distribution, and rail transport services.<sup>2</sup> In line with many OECD countries, India has reformed its manufacturing sectors to allow for more FDI, but restrictions on foreign investments in services have remained relatively high compared to the OECD average (OECD Service Trade Restrictiveness Index).<sup>3</sup> The liberalization of trade and FDI increased the imports of services by the manufacturing sector. The import service intensity increased from around 5 percent in 1990 up to a high of 21 percent in 2017. Imports became particularly important for the Automotive and Electronics sectors, as can be seen in the right panel of Figure 5. In 2017, imports constituted nearly one-third of all services used in the electronics industry and more than a quarter of all services used in the automobile industry. These two industries have driven a large part of the upward trend in service imports in manufacturing. In Europe, Transport equipment is also a high user of imported services, in addition to Textiles and Coke and Chemicals (Veugelers, et al. 2017). Textiles firms in India on the other hand, import relatively few services compared to other sectors.

Figure 4: Imports and Exports by Domestic Firms and Foreign owned Firms <!-- Start of picture text --> Import Share (by Ownership Status)<br>Export Share (by Ownership status)<br>mean median<br>mean median<br>25.00<br>25.00<br>20.00<br>20.00<br>15.00<br>15.00<br>10.00<br>10.00<br>5.00 5.00<br>0.00 0.00<br>domestic minority majority wholly domestic minority majority wholly<br>foreign foreign foreign foreign foreign foreign<br>owned owned<br><!-- End of picture text --> Source: Prowess; Own calculations The general trend across the world is that GVC trade increased rapidly until 2008 and has been declining since (World Bank 2020; Boris and Mancini 2019). Several macroeconomic reasons have been put forward to explain this. such as, lower output growth across the world, a plateau effect of the extent to which production chains can be broken up, the decelerating impact of China and Eastern European countries for

> 2 However, foreign entry is also limited by other measures which affect foreign investors. For example, there are limits/conditions to the proportion of shares that can be acquired by foreign investors in publicly controlled firms. Also, there are specific requirements for cross-border merger conditions in several sectors. Moreover, in several sectors, there are residency requirements for at least one member of the board and the manager.

> 3 As per the OECD Services Trade Restrictiveness Index, India is relatively restricted in services trade compared to other OECD and emerging economies. FDI restrictions in services in India are mainly related to equity restrictions, particularly for professional and business services, such as legal services, accounting services, real estate services, and insurance services. Several other services sectors still have some equity restrictions in place, such as retail, media services, as well as engineering and financial services. For all the services sectors in India, limitations on foreign entry, remain significantly higher than the OECD average. The sectors for which foreign entry is still somewhat burdensome include accounting, architecture; legal services; telecommunication; all types of transport services; logistics services; courier (due to postal services limitations); commercial banking; and insurance. Transparency-related barriers in services are the third most important category that explain India’s relatively high STRIs.

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