Speech at Launch of the Economic Analytical Unit’s Report India’s Services Sector: Unlocking Opportunity?
14 March 2007, Melbourne
Introduction
Thank you Richard Andrews,
John So, Lord Mayor of Melbourne
Ladies and Gentlemen:
Thank you very much for joining me this evening to launch the latest report by my Department’s Economic Analytical Unit called India’s Services Sector: Unlocking Opportunity.
This report is very timely. I have just returned from leading a successful business delegation to India. The size of that delegation, in which some 63 Australian companies were represented, clearly demonstrates the current huge interest in India among Australian business.
The report starts by referring to the abundant optimism in India. Everyone I met, from business people to government officials, was optimistic about the opportunities now opening up in India.
This optimism is not surprising: India’s economy is poised to grow at 9 per cent for the second-consecutive year. By some estimates, India could emerge as the world’s third-largest economy, based on market exchange rates, by the middle of this century. Along with China’s rise, this would represent a major shift in the world’s economic centre of gravity. In particular, it could make a major contribution to reducing world poverty, as millions of Indians benefit from economic growth.
India’s remarkable growth seems to echo the economic success stories of East Asia. Of course, what we are seeing in India today is the start of a long process of change and economic reform. We can’t predict the future, but the EAU report examines how economic growth might happen.
Is there a plausible path from today’s India to the projected giant economy of 2050? And what opportunities might that path present for Australian services providers?
These are important questions and I’m pleased that the EAU has once again produced thorough analysis in answering them. The report focuses on India’s services sector.
Why? Because India’s services sector has made a unique and unusual contribution to the country’s growth. Let me outline the contribution.
Why services?
Unusually for an emerging economy with low per capita incomes, India’s services sector has leap-frogged the manufacturing sector to be one of the economy’s main drivers.
Services occupy around 60 per cent of India’s GDP, an economic structure which makes it look more like a middle-income developing country.
It was India’s experience responding to the Y2K problem that propelled its IT services companies onto the world stage. Through growth in two-way trade in services, India’s own welfare and that of its trading partners has been enhanced, underlining the benefits from international trade.
Yet the problem that rightly concerns many is how to improve the livelihoods of a huge and growing but relatively low-skilled rural workforce.
The reality is that India’s internationally oriented services sector will not itself be a mass employer of low-skill labour on the scale necessary to absorb this workforce.
Fieldwork conducted for the report suggested that there is a plausible route by which services-led growth could lead to broader-based development, and consequently, to large-scale job creation.
Put simply, this would involve flow-on benefits to the broader Indian economy from the growth of dynamic services export sectors such as India’s Information Technology and Information Technology-Enabled Services (IT-ITES).
This sector’s performance has been impressive: total revenues grew by 30 per cent in 2005–06 to US$29.5 billion and are expected to reach US$36–38 billion in 2006–07.
The consequences of this growth are already being seen. India’s services exporters are growing rapidly, placing heavy demands on the construction and infrastructure sectors to build new production facilities and the roads, power stations, and telecommunications networks that service them.
The employees of India’s big IT-ITES providers are enjoying higher salaries and are becoming more international in their outlook and their consumer tastes. This is placing greater demands on the manufacturing, retail and logistics sectors to deliver modern, international-standard goods, on time and in good condition.
And the huge demand for new, qualified employees, is in turn stretching India’s education system, which already places huge competitive pressures on students wanting to attend the top universities.
There has been a powerful positive demonstration effect from the growing and dynamic services sector in India. People can see that reform and deregulation have led to growth.
In turn, that growth is now placing demands upon other areas of the economy, which will need to respond. With the right policy settings, the potential exists for further rapid growth, and in turn this growth will generate pressure for more reform; and so on. If this trend can be continued, employment opportunities can be expected to emerge across India’s economy.
Opportunities for Australia
The rise of India’s services sector is also creating new opportunities for Australian companies. Nearly 40,000 Indians were enrolled in Australian educational institutions in 2006.
Many Australian companies have already established operations in India, including in medical services, construction, infrastructure, mining services, telecommunications, banking and insurance.
I think this is an under-appreciated result from the emergence of tradable services. The most commonly highlighted aspect of this phenomenon has been the trend towards business process outsourcing and “offshoring” of services to India.
But trade is a two-way street. As of October last year, 26 Indian IT companies had established a presence in Australia. These companies are generating high quality employment for Australians in engineering, business management and consulting. This stimulates collaboration in research and development and creates new export opportunities for our country.
For example, the CSIRO recently signed a cooperation agreement with Indian IT company Infosys, which encompasses R&D cooperation for information engineering, as well as the commercialisation of CSIRO’s technology.
Trade in Services
Australian companies could benefit from maintaining a broad, strategic understanding of developments in the services trade when considering whether to venture into the Indian market.
This is a very clear message in the report and it was borne out during my visit when I met Australian companies that have invested in India.
Businesses often ask what it takes to succeed in the Indian market. There isn’t one simple answer to that but I think several things are becoming clear.
First, Australian entrants to India need to calibrate their expectations carefully. Australian businesses need to invest time and effort in understanding the business environment in India and its challenges.
Secondly, they need to be willing to do the hard yards required to adapt. They need to accept that establishing a business presence will be time-consuming and possibly frustrating.
And thirdly, Australian businesses need to take a long-term strategic view of their prospects. Businesses that take these steps have every chance of gaining a foothold in India’s huge, rapidly emerging market.
Finally, for our part, the Australian Government will continue to work on all fronts for a world trading environment that allows Australian exporters to make the most of new opportunities.
During my recent visits to Davos, Washington and New Delhi, I pressed key stakeholders to raise their ambitions in the Doha Round negotiations on services. I stressed the importance we place on ensuring that any Doha package delivers real market opening in all three areas of the negotiations—agriculture, industrial products and services.
Conclusion
The EAU report contains more details than I can cover in my remarks this evening. So I’d like to finish by commending Richard Andrews and his team for researching the opportunities arising from the growth of India’s services sector.
And I thank you again for joining me this evening. I encourage Australian business and anyone interested in understanding the opportunities in India to read this excellent report. I wish you all the very best.