Part III

• GATS, Services Sector and India:

Challenges and Opportunities

• Dr. Mrs. Vijaya Katti

• Professor, Indian Institute of Foreign Trade
• New Delhi
General Agreement on Trade in Services
(GATS):
• It is a treaty of the WTO that came into force in January 1995 as a result of
the Uruguay round negotiations.
• It was created to extend the multilateral trading system to the service
sector, in the same way GATT provides for merchandise trade.
• It covers most service sectors, requiring member countries to open their
market and treat foreign providers fairly.
Definition of “Trade in Services”

• The GATS does not define “services” but does define “trade in services”. The
definition covers not only the cross-border supply of services but also
transactions involving the cross-border movement of capital and labour.
Exceptions to Sectoral Coverage
• The GATS covers any tradable service in any sector with the exception of the air
transport sector, most of which is excluded from coverage. Apart from this, the
only services excluded from the coverage of the Agreement are those supplied
“in the exercise of governmental authority”.
International trade in services
• International trade in services covers trade in intangibles,
such as peoples' skills .
• Services trade is carried out through four modes of supply
namely: cross-border supply, consumption abroad,
commercial presence and presence of a natural person.
• International trade in services through these modes does
not physically cross national border and thus is not affected
by customs tariffs and other taxes applied to merchandise
trade.
• Services trade is affected by domestic regulations in force in
the sectors concerned in countries. International trade in
services is thus sensitive to behind the border, national
regulations that affect the supply of services.
 Contd…
• There are different dimensions on which the emerging
service economy can be differentiated from the
traditional manufacturing economy.
• First, concerning tangibility, the input of service economy
is primarily intangible resources, such as knowledge and
skills, whereas the input of manufacturing economy is
tangible resources of raw materials and goods.
• Second, service itself as an output is also intangible, while
goods produced under a manufacturing economy are
tangible.
• Third, service production and consumption processes are
inseparable (i.e. services are consumed as they are
produced), and there is much interaction between clients
and service providers during the service production
process.
Four Modes of Supply of Services
The services trade can be any one or a combination of:
Cross-border Supply from the territory of one
supply Member into the territory of any other
Member
Consumption Cross-border movement of consumers
abroad to purchase a service abroad

Commercial Supply of a service via establishment

presence of a territorial presence
Presence of Entry and temporary stay of foreign
natural persons residents to supply a service
WTO and Services
• Cover 12 services sectors and over 150 sub-sectors
• General rules and principals
• Sectoral and cross-sectoral (horizontal) commitments are classified
under
• Market Access and National Treatment
• By Mode of supply
• Full (No restrictions)
• Positive list Approach to liberalisation: Countries have the flexibility to
choose the sectors and Modes they want to liberalize
India’s Services Sector
• India has pursued a services-led development path and has become one of the
major global exporters of business services, notably in the ICT sector.
• India is the fastest growing large economy in the world and possibly one of the
economies with the greatest potential for sustained growth and development in
the medium term.
• India’s reliance on services as the engine of growth during the transition from a
low to a middle income country is unprecedented.
Contd…
• Indian business services exporters have helped improve clients’
competitiveness around the world.
• India has a strong comparative advantage in ICT-related services.
Business process outsourcing and business process management
have been the most important services sectors in the past and still
account for the bulk of India’s IT-enabled services exports.
 Services Sector in India

• India’s services sector expanded quickly with double-digit

growth in the second half of the 2000s.
• The services sector covers a wide array of activities ranging from
services provided by the most sophisticated sectors like
telecommunications, satellite mapping, and computer software
to simple services like those performed by the barber, the
carpenter, and the plumber; highly capital-intensive activities
like civil aviation and shipping to employment-oriented activities
like tourism, real estate, and housing; infrastructure-related
activities like railways, roadways, and ports to social sector-
related activities like health and education.
The role of services in India’s
economy
• Services have played a more important role in India’s
economic development than in any other major
economy.
• The literature describes economic development as a
shift from an agrarian economy dominated by
subsistence farming to an industrialised economy with a
rising share of services in GDP.
• This is a virtuous cycle starting with rising productivity
in farming, which releases labour to urban
manufacturing and services.
Contd…
• The services sector begins to gain ground as a share of GDP first during the early
phase of industrialisation, where traditional services such as transport,
distribution and public administration support and drive urbanisation and
complement the rise of manufacturing.
• A second wave of services growth tends to follow when the economy reaches a
per capita income level around USD 2000, when demand for modern services
such as finance, business services and telecommunications start rising faster than
GDP.
 Manufacturing economy Vs. service economy:
implications for service leadership

