In February, The Economist (the British weekly) hazarded a guess that India’s current account deficit in 2006-07 would be 3% of GDP. Others, including me, felt it would be closer to 2% of GDP. In fact, it was just 1.1% of GDP, according to the latest RBI data. This explains why the net dollar inflow has been much higher than anticipated, driving up the rupee.
Why did earlier estimates of the current account deficit go so badly awry? Because net invisibles surged in the last quarter of the year. So, we need to study the invisibles section in the Reserve Bank data with care.
In 2006-07, remittances from overseas Indians rose to $28.9 billion, a good improvement on the previous year’s $25.2 billion. But the biggest jump by far was in ‘miscellaneous’ invisibles, to a whopping $62.4 billion from $45.9 billion the previous year.
The miscellaneous category includes software exports, which in 2006-07 totalled $31.3 billion. That still leaves a rather large balance of $31.1 billion of miscellany to be explained.
The Reserve Bank has been trying for years to get a better idea of the components of these huge miscellaneous flows, and has tried to break down the data into different categories. The accompanying table shows the main items in the miscellaneous section other than software for 2006-07.
What stands out is the huge inflow under the head ‘business services’. Receipts from business services amounted to $23.4 billion, almost double the previous year’s figure of $12.9 billion. Just as startling is the doubling of outflows under business services, from $10.5 billion the previous year to $20.2 billion in 2006-07.
Now, a few years ago, very little came in or went out under these heads. So, what has changed? What are these boom industries? The RBI has an official explanation: “business services receipts and payments were mainly driven by trade-related services, business and management services, consultancy services, architectural and engineering services and other technical services, and office maintenance services. These reflect the underlying momentum in trade of professional and technology related services.”
Alas, this is a palpably unconvincing explanation. India does, of course, have a fast-growing sector in IT-enabled services. This includes not only low-end business process outsourcing but higher-end professional areas ranging from medicine and engineering to law and accounts. However, these service exports are already covered under the head ‘software’ in the RBI data. They cannot reappear again under the head ‘business services’.
Nasscom says that exports of software and IT-enabled services were $23.6 billion in 2005-06 and $31.3 billion in 2006-07 (of which IT-enabled services were $6.3 billion and $8.3 billion respectively). The Nasscom figures corresponding exactly to the RBI’s data under the head ‘software’. This confirms that business service exports which have been outsourced to India, and are variously called BPO and KPO, are already included in the RBI data under ‘software’.
What, then, are the business services totalling $23.4 billion that the RBI has now disclosed in its data? Many
professionals are indeed selling their services abroad, but most are covered by IT-enabled services. Apart from them, we have sundry consultants, engineers, architects and even journalists earning sums from abroad. But is it even remotely possible that their earnings can add up to $23.4 billion? Hardly.
To put $23.4 billion in perspective, this sum is almost as large as India’s entire exports of IT and IT-enabled services in 2005-06. Achieving such large exports has made India world famous, and has made household names of Infosys, Wipro and other IT stars.
It is not remotely possible that sundry architects, consultants and business professionals have managed to earn as much as our entire IT industry did a year earlier. The very suggestion is absurd. We can cite dozens of software heroes (from TCS to I-flex) and several IT-enabled services heroes (from Genpact to WNS). But can you cite any ‘business services’ heroes who earn billions from exports? If they exist, why are they not winning export awards galore and gracing the covers of business magazines?
Almost as startling is the huge outflow under ‘business services’. These outflows were negligible a few years ago. What, then, are the payments to the tune of $20.2 billion last year? How is it that both inflows and outflows have doubled last year? Who is sending out these huge sums and who is receiving them?
In the old days, the ‘miscellaneous’ category was a small residual item. In more recent years, ‘miscellaneous other than software’ was the new residual. But now this has been broken down into new sub-heads. On the face of it, ‘business services’ is not a residual – the RBI lists another category called ‘others,’ and that sounds like a residual. But, if ‘business services’ are not a residual item, what are they? Who owns and runs these multi-billion dollar business services?
Some distinguished academics like Devesh Kapur, now head of CASI at the University of Pennsylvania, argue that the RBI actually has no clue about what is coming in and going out. RBI officials themselves admit that, with the liberalisation of the economy, billions can move in and out with no questions asked, so they can no longer accurately track who is receiving or sending money.
Alarmists may claim that the huge flows include sums to finance terrorism and launder drug money. May be, but there is no good reason why the sums under these heads should have grown so rapidly in recent years. Nor do terrorists need billions to make a few explosives.
Clearly, this is an urgent area for investigation and research. It seems paradoxical that, with all the fame India has gained in software, it has not devised software that can track and explain the huge sums flowing in and out of India. A country of India’s size and sophistication should not have a black box of $23.4 billion lurking in its balance of payments. We must know what lies inside.