Showing posts from December, 2012

Service sector incentives - Policy challenges

Services has emerged as an important part of our exports. More about facts and figures on service sector here  ;-) Anyway, this blog is about the challenges when  it comes to grooming (?) services sector through incentives. There is a line of thinking which says that services sector grew as the Govt. was caught napping and didn't know how to deal with it. So all that the Govt has to do now, for services to keep growing, is to just let it be and don't spoil the party by interfering. However, from a trade policy-making point of view, services has emerged as a strong sector with a comparative advantage that is here to stay for some time to come. The policy-makers could not ignore this sector, and in good faith, decided to introduce incentives for this sector too, alongside other sectors. The current foreign trade policy incentivises services exports through schemes such as Served From India Scheme (SFIS). To know more about the scheme refer chapter 3 under this FTP link . 

Service sector of India and the Rybczynski effect on manufacturing

The theory I am going to propose below is not based upon any serious study. So the possibility of holes are not excluded. Thus it goes. If there are two tradeable sectors in an economy, and if one of them is a leading sector and the other one lagging, Rybczynski (pronounced Rib-Chin-Skee) theorem predicts that, over a period of time, there would be more than proportionate expansion in the leading sector, at the cost of the lagging one. This would happen when one reads Rybczynski's theorem in the light of Heckscher-Ohlin model. Alongwith, you might be interested in understanding the mechanics, by reading about what's popularly known as Dutch disease . Cut to India. We have a leading sector in services, and a lagging (albeit important) sector in manufacturing. When I say leading, I am not referring to the sheer size, I am referring to the productivity and comparative advantage the sector enjoys in international trade. In this respect, services sector is a leading sector