Saturday, May 9, 2015

Koan Partner Vivan Sharan on "Setting Standards for the Indian Services Economy"

Historically, the thrust of Indian standards has been on manufacturing sector products, with few standards for services. The nodal authority for standards, the Bureau of Indian Standards (BIS), is contemplating a renewed emphasis on developing standards for services. Given India’s domestic context and rapid developments in the global trade regime, this would be most timely. 
In April 2015, the Ministry of Consumer Affairs moved a cabinet note for making amendments to the Bureau of Indian Standards Act, 1986. The amendments will likely give the BIS more teeth in enforcing standards. Contravention of this Act currently attracts nominal punishment. Simultaneously, the BIS must aim to create pro-competition and pro-consumer service-standards benchmarks, so that industry can take a cue and eventually, take the lead.   
It is no secret that services have been the primary driver of India’s GDP growth since the early days of economic liberalisation in the 1990s. The service sector broadly constitutesinfrastructure services such as financial, telecommunications and transport on the one hand, and social services such as education and health on the other. 
Globally, services account for around 20 per cent of trade in balance of payment terms and around 42 per cent of trade in value added terms. The difference in the two metrics is because most products have a service component in their production – the value addition of which gets hidden in the ultimate product cost. 
Notably, the service component of Indian exports case is over 50 per cent – more than most other countries and at par with Hong Kong, China, Singapore, Iceland and the EU27. Some of the sectors in which India's exports are consistently growing are in education, health and in business services such as business processing outsourcing and other ICT related services.
It can be argued that the service sector will necessarily represent India’s competitive advantage in the Global Value Chains (GVCs) of trade. Micro Small and Medium Enterprises (MSMEs) are the largest source of employment after agriculture, and goods and services produced by them account for close to 40 per cent of exports. 
Even as the employment generation imperative becomes starker on account of the country’svast andyoung demographic, MSMEs will be absorbing a significant proportion of the workforce. MSMEs are also likely to be structurally more nimble than large firms. Capacity building by government and private sector can make MSMEs more adaptive to the dynamic GVCs than their larger industry counterparts.
Moreover, given India’s talent pool in service areas such as ICT, the global demand for well-run MSMEs will only grow.
The global trading regime for services trade is underpinned by the General Agreement on Trade in Services (GATS). The GATS came into force in 1995 and similar to its merchandise trade counterpart the General Agreement on Tariffs and Trade (GATT), GATS is a rules-based system for global trade in services. It is equipped with a “built-in” agenda aimed at achieving progressively higher levels of trade liberalisation through successive rounds of negotiations.
These negotiations aim at the reduction or elimination of the adverse effect on trade in services of measures as a means of providing effective market access. As part of the Doha Round's in-built agenda of services negotiations is a rules component which is inter alia, negotiating the establishment of disciplines on domestic regulation, including on technical standards.  
The objective is to ensure that such technical standards do not constitute a barrier to trade in services. Twenty years have passed since the GATS was created and no progress has been made on technical standards, while the global trading regime is evolving fast. 
In spite of the lack of progress at the WTO, technical standards are nonetheless being rapidly developed in parallel processes. As of April 2015, the WTO had received notifications of some 612 Free Trade Agreements (FTAs)/Regional Trade Agreements (RTAs). 
Currently three ‘mega FTAs’ are also on the anvil. The Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are being led in large part by the United States and the European Union, while ASEAN countries are leading discussions on the Regional Comprehensive Economic Partnership (RCEP). India is not a part of the TPP and TTIP – expected to cover a majority of world trade by value, particularly if China joins the TPP as is expected. Similarly, India is not a part of the Trade in Services Agreement (TISA), another FTA-style trade agreement, being negotiated between 24 members of the WTO. 
Owing to its non-participation inthe TPP, TTIP and TISA, Indian companies, particularly MSMEs with limited capacities to respond to strict standards regimes will lose out on the opportunity to shape such standards as well as to benefit from emergent GVCs. And in losing a seat at the table are other domino-effects including becoming norm takers as the regulatory disciplines in these mega FTAs/RTAs will inevitably end up in the multilateral trading system, this time being pushed by what will then be a North-South coalition- which is the composition of some of these initiatives, making it that much harder for India to contest. This demands an urgent response. 
The Indian private sector will necessarily be at the forefront of the response. Given that goods and services are often closely tied in value chains of production, supply chain management will become increasingly important for firms to stay competitive in the global economy. In a reflection of this, globally, standardisation has already moved into systems rather than product areas (an example is the ISO 9000 series of voluntary systems standards). 
The Indian Government also has its work cut out. It will have to build requisite capacities to ready industry. New service standards will have to respond to the fact that services are innately unique from merchandise goods. Unlike in the case of merchandise goods, both production and consumption of services can be simultaneous. Moreover, physical specifications for services are not feasible and therefore laboratory testing cannot be carried out to ensure service quality. 
Globally, standards tend to apply to service suppliers and the physical equipment used rather than the service itself. 
However the economic footprint of services such as ecommerce is bound to change this. India would do well to take the lead on ecommerce standards, with a view to protecting the consumer without killing the competitiveness of job-creating firms. Moreover skill development related standards particularly for skill redevelopment in technical sectors is an urgent imperative.
In addressing skills development challenges, priority focus should go to sectors in which India is currently exporting so as to leverage existing strengths.  Such work will need to be done in collaboration with all relevant stakeholders as well as key destination markets such that this standard development process can also be used as a means to propel India's export growth in these sectors by helping to open markets, and keep them open.
Taking a step back from the nuances of standard setting, the Indian Government must at the outset aim to answer two questions:Is it willing to let the private sector take a lead in creation of industry standards? And what is the strategic objective of setting service standards – domestic supply chain efficiency or aspirations to match global benchmarks?
But creating such standards will be no easy task.  Technical standards are by their very nature complex and intrinsically sector and even sub-sector specific.  Standards for telecom are not similar to travel and logistics or to financial services, and certainly not to health.  It will therefore take concerted effort and collaboration between government, private sector specialists and all other relevant stakeholders including from civil society and consumer interest groups. Long and complex as it is though, the process must start.

Vivan Sharan, Partner, Koan Advisory Group
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