us why. Services exports grew by an impressive 27 percent in FY23, significantly faster than exports of merchandise goods that were up 6 percent. Adjusting for COVID's impact, services have also grown significantly faster than non-oil merchandise exports from FY19.

Importantly, an analysis of the services data shows strong traction in non-software exports. “India has consequently started to generate large positive balance in certain segments of non-software trade sector,” Kotak Institutional Equities said in a note.

What is driving the surge in India’s services exports? The answer lies in availability of a large talent pool and cost arbitrage.

These advantages existed in pre COVID years as well. But the rapid rise in inflation during the pandemic and labour shortages in developed countries are giving renewed thrust to outsourcing. The contribution of offshore revenues rose significantly at IT companies in recent years—increasing from 71.9 percent in FY20 to 75.6 percent in FY23 at Infosys.

It is not just the traditional IT services work that is increasingly being shipped to cheaper locations. As this Wall Street Journal report explains, after experimenting with remote work, enterprises are increasingly looking to outsource more skilled work. Perhaps this explains the spurt in non-software exports.

“It is not just India’s tech majors. Smaller IT companies are gaining market share. And it is not just IT services either. MNCs are setting up Global Capability Centres in India and moving up the value chain to data analytics, business development, design, and R&D,” explain economists at HSBC Global Research.

Still, all is not hunky-dory. India suffers from a poor education system. A vast number of college graduates lack technical know-how and depend on employers for training. It is imperative to broaden the talent base through appropriate education. Importantly, the country lacks crucial trade agreements with major economic blocs. This is constraining India’s merchandise exports and its full export potential, writes Abhijit Kumar Dutta in this piece. And the opportunity for the masses lies, not in high-tech services, but in labour-intensive manufacturing exports. Do read.

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Technical Picks: Escorts, Bank of Baroda, Tata Communications, Bank of Baroda and Natural gas (These are published every trading day before markets open and can be read on the app). 

R Sree RamMoneycontrol Pro