Shifting composition: Dependence on services exports is increasing

Services exports are driving India's trade growth and resilience, but stronger manufacturing output remains essential for broad-based job creation and sustainable growth

India’s exports in 2025-26 touched a record $860 billion, nearly double the level of $468 billion notched up in 2014-15. But the real story lies beneath the headline numbers. Services exports surged from $158 billion to $418 billion over the period, growing much faster than merchandise exports, which rose from $310 billion to $442 billion. Services now account for 48.6 per cent of India’s exports and, if current trends persist, could overtake goods exports this year. This will make India an outlier among major economies. East Asia’s growth miracle was built on factories; India’s story is increasingly being built on knowledge-intensive services. 

Services exports expanded at a compound annual growth rate of 9.3 per cent over the last 12 years, far outpacing merchandise exports, which grew at 3.3 per cent. Software services remain the largest component, accounting for over 40 per cent of services exports. But as a 2024 research article by economists of the Reserve Bank of India showed, India’s comparative advantage extends beyond traditional information technology (IT) to a wider range of knowledge-intensive activities, including engineering; professional and management consulting; and legal, technical and research services. Importantly, the resilience of services exports has been driven largely by volumes rather than price effects, suggesting the rise reflects structural competitiveness rather than cyclical factors. Global capability centres (GCCs) are transforming research, design and innovation, with multinational corporations increasingly attracted by the country’s talent pool, competitive costs, and expanding digital infrastructure. Improvement in logistics and connectivity, together with rapidly expanding data-centre capacity and rising foreign investment in services, has strengthened this ecosystem. Unlike manufacturing, modern services depend less on imported inputs and are, to a lower degree, constrained by geography, allowing India to integrate deeply into global knowledge value chains. It has also made India’s external sector more resilient. India runs a large merchandise-trade deficit, which was above $300 billion in 2025-26, partly covered by a surplus in services trade. 

While services exports are helping narrow the trade deficit, this process also exposes deficiencies on the manufacturing front and in merchandise trade. Despite years of production-linked incentives and renewed emphasis on various sectors, manufacturing exports and output have grown modestly. Exports have been accompanied by higher imports, underscoring the shallow domestic value addition in many sectors. More fundamentally, no major economy has achieved broadbased prosperity without a strong manufacturing base and exports. Services generate high-value jobs but cannot absorb labour on a scale that factories can and did in many of India’s peers. Nor can India’s position in services be taken for granted. The rise of generative artificial intelligence (AI) threatens parts of the traditional outsourcing model. Routine coding and back-office work could face disruption. While AI also offers new opportunities, sustaining India’s edge will require moving up the value chain in engineering design, research, product development and AI-enabled services. However, evolving risks and opportunities in services should not divert policy attention away from manufacturing. Increased manufacturing output and exports are essential for achieving higher and more sustainable economic growth.