AI and trade deals are driving India’s services exports

India’s computer services exports have risen 30 per cent since the advent of ChatGPT in November 2022, even as overall services exports have plateaued, World Bank’s South Asia Chief Economist Franziska Ohnsorge said, terming Artificial Intelligence (AI) and the conclusion of more trade agreements that can trigger a “manufacturing renaissance”, as the two big investment opportunities for India in coming years.

Illustration: Dado Ruvic/Reuters

Although private investments in India have slowed down since the pandemic, they are still growing faster than other developing countries, but weak net foreign direct investment (FDI) flows are a concern, Ohnsorge indicated, noting that India’s FDI to GDP ratio has been low for a while and is well below other emerging markets.

Urging India to open up trade barriers and lower tariffs to enhance its market access from 12 per cent of GDP to about 50 per cent that many of its rivals have attained, Ohnsorge said this could trigger a manufacturing boom, and create more jobs for India’s youth to move them out of low productivity occupations like agriculture.

“The world is big… even if one trading partner is becoming less accessible, others may become more accessible with trade agreements,” the economist said, referring to the US’ 50 per cent tariff on Indian goods imports and the country’s drive to secure trade deals with EU, Canada and other nations.

“Private investment growth has slowed since the pandemic.

“That is the opposite of what’s happening everywhere else, in other emerging markets, and also the opposite of what has happened in public investment, where you see a dream acceleration.

“But even with the slowdown, private investment growth in India is higher than it is in other emerging markets and developing economies.

“So it’s slow by Indian standards, but not by international standards,” the World Bank economist stressed in an interaction on the sidelines of the Kautilya Economic Conclave.

“What is slow by international standards is FDI that is weak.

“I have one chart where it’s really striking, where you see the interquartile range of all the FDI to GDP ratios in other emerging markets, and then you see the Indian bar well below.

“So, FDI is the thing that’s slow by international standards,” she underlined.

Her comments assume significance in the context of the nearly 97 per cent drop in net FDI inflows in 2024-25, partly due to large repatriations by existing foreign investors.

“It could be that currently, there’s just, by coincidence, a flood of repatriation, but that’s quite a coincidence.

“Suddenly, a flood of repatriation that makes up for gross FDI flows.. but I have looked at net flows and the logic is that the signal from lower gross FDI or more repatriation is the same (about) investor confidence,” Ohnsorge explained.

Asked if foreign investors may be taking a cue from the slow pace of domestic private investments, she said, “I would assume there’s some correlation, but I haven’t looked at it.

“All I know is historically, two years ago, it (FDI inflow) was already low. It was always in the bottom quartile of emerging markets. Maybe it’s gotten even lower now.”

“Emphasising that FDI tends to come into tradeable sectors, Ohnsorge linked this to opportunities in India’s goods exports, which are “exceptionally low”, partly because of the high tariffs on intermediate goods.

“When people talk about India’s trade to GDP ratio being low, that is really a reflection of goods exports, not service exports, which are exceptionally high and a success story,” she said.

“Everyone has this big tariff number in their head, but what people don’t notice is that it implies tariffs on intermediate goods that are double of those elsewhere.

“In other industries, you can replace intermediate goods with people, like in agriculture.

“You can’t do that in manufacturing which is really hurt by tariffs on intermediate inputs.

“So if those can be lowered and ideally embedded in a broader trade agreement that goes well beyond tariffs, you could get a real manufacturing renaissance in India,” she remarked.

“If you look at the trading partners that other countries have trade agreements with… for Mexico, Vietnam, their market access is like 50 per cent of GDP. That’s a lot.

“For India, it’s 12 per cent of GDP, according to data as of 2023.

“So then you have to add the UK agreement, the EU agreement, Australia and Canada and possibly the US, then India also could have market access at 50 per cent of GDP, if this actually materialises.

“So this is the kind of thing that could truly trigger a renaissance in manufacturing,” she concluded.

Stating that India is well placed to benefit from AI, she pointed to its rapid adoption, especially in services exports and the BPO sector.

“Twelve per cent of job postings in the BPO sector since the release of ChatGPT (in November 2022) require AI skills, and that’s double of what it was before ChatGPT’s release and triple of what other sectors do.

“So the BPO sector is really enthusiastically embracing it (and) there’s been a 30 per cent increase in computer services exports, whereas overall services exports have just plateaued,” she noted.

“So it seems that computer services exports in particular, are benefiting from whatever is happening since the release of ChatGPT.

“So that’s a good investment opportunity on the service export side. That sector is booming,” Ohnsorge observed.