Software exports and India's BoP

For years it was a mystery that while software exports were booming, their equivalent foreign exchange earnings were not reflected in the balance of payments (BoP) statistics. True, India's BoP statistics on 'invisibles,' under which software earnings are classified, had been showing a strong growth during much of the 1990s. Indeed, it was these invisibles (broadly different kinds of services) which were responsible for the relatively healthy foreign exchange situation during the past decade.

However, the receipts from invisibles, which covered 60 to 70 per cent of the trade deficit, appeared to have been driven largely by remittances from Indians working abroad and the effect of software exports was not readily visible. (See 'Software earnings and management fees', The Hindu, January 19, 2000). This is no longer the case.

The latest and detailed RBI data on invisibles show that net receipts from software exports last year contributed close to 25 per cent of the net surplus in invisibles. (``Invisibles in India's Balance of Payments: 1997-98 to 1999-2000'', RBI Bulletin, January 2001)

Even until as recently as 1996-97, net receipts from ``Miscellaneous'' services - which included software exports - showed a small negative outflow. This was largely on account of large payments on other kinds of services, mainly in running foreign offices of Indian companies, management fees and advertising abroad. There was also the suspicion that while gross software earnings were considerable, the net receipts were negligible because foreign expenditure outlays - real and imaginary - were almost equally large.

The new RBI data should clear many of these doubts. As Table I shows, remittances from Indians abroad (``Private Transfers'') still dominate the surplus in invisibles. But what is significant is that miscellaneous services now make a significant contribution to net receipts. The surplus in miscellaneous receipts has increased more than nine times in just three years. Further, the $3.7 billion growth in the overall surplus of invisible receipts in 1999-2000 came almost equally from remittances and miscellaneous services. The net earnings of $3.2 billion from miscellaneous services in 1999-2000 is a vast difference from the negative receipts during most of the 1990s, which reached as much as (-)$1.4 billion in 1995-96.

Within miscellaneous services it is software that dominates (Table II). Two things seem to mark out 1999-2000 from the past. One, software exports recorded a quantum leap even as the net outflow from other services (management fees, expenses in running offices abroad) declined. The software burst in 1999-2000 was of course related to the Year 2000 business. But projections for 2000-01 too are of growth of close to 50 per cent.

So as long as software exports continue the scorching pace of recent years and as long as outflows from the ``others'' category are controlled, net receipts from miscellaneous services will keep playing a major role in India's earnings from invisibles, or what should be better termed as service exports.

(The RBI data reflect the economy's net foreign exchange earnings from software and other services and not of the companies in each sector. Thus, the software earnings as reflected in the BoP data will be neutralised to some degree by expenditure by software firms on foreign offices, reflected in the ``Other services,'' and on salaries paid and spent abroad, reflected in compensation of employees. How much all this adds up to one cannot really say. The true picture of net foreign exchange earnings can be had only from analysing company balance sheets.)

In addition to throwing light on software exports, the new RBI data show up some other interesting trends. First, while the outflows from ``Investment Income'' continue to be considerable these are mainly on account of payment of interest on loans ($3 billion in 1999-2000) and interest on NRI deposits ($1.7 billion). Dividend and profit repatriation remain fairly small ($537 million last year).

Second, the gross payments in the Investment Income category added up to a large $5.5 billion in 1999-2000. They were moderated to some degree by an unusual category of earnings which has surfaced in mid-1990s - interest on RBI investment in securities abroad. The relatively large foreign exchange holdings that the RBI has held are yielding no mean income - $1.4 billion last year.

Third, in the category of miscellaneous services itself, payments for financial services by foreign financial institutions more than doubled between 1997-98 and 1999-2000 (from $640 million to $1.3 billion). That more than neutralised the increase in receipts from telecom services (mainly earnings by VSNL from its call sharing agreements) from $171 million to $1.1 billion over the same years. Once a new regime of call accounting rates is negotiated with U.S. telecom companies this surplus is likely to shrink even further.

All in all, private remittances and, increasingly, software exports are yielding large surpluses in invisible earnings. These more than merchandise exports or the elusive capital inflows have contributed to the reasonably good health of the BoP in the 1990s.

CRR

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