Servicification is contingent on a vibrant manufacturing ecosystem

Representational Image (Reuters)

‘Servicification’ of manufacturing, which denotes an increase in the sector’s use, sale, and production of services has played a central role in pushing up the share of valued added by services in global exports to over 50 percent during the past decade. Indeed, servicification is the glue that has been holding global value chains (GVCs) together, and is being posited as a major opportunity for India, what with new communications technologies such as 5G promising to enhance the tradability of services.

However, in the wake of COVID-19 the world has firmly entered an era of selective de-globalisation and protectionism where the barriers to services trade may well rise. So, even as services remain critical to industrial productivity, a vibrant domestic manufacturing ecosystem is necessary for India to capitalise on the servicification trend. Especially, since the other emerging trend of this era — the regionalisation of manufacturing supply-chains — will afford India the opportunity to do so. A growing ‘servicified’ manufacturing estate will enhance India’s bargaining power in trade negotiations that could be used to open the way for further services exports.

Today, software, transport and distribution services all make critical contributions to any manufacturing value chain. Manufacturing firms also depend on financial, business, professional, and problem solving (e.g. engineering) services for competitiveness, even as they themselves offer a number of services bundled together in the form of installation, maintenance, and repair.

In the heyday of globalisation, the contribution of foreign services as inputs to domestic manufacturing was on the rise globally. As such, accelerated digitisation in the wake of the pandemic also allowed India to grow its services exports led by software, financial, and business services to record levels during financial year 2021-22.

However, whether it be the export of professional services or bundled services such as repair, international movement of short-term services providers or what the WTO called ‘Mode 4’ is obviously of great importance. Even before the pandemic, this was a most contentious issue, and has since been a major reason why India does not yet have free trade agreements in place with either the European Union or the United States.

Also, while advancements in communications technology may open up new vistas for digitised services exports, this is being offset by concerns related to cybersecurity, stringent data protection laws, and other non-tariff barriers such as national standards. With the advanced economies looking to protect their domestic services sector that accounts for a majority of employment, the trend towards an ever-increasing share of foreign service inputs in local production may not hold or at least slowdown appreciably.

Pandemic-era disruptions and geopolitical tensions have also foregrounded the tyranny of distance for transnational corporations (TNCs). Western TNCs, in particular, encouraged by their governments, are now looking to reduce the fragmentation of their supply-chains by co-locating various contributing elements at a diversified set of production sites, preferably close to their home countries.

Incidentally, this shortening of supply-chains was being mulled over even before the pandemic with the case for co-locating R&D with manufacturing activities backed by standard economic rationale. The pandemic has greatly burnished the viability of such ideas, and the result will be the unbundling of global supply chains into a discrete number of regional ones.

This trend towards regionalisation of manufacturing supply chains, however, provides a new window for India to hasten industrialisation. While there will be some re-shoring, the West will essentially have to break its current dependency on China by turning to new regionalised centres of production in the emerging economies. However, these centres will not be equal in size and only India can achieve the concentrated scale in goods production that will be necessary if global inflationary tendencies are to be kept in check.

India’s status as an offshore development hub and software powerhouse obviously supports its ambitions to emerge as an integrated regional manufacturing hub. The rise of Indian manufacturing will, in turn, provide better economies of scale to domestic service providers and underpin their cost- competitiveness. The pull of the Indian manufacturing services market may lead to the West becoming more amenable to providing Indian services firm’s contra access.

If an emphasis is kept on innovation-driven growth, the melding of domestic services and manufacturing will also help India create sorely-needed national technical standards relevant to the fourth industrial age that can be used as a bargaining chip with the West.

Ultimately, manufacturing TNCs utilising Indian services industries are likely to themselves become votaries of the same in other regional centres where they have a presence.

Saurav Jha is a geostrategic affairs commentator, and author of Negotiating the New Normal: How India Must Grow in a Pandemic Ridden World. Twitter: https://twitter.com/SJha1618. 

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