India's Services-Led Growth Model and Its Limitations

In contrast to most economies that industrialised, which moved from agriculture to manufacturing, then to services, becoming the dominant part of output, India has taken on the middle, manufacturing-intensive, stage of development. Services today account for 50-55 percent of GDP (the Economic Survey 2025-26 puts the share of services in GDP in H1 FY26 at 53.6 percent of the gross value added), but manufacturing has stubbornly remained at 15-17 percent of GDP for three decades, and agriculture, which still supports 42-46 percent of the population, has accounted for only 16-18 percent of GDP at current prices. 

Illustration by The Geostrata

In many ways, this is a leapfrogging model, before it worked, its structural limitations were beginning to become evident as India attempted to generate high-quality employment for a large, young, and growing labour force. This means thinking clearly about the strengths and the constraints of this model, without demonising either the services sector or Indian business as an enemy to what comes next. 

SO WHY DID THE MODEL WORK? 

It was not a statistical fluke, but rather a reflection of actual comparative advantages. The services boom because of English-language education, a steady supply of engineering graduates, and lower wage costs in developed markets, all reinforced by the global circumstances of the Y2K transition, the internet boom, and the 1990s and 2000s offshoring wave, which gave Indian IT firms a first-mover advantage that has proven durable.

IT and IT-enabled services exports have grown to hundreds of billions of dollars and are much less volatile than merchandise exports or portfolio capital flows. India also has developed strength in a variety of other tradable services, ranging from R&D in pharmaceuticals to financial services back-offices, legal process outsourcing, consulting, and increasingly, high-value engineering and design work from Global Capability Centres (GCCs) that generate about USD 64.6 billion and employ over 1.3 million people. 

The model also had a fiscal angle to it. It needed less public capital investment in infrastructure to support services than an equivalent manufacturing push would have, and it absorbed a share of the English-speaking, tertiary-educated youth available in the country, at a time when the capacity of the state to build large industrial ecosystems was limited. 

THE LIMITATION: WHERE THE MODEL RUNS INTO STRUCTURAL WALLS

1. Limited jobs and large working age population

India adds 8-10 million workforce to the working-age population each year. Services, and in particular the high-value services that have driven growth (software, finance, consulting) are capital and skill-intensive services, not labour-intensive. However, the same IT firm may generate billions of dollars in revenue but add fewer employees than a manufacturing plant of similar economic footprint would.

The result is that India's growth numbers have rarely translated into jobs in similar proportion: as it aspires to a far greater share of output through manufacturing (which employs just 11-12% of workers), agriculture continues to employ 42-45% of workers for a far smaller share of GDP (a reflection of high disguised unemployment), and much of the rest of the workforce ends up in low-productivity informal services, retail, transport, personal services, which do not offer the wage or productivity gains of formal jobs. 

2. Narrow and Exposed Export Base

Services exports from India are concentrated in a few sub-sectors and a few geographies of demand (mainly the United States, which absorbs more than 60% of Indian IT and BPM exports, and Europe), which makes them more susceptible to changes in global technology cycles, immigration and visa policy in destination countries, and automation; generative AI, for instance, poses a challenge to the longevity of some of the traditional IT services work, testing, maintenance, tier-1 support that has formed the employment base of the sector, while also creating new, higher-value opportunities for firms that are able to adapt. 

3. Regional Disparities

A small number of metropolitan cities, especially Bengaluru, Hyderabad, Pune and the National Capital Region(NCR) where the bulk of GCCs and IT hubs are located, have been the main beneficiaries of services-led growth. While regional disparities between those states that captured the services boom and those that did not, have widened the gap. However, the model has not been able to absorb workers from India's vast, less-educated rural workforce which historically has been able to do better at manufacturing . 

4. Trade dependence 

Services exports have been a real area of strength, but India has continued to run a large merchandise trade deficit, which has been compensated to a significant extent by services surpluses and remittances, which totaled USD 135.4 billion in FY25, the largest inflow of any country in the world. It works fine as long as global demand for Indian services remains high, but it also implies that the current account is less stable than it should be in the case for a more diverse manufacturing and services economy. 

5. The De-industrialisation debate

The deindustrialisation pattern is also borne out in the influential 2016 paper by Harvard economist Dani Rodrik on premature deindustrialisation which found that developing countries are becoming service economies at much lower levels of income than today's high-income economies.

