Beyond borders: India must harness its untapped services trade potential

A useful way to understand shifts in global trade is through the “gravity model”, which says that bilateral trade between two countries is directly proportional to their economic size and inversely proportional to the distance between them. A study featured in the latest World Economic Outlook, of the International Monetary Fund, shows that this logic is weakening for services, and services exports have grown at a much faster pace than goods in recent decades.  In the early 2000s, a 1 per cent increase in distance reduced trade in services by 0.63 per cent, much like trade in goods. By 2022-23, this effect had fallen to 0.52 per cent. In simple terms, geography matters less for services. Even after the 2008 financial crisis and “slowbalisation”, trade in services is becoming a stronger driver of global growth. 

Two forces are driving this change. First, the nature of services itself has shifted. Earlier, trade in this field was dominated by transport and travel, which depend on the movement of people and goods, and accounted for nearly 70 per cent of services trade in 2000. However, the share of such services had fallen to less than 40 per cent by 2023. In their place, modern services like information technology, finance, and business services have taken the lead, which are easier to deliver across borders without physical proximity. Second, technology has changed what can be traded. Digital platforms, cloud computing, and remote work have made many services tradable. Nevertheless, much of the opportunity remains unrealised. Globally, services trade remains concentrated among advanced economies. At the same time, the nature of constraints is shifting. Unlike trade in goods, where tariffs dominate, services face regulatory and structural barriers like data-localisation rules, licensing requirements, restrictions on foreign ownership, and compliance standards. 

Rising geopolitical tensions are reinforcing these “behind-the-border” barriers, making market access more complex. India’s services exports remain dependent on a few markets, especially the United States (US) and Europe, exposing it to regulatory risks. This is important because India’s services trade has become central to overall trade performance, with its share in global services exports rising from 1.9 per cent in 2005 to 4.3 per cent in 2023. In 2024-25 (FY25), services exports reached a record $387.5 billion, growing 13.6 per cent, while the surplus in services trade rose to $188.8 billion, also a record high, covering nearly two-thirds of the merchandise trade deficit. According to the Stanford Artificial Intelligence (AI) Index Report 2025, India ranks second globally in AI skill penetration, just behind the US. A key driver has been the rise of global capability centres, which expanded at about 7 per cent annually between FY20 and FY25, supported by talent availability and cost advantages. 

As distance becomes less relevant and digital trade expands, India has a clear opening. The focus must shift to building services competitiveness through investment in high-end segments such as AI, stronger digital infrastructure, and easing regulatory barriers through multilateral efforts or deeper bilateral and regional integration frameworks, which enable cross-border flows. Deeper integration of services with manufacturing will also be critical to fully capture the gains from the evolving global services economy. However, while India has the capability to expand its services exports and must look for new markets and sectors, it is also worth noting that its relatively strong performance in services should not dilute the policy focus on merchandise trade. Higher merchandise exports will help create jobs at scale.