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Growth in Exports of Services of India Exogenous Human Capital, Labor Market Infirmities and Complementing Foreign Capital

Abstract This article explores the determinants of exports of services of India through an augmented-gravity model. It finds that (i) the dampening effect of distance on the exports of services declines over time, (ii) exports of services exhibit growth potential under favorable trading conditions, per se, economic freedom of trading partner, as it is found to be positively associated with and an important determinant of India's services exports, (iii) overall, the determinants for exports of services are different compared to exports of goods, and (iv) while market size and geography (distance and remoteness) matter for exports of goods both in the short- and long- run, exports of services are purely driven by exogenous human capital accumulation; wherein human capital may be causing an endogenous growth in exports of services due to labour market infirmities. It highlights that the human capital to physical capital ratios may converge (unconventionally) to a steady state signaling investment in physical capital and innovation in services; the latter is an unavoidable phenomenon resulting in the realisation of a complete product life- cycle beginning from introduction to maturity and decline stages for the entire services sector.