Amid a clouded global outlook, India’s services exports have emerged as a rare bright spot. In a world marked by trade disruptions and geopolitical tensions, the strength of India’s services sector now defines much of its competitiveness and resilience. But can an economy rely predominantly on a sector that demands highly skilled professionals while leaving behind the semi-skilled and unskilled workforce?
Recent data from the National Stock Exchange (NSE) show that India’s services exports have grown at a compound annual rate of 14.8%, far outpacing goods exports at 9.8%. With India poised to become the world’s third-largest economy by 2027, services are no longer a supplement but the main driver of growth. The country is betting that a services- and consumption-led model can deliver prosperity where the traditional manufacturing-led route has faltered.
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Diverging from the East Asian model
Historically, industrialisation in East Asia—from Japan and South Korea to China—followed a familiar path. Labour-intensive manufacturing drove exports, absorbed millions of semi- and unskilled workers, raised productivity, and created a broad middle class. India, by contrast, is attempting a different experiment.
Its growth rests increasingly on IT and business process outsourcing, consulting, software, financial services, and global capability centres (GCCs). The NSE notes that India could become to services what China was to manufacturing. Over 1,700 GCCs now operate in India, generating tens of billions of dollars annually and employing over 1.6 million people.
Structural advantages and buffers
India enjoys distinct advantages in this digital era—English-speaking talent, cost competitiveness, and improving physical and digital infrastructure. The services sector’s share in gross value added has risen from 50% in FY14 to 55.3% in FY25. On the external front, services exports have cushioned the current account deficit, which stood at a modest 1.1% of GDP in Q3 FY25, helped by net services receipts of $51 billion.
Domestically, rising incomes, urbanisation, and digital adoption have strengthened consumption demand. These forces provide internal buffers against global slowdowns and make India less dependent on cyclical swings in external demand.
Global headwinds and shifting competitiveness
India’s service export success cannot be taken for granted. Global demand patterns are shifting as automation, artificial intelligence, and nearshoring reshape business operations in advanced economies. Many Western firms are bringing back parts of their digital or customer-service work to comply with data-security norms and local employment pressures.
This trend could gradually erode India’s labour-cost advantage and challenge its long-held dominance in IT and business-process outsourcing. The next wave of competitiveness will depend less on cheap labour and more on innovation, intellectual property, and upskilling—areas where policy support remains thin.
The employment conundrum
A services-led model cannot substitute for a manufacturing revival. Services exports, especially high-end IT or knowledge-based work, are skill-intensive and create fewer opportunities for semi- or unskilled workers. The fear is of jobless growth—a widening gulf between high-value employment and the vast pool of underemployed youth.
Despite its strong performance, India’s services boom has not alleviated the persistent jobs deficit, especially among graduates. Many technical and engineering graduates remain underprepared for industry needs, while infrastructure outside major cities limits the spread of the services economy.
The other concern is the uneven geography of services growth. The boom is largely confined to a few metropolitan clusters—Bengaluru, Hyderabad, Pune, and Gurugram—while vast parts of India remain untouched. This concentration amplifies regional inequalities and strains urban infrastructure. A more inclusive strategy would involve nurturing tier-2 and tier-3 city ecosystems, developing digital and logistics infrastructure, and aligning state-level skilling programmes with local industries. Without this spatial diffusion, services growth risks becoming a narrow urban phenomenon rather than a broad-based economic transformation.
The missing manufacturing engine
Manufacturing remains the weak link. Despite modest progress, India’s industrial base and export competitiveness lag behind peers. Without a robust manufacturing engine, challenges like low productivity, weak backward linkages, and dependence on imported intermediates persist. The merchandise trade deficit remains high, driven by imports of capital goods, energy, and intermediates, offsetting much of the services surplus.
While the current account remains manageable today, a durable surplus or sustainable narrowing of the goods deficit remains elusive. Without manufacturing growth, India risks an imbalanced structure—one that generates value but not enough jobs.
Leveraging services to strengthen manufacturing
It is also a mistake to view services and manufacturing as opposing forces. In fact, the two can be mutually reinforcing. Modern manufacturing depends heavily on design, data analytics, logistics, and financial services—all areas where India already excels. A deliberate integration of services into industrial policy could boost manufacturing productivity and export competitiveness.
India’s “Digital India” and “Make in India” programmes should converge around this principle: to create digitally enabled manufacturing ecosystems that combine the country’s software strength with its industrial ambitions.
Balancing reform and diversification
Economists widely agree that India’s long-term stability demands simultaneous deepening of both services and manufacturing. Policies such as the Production-Linked Incentive (PLI) schemes, cluster-based industrial zones, and export-oriented special economic zones (SEZs) are vital to building scale and competitiveness. Complementary reforms in logistics, power supply, land acquisition, and ports are equally important to attract global value chains and labour-intensive industries.
The goal should be twofold: to upskill workers for services while creating millions of semi-skilled jobs in manufacturing and allied sectors like construction, logistics, and renewable energy. Such a dual-track strategy would sustain growth, improve inclusion, and enhance India’s resilience to global shocks.
Sustaining a dual-track growth model will require an equally ambitious reform agenda. India’s demographic dividend can only pay off if education and skilling systems align with emerging job markets. The new labour codes, when fully implemented, should promote flexibility while ensuring security and productivity. Expanding apprenticeship networks, industry-linked vocational institutes, and public-private partnerships in training will be essential. These reforms will ensure that both the services and manufacturing sectors have the workforce they need to drive India’s next phase of growth.
India’s services success is real and transformative. But it must not obscure the parallel need to broaden the employment base. To truly become the world’s third-largest economy, India must walk a policy tightrope—embracing the services revolution while rebuilding the manufacturing imperative. Only by doing both can the country achieve inclusive, sustainable, and durable growth.