For Mode 1 services, India needs to build skills in futuristic technologies

Dr. Arpita Mukherjee, Professor at ICRIER shares her views on the rapid growth of Mode 1 services, and how India should be prepared for the next phase of digitalization in services trade. She emphasizes that Indian IT companies should focus on building/upgrading skills rather than hiring bulk employees.

IBT: What is the present scenario of services digitization in India? How has COVID-19 phase impacted its growth?

Dr. Arpita Mukherjee: During COVID-19, we have seen rapid digitalization and Mode 1 trade in many sectors. One of them is health-tech, as technology has helped to provide health services across borders. Telemedicine or sharing patient data can be an example of Mode 1 trade. Similarly, education has also going online. Broadly, the delivery of services online using IT is Mode 1 trade.

In financial services, if a bank sets up an offshore unit and is sending their data for processing in India, this type of cross-border trade in services will be called Mode 1. An Indian IT company can deliver services off site for its clients, which will fall under Mode 1.

Today, increasing trade in Mode 1 is common. Even before COVID 19, many services including audiovisual services, education, retail, and healthcare had gone online, but the pandemic has increased the speed of adaptation of technology, and Mode 1 trade is expected to see an increase. Even before the Covid-19 pandemic, companies like Byju’s and Unacademy were providing on-line education services in India, but Covid 19 made online education a necessity. For financial services, we have shifted to online financial payment systems at a fast pace. Many companies abroad have set up their offshoring centres in India for data processing.

Speaking of commitments in the General Agreement on Trade in Services (GATS) in the Uruguay Round, there were certain services, which could not be thought at that point to be delivered through Mode 1. For example, in the case of maintenance and repair, many countries did not take commitments as they thought physical presence was a necessity, which is now gradually changing. Nowadays, if you want to install a computer, you can take help from a chatbot for its repair and maintenance services.

At the same time, the service delivery models within Mode 1 are changing. For example, companies in India and Philippines were earlier providing voice-based services to their clients in the USA, EU, etc. Such voice-based BPO service is gradually dying and being replaced by chatbots and other technologies. A customer is speaking to a person only when the chatbots are not unable to provide a service.

Thus, there are two things happening in Mode 1. First, a certain amount or part of every service today can be delivered online. Second, the type of Mode 1 is changing and will change with the use of AI and Machine learning, as we are moving towards more automation rather than leveraging on cheap human labour/resources.

Human resource requirements are moving towards more skilled professions. A lot of professional services like architectural design can now be accomplished online with technologies like 3D printing. Definition and classification of services and their different modes of trade should be relooked into in context of developments in 4IR technologies.

IBT: How do you think trade is shifting towards online delivery and how this shift is mapped by data?

Dr. Arpita Mukherjee: Data is very important to map trade through Mode 1. For Modes 1 and 2, trade data, country and sector-wise is now available across many developed countries and some developing countries, through the WTO, OECD, UNCTAD, etc., although how countries collect and analyze it is a different story. In the case of India, the bilateral sector/sub-sector-wise services trade data is not available in public domain, either in the RBI or in WTO, OECD, etc. RBI collects data on online transactions for Mode 1 and Mode 2 through its authorized agents. There are some issues with the data for which RBI does not present bilateral trade data in public domain.  Thus, there are data gaps.

Services trade data can also be collected from tax filings like GST filing in case of India at the sector and district level by destination market or by source country. But one needs to review the definition and classification used for this purpose, and the process for data sharing between the Ministry of Commerce and Industry and the Ministry of Finance. The third way to collect services data is from the clusters like Special Economic Zones. That is why the data for the IT industry was easily being collected and collated in the past, as a majority of the IT companies were earlier located in SEZs. Fourth, data can be collected by industry bodies. NASSCOM has a fairly robust Mode 1 data. Data can be collected by regulators like banking or telecom regulators. However, there should be a centralized process to check, clean, collate and present such data collected by different sources. Overall, Mode 1 data is easy to get, but it needs regulatory cooperation, data sharing across difference government agencies, and funding.

For Mode 1, many countries do a company level survey  for select sectors to

(a) Match the data/information with data collected from sources like central bank and

(b) Deep dive into some sectors with growth potential like finance or health tech or edutech.

For services like manufacturing services, some countries do survey of the manufacturing sector and ask firms on how much of the technology or the Mode 1 they are using for trade. Most of the countries, including the US and the UK, do collate data through regulatory process and surveys.

IBT: What do you think would be the challenges in online deliveries, especially vis-à-vis data protection and unemployment concerns?