According to his study, Britain, Germany, and Sweden started deindustrialising only when their per capita incomes were about USD 9,000 to 11,000 (in 1990 dollars), but in India, manufacturing employment was only 13% as high as in the United States in 2002, when the country had a per capita income of only about USD 2,000. This is significant because Rodrik and others argue that organised manufacturing has "unconditional convergence", it catches up in productivity regardless of a country's institutions or policies, and it has been the most reliable way of dragging low-productivity workers out of subsistence. 

6. How India compares with a global benchmark

When India is placed next to its Asian neighbors, its manufacturing position appears structurally misaligned. According to IDEAS data from the World Bank, with share of manufacturing in GDP was approximately 13% for India in 2024, compared with 19% for Indonesia, 23% for Malaysia, and 24% for Vietnam, while China, even after intentionally reducing its own reliance on the sector, was still at 25%. In terms of employment, the difference is equally stark. 

Vietnam and China each have nearly one third of their workforce in industry, while India has about a quarter. The World Bank, observed separately that India is ceding low-cost, labour-intensive export categories (textiles, leather, and footwear) to Vietnam and Bangladesh, the very category of industrial employment that absorbed the least skilled entrants to the workforce in the earlier waves of industrialisation in East Asia. 

7. Is the Manufacturing Anxiety Overstated?

A fair analytical observation should also address the other side of this argument. Not all economists agree that the stagnation of Indian manufacturing is real, or that a path of services-led growth is necessarily inferior.

Bishwanath Goldar, an economist, has argued that if a more careful double-deflation method of calculating manufacturing value added at constant prices is used, then India's manufacturing GVA share may have reached 32-34% by 2018-19 (much higher than the conventional current-price estimates of under 20%), and that it is evidence that India has been manufacturing-led, not services-led, once mismeasurement is taken into account. 

Other economists counter that India's real comparative advantage may lie in skill-intensive tradable services, not in trying to replicate the East Asian low-wage factory model, and that a policy fixation on the share of GDP coming from manufacturing risks misallocating resources toward a sector in which India lacks the underlying cost competitiveness. The measurement dispute and the strategic dispute are both genuinely unsettled among specialists, and a services-led economy is not, by itself, evidence of policy failure. 

8. Productivity convergence is not guaranteed

Whatever side of that measurement debate one takes, the underlying policy question remains same: once the easy gains from shifting educated workers into globally competitive services have been realised, further productivity growth must rely either on continuous upskilling of a much larger, less-educated workforce or on a genuine expansion of labour-intensive manufacturing (or both).

Neither is happening automatically. Both require a dedicated push in sustained policy effort-  in vocational training, land and labour market reform, and ease of doing business. Rather than simply continuing to support the services sector as it currently operates, upskilling workers through a national services sector apprenticeship mission linked to GST registered MSMEs. 

NOT AN ARGUEMENT AGAINST BUSINESSES: AND ARGUEMENT FOR BROADER DIVERSIFICATION

This is not a criticism of India's services industry, its firms, or the entrepreneurs and workers who built it, but a case that the IT and services sector has generated actual wealth, foreign exchange stability, and a demonstration effect that Indian firms can compete globally on quality and cost. 

The policy implication is not to suppress the growth of services but to solidify the base under it: make manufacturing more competitive (e.g., via production-linked incentives), enhance logistics and power infrastructure, reduce compliance for small and medium enterprises, and invest in vocational and technical education so that a larger share of the workforce can engage in higher-productivity activity in services, manufacturing. 

The new policy focus on manufacturing, semiconductor investment, electronics assembly, defence production, and renewable energy generation is not a repudiation of the success story of services, but an acknowledgment of this gap. The two goals are not incompatible but mutually supportive: a more labour-intensive manufacturing base would reduce the pressure on services to create jobs, and ongoing upgrading within services would enable India to remain competitive in a world in which automation is transforming jobs in the sector.  

CONCLUSION 

India's services-led growth model is genuine, largely earned success based on real comparative advantages and good entrepreneurial execution, with its structural limitations, which are not limited to inadequate job creation to the size of the workforce, narrow export concentration, weak linkages to the broader economy, and regional imbalance.

Whether one reads this through the lens of premature deindustrialisation or through Goldar's counter-argument that India's manufacturing strength is underrepresented by conventional statistics, the policy conclusion seems to be the same: broadening the productive base of the economy rather than pulling back from what has worked in services is the more viable course.

A more sustainable Indian growth model is one in which services continue to lead at the frontier but are joined by manufacturing and infrastructure investment that can absorb the scale of labour that services alone cannot, with the hope that the new investment will create a virtuous cycle of demand. 

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BY PRIYANKA YADAV TEAM GEOSTRATA

info@thegeostrata.com