Services sector: In the eye of the COVID-19 storm

After a positive growth performance in 2019, global services trade is expected to be directly hit by the economic fallout of COVID-19. India’s services activity showed unprecedented contraction in April, with only a partial recovery in May. While prospects look weak for most services industries, some sectors like IT/ITeS could actually be looking at a silver lining.

Global commercial services trade had grown in 2019, with exports increasing slightly by 2% to reach US$ 6.03 trillion during the year, even as merchandise trade declined by 0.1% in volume terms. However, WTO projects that services trade may be more directly affected by COVID-19 due to the imposition of transport and travel restrictions and closure of many retail and hospitality establishments. Moreover, you cannot have inventories of services to be drawn down today and restocked at a later stage. Services are also strongly interconnected, with air transport being strongly correlated with growth in cultural, recreational and sporting activities as well as business. The reluctance of people to go out has also meant bad times for sectors like hospitality, beauty services, retail and restaurants.

India’s commercial services exports were estimated at US$ 214 billion in 2019, and the country was ranked 8^th globally. Only Germany (-2%) and France (-5%) witnessed yoy declines in 2019. Ireland was a standout performer, with commercial services exports growing by 12%, followed by Japan and Netherlands (6%); India (5%) and China (4%).

After a record low of 5.4 in April, services activity in India recovered only slightly to record 12.6 on the IHS Markit India Services Business Activity Index. The impact of COVID-19 continued to weigh in on services business activity in May 2020, as business operations, consumer footfalls and demand remained way below normal levels. Most measures have seen recovery, but there are still signs of extreme month-to-month declines in output and new orders. Spare capacity continued to rise, albeit to a far lesser degree. Employment continued to fall in response to weak demand and expectations of further challenging conditions.

Latest data on monthly services exports for April by RBI shows a dip by 9.4% compared to March 2020 and a decline by 8.92% YoY. The IHS survey also points to a strong decline in new business activity from overseas markets in May, as around 95% of surveyed companies reporting a fall in foreign demand when compared to April. The global COVID-19 pandemic was cited as the overwhelming factor causing international business decline. Output expectations for the coming 12 months have dropped to their most negative since records began in December 2005.

Source: Services Export Promotion Council, based on services export data for 2018-19

Telecommunications, computer and information services form a major chunk of India’s services exports, garnering a share of 41% in 2018-19 and growing by 8.14% YoY. This was followed by business services at 19%, travel at 14%, and transport at 9%.

Experts are projecting some positive traction for IT/ITeS sector in the post-pandemic period, which is a silver lining for India’s IT sector. Despite overall decline in IT budgets, BCM, remote working, collaboration, automation, AI, ML, cloud, supply chain and security are expected to see growth in this fiscal, despite overall decline in IT spend in 2020.

The growth outlook for the IT sector is now predictably subdued. Ratings agency, ICRA expects the sector to grow at 3-5% in FY 2021, revising its earlier expectation of 6-8%. This forecast, however, is based on the assumption that there will be a gradual recovery during the second half of the year. This bleak growth is attributed to simultaneous supply and demand shocks emerging from the spread of the disease across the world.