Services exports are booming, and this is just the beginning

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India’s policy focus remains on manufacturing, but it’s the services sector that is delivering on all fronts — exports, job creation and tax revenues. Its share in India’s GDP has increased from 44 percent in 2004 to 55 percent in 2024. In contrast, the share of manufacturing in the country’s GDP has been hovering around 14-17 percent in this period.

India’s services exports grew  a whopping 23.6 percent (YoY) in February and by 14.1 percent between April and Feb in FY25, reaching a total of  $ 354.9 billion. In contrast, merchandise exports contracted by 10.9 percent in February and have recorded almost zero growth in the current fiscal (April-Feb).

Within the services sector, much of the attention is on IT services and of late Global Capability Centres (GCCs). This is not without reason: 48 percent of India’s services exports are IT services, including software and IT-enabled services (ITES) amounting to as much as $ 205 billion in FY24.

Unrealised potential of “other business services”

Nevertheless, one segment of India’s tertiary sector that still has immense untapped potential is “other business services”. Beside IT & ITeS, this is one of fastest growing sectors - its exports grew from  $ 37.3 billion in FY18 to $ 80.35 in FY23 (latest available data). India’s global export share in this category is 4.43 percent (compared to 20 percent for IT & ITeS) even though the size of the global export pie in case of “other business services” is approximately 2.4 times of IT & ITeS: $ 1813 billion versus $ 761.5 billion (2023).

Thus, the scope for boosting exports of “other business services" is immense, and it is high time Indian policymakers accorded this sector the attention it deserves. This is particularly crucial as India's IT and ITeS exports face potential disruptions from AI advancements, while already struggling goods exports are likely to encounter further setbacks due to Trump’s reciprocal tariffs.

According to the World Trade Organisation (WTO), "other business services" encompasses a variety of commercial and professional services that are not classified under specific headings. They include:

1. Research and Development Services: Services related to basic and applied research, as well as experimental development of new products and processes.
2. Professional and Management Consulting Services: This category includes legal services, accounting, management consulting, public relations, advertising, market research, and public opinion polling among others.
3. Technical, Trade-Related, and Other Business Services which include among others architectural and engineering services and trade related services

A significant proportion of professional and management consulting services, including legal research and drafting, market research, advertising, public relations, writing, editing, and content creation for foreign clients, are being delivered by individual professionals and smaller firms. Additionally, expert insights and advisory services to institutional investors, private equity and business houses through expert network management companies such as GLG, Guidepoint and InsightAlpha are often provided by professionals operating through proprietorship firms, LLPs and companies with fewer than 5-10 employees.

Thus, making it easier for these small firms run by professionals and first-time entrepreneurs to operate —- by cutting down ‘regulatory cholesterol’ —- will significantly boost the export of non-IT professional services. That requires not money but strong political will.

GST process improvements are a must

Registering a business in India is now easier than it used to be, but closing down a loss making one remains difficult. Similarly, changing the registered address of a limited liability partnership firm or private limited company from one Indian state, say UP to another state Karnataka is cumbersome.

Dealing with a badly designed and poorly implemented GST regime is a common problem for all kinds of smaller business entities whether exporting goods or services.

Thus to help them:

# GST registration needs to be made voluntary for 100 percent export firms until it reaches a sales turnover of say Rs 1 crore - at present, this limit is Rs 20 lakh for a services firm.

# Unused input tax credit should be automatically refunded and credited back to the exporters’ bank accounts within 90 days, and GST officials shouldn’t have any discretion in this regard. As of now, discretion is invariably being used to delay/deny tax refunds or extract bribes by tax officials.

# For GST registered firms, just like income tax, the payment of GST should be made quarterly and filing GST returns annual. That will save a lot of time for smaller firms to focus on marketing their services overseas.

# Despite the promise that GST will create a "one nation, one tax" system, businesses still need to register separately in each state they want to operate in. It’s time we introduced “one national registration”.

Tax benefits shouldn’t be limited to companies

The Indian government slashed “income taxes on profit” in Sept 2019 to incentivise private investment. This benefit should be extended to all kinds of registered business entities including proprietorship, partnership, LLPs, and not only private limited and public limited companies.

Smaller services firms are de facto denied bank credit especially from state-owned lenders as their “credit appraisal and disbursal system” is based on collaterals of land, plant and stocks-in-trade which is more suited to manufacturing firms. It will help if these banks give more weights to cash flows for sanctioning loans.

Private banks have been fleecing small exporters by extracting exorbitant forex conversion charges which could be as high as 2-3 percent of the value of the export sales. Public sector banks offer better conversion rates but they are more focused on paper filing and reporting than export facilitation. This must end. Introduction of UPI for cross-border transactions can help curb the exploitation of small exporters by banks.

To conclude, with the right policy support, smaller firms in India's tertiary sector can play a crucial role in driving up export of other-business services, needed to reduce India’s trade deficit, achieve current account balance and ensure a stable rupee.

Ritesh Kumar Singh is a business economist and CEO, Indonomics Consulting Private Limited, a policy research and advisory startup. He tweets @RiteshEconomist. Steven Raj Padakandla (@pstevenraj1) is part of the faculty at IMT, Hyderabad.

Views are personal and do not represent the stand of this publication.