• An “economy” can be conceived as a process

that transforms raw materials into something of
value, which can either be tangible or non-
tangible. Economies are distinguished based on
its main driving force.
• A manufacturing economy is driven by the mass
production of products, whereas a service
economy is based on knowledge intensive
industries and services in economic production,
well-educated workers in the occupational
market, and innovating firms in business.
• With this in mind, India has launched important
structural reforms to liberalize its market and attract
Foreign Direct Investments (FDI), which are the main
drivers of economic growth, especially in developing
countries
• The service economy is also referred to as the knowledge or
information economy in the literature.
• It is noteworthy that “services” in a service-oriented society are not
confined to the tertiary sector in economy, but critical in the
production of economic value in all industries.
• Moreover, the shift of economic paradigm goes together with
extensive changes in organizational and social systems, which
collaboratively shape the profile of a service-driven society
Servicification and Servitisation of
Indian Industry
• Meaning and Importance
• The segmentation of Industrial production into activities such as
research, marketing, branding, after-sale services etc. –referred to as
“servicification” of manufacturing.
• Manufacturing items is becoming increasingly service orientedas
managers are involved in enhancing performance of outsourced
activities and manage supply chains.
 Process of Servicification

Intermediate Production Output

consumption

Service inputs in Service activities within Service sold bundled with

manufacturing manufacturing firm goods

Manufacturing firms use There is employment within

Manufacturing firms
higher number of services manufacturing firm is support
increasingly sell services
inputs of R&D, logistics, marketing and
bundles with goods
sales
Factors contributing to
Servicification
• Adoption of new technologies for increasing productivity
• Increasing importance of transport and communication for
manufacturing necessitating participation of services in Value chains
by manufacturing enterprises
• Using services to add value to products and establish customer
relationships can be a method for manufacturers to rise value of
products to customers
• Legal services utilized to help manufacturers overcome market entry
restrictions by assisting them with compliance with regulations
Servitisation

• Services which help in servicification of manufacturing incl.

• Design services, R&D Services, Photocopying Services, logistics,
Transportation, Marketing, Branding, IT Services, Human Capital
Management Services, Legal and Accounting Services, Financial
Services, etc.
• Servitisation – Process of adding services to a product focused
company in order to generate additional revenue streams and deliver
a desired outcome to clients so that company becomes solution
focused. Classic example is CUSTOMER CARE SERVICES, Netflix and
Spotify
Servitisation

• Increased offering of fuller market packages and bundles of customer

focused combinations of goods, services, support, self service and
knowledge in order to add value to core product offering
• Servitisation enhances the consumer loyalty, increases the product
cycle, stimulates innovation and reduces the market risks.
• Strong evidence of growing services sector in developing economies
• Outstanding performance of India in IT Services
• India has taken cue from the world by incentivizing Servicification and
Servitisation
Trade in Services

• India is one of the major trading nations in services. India’s

liberalization policy driven by FDI and IT exports.
• Commercial services, transport and other business servicesare major
importable items of India.
• After a flat trajectory upto 1991, trade in services boomed after 1991
reforms.
• Reforms, Deregulation, technical advancement, multinational
expansion, innovative delivery models and a big underserved local
market have boosted India’s services trade and investment.
Services Trade Restrictiveness Index
( STRI) 2020
• Published by OECD in 2020 shows that India has relatively more
restrictive Trading Environment .
• Before 2016, India had more open environment but since then, it has
imposed new barriers. Foreigners’ access to various critical service
sectors is either limited or subject to strict constraints.
• Restrictions on essential strategic service areas include Rail freight
Transportation, legal services and accounting. These sectors are
either closed to foreign service providers or protected for public
monopolies
FDI in Services

• The services sector has attracted significant FDI in post reform era.
• Availability of skilled workers at low wages, and enormous and
untapped market potential
• Despite lockdown measures, supply chain constraints, FDI in India
increased in 2020.
• Services sector which is the largest receiver of FDI in India has has
witnessed a robust growth in POST COVID Scenario.
• Computer hardware and Software subsector drove the surge in FDI
equity inflows.
• Retail Trading, Agricultural Services and Education also attracted FDI.
Challenges
• The immediate challenge for the services sector covering myriad activities and areas is
growth revival. India’s growth has been basically a services- led growth pulling up overall
growth of the economy.
• While this could be through a business-as-usual approach, a more targeted approach
with focus on big-ticket services could lead to exponential gains for the economy.
• The services sector is an uncharted sea throwing up many daunting challenges as well as
opening up many exciting opportunities.
• While many hitherto non-tradable services including those in the government and social
sectors are becoming domestically tradable, many services hitherto confined within
national borders (like telemedicine) have become internationally tradable.
Additional Reading Materials

• OECD Services Trade Restrictiveness Index: Policy trends up to 2023,

February 2023
• The General Agreement on Trade in Services (GATS) and international
trade in health services. Impact and regulations PhD. Driss BAKHOUYA1
• India Services Sector
• A Multi-trillion Dollar Opportunity for Global Symbiotic Growth, April
2017, CII, Delloite
• SNAPSHOTSHOWCASEINFOGRAPHICSREPORTSRELATED NEWS Last
updated: May, 2023 SERVICES INDUSTRY INDUSTRY REPORT Feb, 2023
• THANK YOU