Dr. Arpita Mukherjee: Job concerns can be reflected in three ways. First, online services delivery can impact Mode 4 exports and local jobs. At the same time, Mode 4 can also impact local jobs. For example, if American technology firms are employing people on H1 and L1 visa, that can be considered by some as adversely impacting local jobs. Second, what kind of jobs are being affected needs to be seen. Third, online delivery can help in cost saving and thus more employment can be created in future. It can help firms to have faster growth and wider client access, which can create jobs. Hence, online deliveries can create opportunities and challenges, but so far, its impact is mostly positive for job creation across markets and for us (India) there has been job creation.

Regarding data protection, for Mode 1 trade there is need for data sharing with a trust. Countries can have regulations for national security and consumer protection. In this context, when a trade agreement is signed, some binding commitments are needed to ensure free flow of data with a trust. Through binding commitments, national security may be ensured, while protectionism can be prevented.

Regarding commitments in Mode 1, we are worried as we do not yet have a regulation on online data protection. But since India has the strength to develop as a data processing hub, therefore, we need to have a policy, which allows us data access with the trust.

Majority of the global companies are EU GDPR compliant. Research has revealed that around 2/3^rd of Indian exporters are also compliant to GDPR. So if we have any data protection regulation like GDPR, the government can have access to data for national security, governance and consumer rights protection, while it can help us to take commitments and enhance our Mode 1 exports.

During Covid, many countries relaxed their regulations to help cross-border data to be processed, but one should actually focus and smartly design policy to meet security requirements and ensure government access to data for governance purposes. At the same time, there are limits to which we can ask. For example, we may not be able to ask a private company to share its source code as it impacts their business, unless the company is working for a government project.  For governance purposes, there is need for inter-agencies and intra-agencies government-to-government data sharing. Public procurement and working with government is not under Mode 1, services trade discussions in trade agreements.

IBT: What is your view in terms of India’s potential in Mode 1 exports digitally? Also, what should be the roadmap to ensure that India does not miss this opportunity in the coming years?

Dr. Arpita Mukherjee: India has a huge potential of Mode 1 exports, which somehow got missed. When the Doha Round of negotiations began, India was keen to have greater market access for both Modes 1 and 4.  When e-commerce companies started coming in, it became quite confusing for us as we had not collected data on e-commerce and Mode 1 trade. While the RBI does have a trade estimate and India’s entire positive trade balance is in Modes 1 and 2, somehow this Mode got neglected, with overemphasis on Mode 4.

At the same time, the coverage and definition of Mode 1 started getting broader. We now have Mode 1 cross-border services trade; e-commerce also covers part of cross-border services trade. The coverage of Mode 1 and its linkages with e-commerce has added to the complexity. More so, some papers claimed that developing countries will lose billions of dollars in revenue through e-commerce. Given that there is no data on Mode 1 trade from countries like India by sub-sector and markets in public domain, such claims ignored the fact that India is a major exporter of IT/ITeS services, and may not be in the same situation as other developing countries in terms of Mode 1 exports.

To understand our competitiveness and abilities in the sector, we have to understand how technology is evolving. When we talk to companies, we realize that industries also need to come up to the mark and change their business models to play a bigger role in Mode 1 trade. In the past, our IT product exports were limited, as we were offering support and maintenance services to many global multinationals at a lower cost. This low-cost service model and BPO model may not be sustainable in the long run and we need to move up the value chain, develop skills for 4IR technologies and have a thorough review of our curriculum and skills to make us future ready.

How many engineering colleges were teaching AI and Machine Learning till about 5 years ago? We need to actually build in such courses, so that we do not miss the opportunity that comes with 4IR and enhance our Mode 1 trade. Today, our students go to countries like the USA and Canada to study and they represent a substantial part of the technology workforce. We can build this ecosystem in India, but for that, we need to build the skills here. Hiring lower quality talent in huge numbers will not solve the problem. Talent has to be specialized, and for that, education has to be specialized.

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Dr Arpita Mukherjee is a Professor at ICRIER and Member, Committee for Advanced Trade Research, TPCI. She has several years of experience in policy-oriented research, working closely with the Government of India and policymakers in the EU, US, ASEAN and in East Asian countries. She has conducted studies for international organizations such as ADB, ADBI, ASEAN Secretariat, FCO (UK), Italian Trade Commission, Konrad-Adenauer Stiftung (KAS), OECD, Taipei Economic and Cultural Centre (TECC), UNCTAD and the WTO and Indian industry associations such as NASSCOM, FICCI, IBA, IDSA and EICI. Her research is a key contributor to India’s negotiating strategies in the WTO and bilateral agreements. The views expressed here are her own.