India's Services Exports: The Engine of External Stability – Economic Survey 2025-26
India's services sector, particularly IT and IT-enabled services, has been the backbone of the country's export performance since the turn of the millennium. The Economic Survey 2025-26 provides a nuanced analysis of services exports – acknowledging their crucial contribution to external stability while highlighting limitations in terms of broader economic transformation. This article examines India's services export story and its implications for economic strategy.
Services Exports Outpacing Goods: The Data
The Economic Survey 2025-26 presents striking data on export performance. Over the five years since 2020, the compounded annual growth rate (CAGR) of total exports has been 9.4 per cent, while that of merchandise exports has been only 6.4 per cent. Services have done much of the heavy lifting.
India runs a trade deficit in goods – importing more merchandise than it exports. However, the services trade surplus partially offsets this goods deficit. Together with remittances from Indians working abroad, services exports have been critical in maintaining current account balance and supporting the rupee.
The survey describes this services export performance as "creditable and macro-stabilising" – acknowledging its genuine contribution to India's external sector stability.
IT-Enabled Services: India's Global Strength
The Information Technology-Enabled Services (ITeS) sector has been India's mainstay for growth and exports since the dawn of the millennium. This includes software development, business process outsourcing, research and development services, and increasingly sophisticated services like analytics, artificial intelligence applications, and cloud computing.
India's competitive advantages in this sector include:
Talent Pool: A large English-speaking workforce with technical skills. India produces millions of engineering graduates annually.
Cost Advantage: Labor costs remain substantially lower than in developed countries, making India an attractive outsourcing destination.
Quality and Scale: Decades of experience have built capabilities in managing large, complex projects to high quality standards.
Time Zone Advantage: India's time zone allows round-the-clock operations for global companies.
The Limitation: Services Exports Don't Transform Economies
While acknowledging services export success, the Economic Survey 2025-26 makes a crucial point: services exports are "not a substitute for the goods-based export ecosystems that ultimately underpin durable external and currency stability."
The survey argues that while services exports are economically valuable, "they do not systematically compel broad upgrades in state capacity, as successful firms can bypass weak institutions, relocate easily, and generate limited economy-wide pressure on governments to reform."
This is a profound insight. An IT company can operate in a poor infrastructure environment by providing its own power backup, transportation for employees, and digital connectivity. It doesn't depend on efficient ports, highways, or customs clearance. Manufacturing, by contrast, requires all these infrastructure elements to function.
"Unlike manufacturing exports, they do not impose hard fiscal, employment, or logistical constraints on the State, allowing institutional weakness to persist even alongside globally competitive firms."
Currency Stability and Manufacturing
The survey makes another important observation: "Currency strength, in general, or currency stability during crises, has always eluded countries that could not become successful and significant exporters of manufactured goods. Countries with strong, stable currencies are known for their manufacturing excellence."
This helps explain a paradox: despite strong services exports and robust macroeconomic fundamentals, the Indian rupee underperformed in 2025. The structural composition of exports – services-heavy rather than manufacturing-led – affects currency dynamics.
The survey notes that the rupee "is punching below its weight" relative to India's economic fundamentals. The solution lies not in services alone, but in building manufacturing export capabilities.
Composition of Services Exports
India's services exports have diversified beyond traditional IT services. The current composition includes:
Software and IT Services: Still the largest component, including custom software development, IT consulting, and system integration.
Business Services: Back-office operations, customer support, finance and accounting outsourcing.
Research and Development: Engineering services, pharmaceutical research, analytics.
Financial Services: Limited but growing, particularly from GIFT City's international financial services center.
Travel Services: Tourism receipts, though affected by pandemic and slow to recover.
Transportation: Shipping, aviation, logistics services.
Global Capability Centers: The New Wave
A notable trend is the growth of Global Capability Centers (GCCs) – in-house service delivery units of multinational corporations located in India. Unlike traditional outsourcing where work is contracted to Indian companies, GCCs are directly owned subsidiaries performing high-value functions.
GCCs have expanded into areas like product development, advanced analytics, and strategic functions. They employ higher-skilled workers at premium salaries and contribute to capability building in the Indian workforce.
The growth of GCCs represents a evolution from "body shopping" to genuine high-value service delivery, potentially addressing some concerns about the superficial nature of services exports.
Services Exports and Employment
Services exports support significant employment, both direct and indirect. The IT-BPM sector alone employs millions of people in formal, well-paying jobs. This has contributed to the growth of India's middle class and consumption-led domestic demand.
However, employment intensity of services exports is lower than manufacturing. A dollar of services exports generates fewer jobs than a dollar of labor-intensive manufacturing exports. This has implications for absorbing India's large working-age population into productive employment.
Services Trade Agreements
India has pursued services market access in trade negotiations. Mode 4 movement of natural persons – allowing Indian professionals to work temporarily in partner countries – has been a key ask.
The India-EU FTA likely includes provisions improving services access to the European market. Similar provisions in other trade agreements can expand opportunities for Indian service providers.
UPSC Relevance: Services Sector and Trade
Services exports feature prominently in UPSC:
- GS-III: External sector, trade, balance of payments
- Economy: Sectoral analysis, export composition
- Current Affairs: IT sector developments
Practice MCQs on Services Exports - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, the CAGR of India's total exports since 2020 has been:
(a) 5.4%
(b) 6.4%
(c) 9.4%
(d) 12.4%
Answer: (c) 9.4%
Q2. The CAGR of merchandise exports over the same period was:
(a) 4.4%
(b) 6.4%
(c) 8.4%
(d) 10.4%
Answer: (b) 6.4%
Q3. According to Economic Survey 2025-26, services exports do not:
(a) Generate foreign exchange
(b) Support the rupee
(c) Systematically compel upgrades in state capacity
(d) Provide employment
Answer: (c) Systematically compel upgrades in state capacity
Q4. Countries with strong, stable currencies are typically known for excellence in:
(a) Services exports
(b) Manufacturing exports
(c) Agricultural exports
(d) Tourism
Answer: (b) Manufacturing exports
Q5. Global Capability Centers (GCCs) are:
(a) Government service centers
(b) In-house service units of MNCs in India
(c) International NGOs
(d) Export promotion councils
Answer: (b) In-house service units of multinational corporations in India
Conclusion
India's services exports have been a pillar of external sector stability, as the Economic Survey 2025-26 acknowledges. Their contribution to foreign exchange earnings, employment, and economic growth is undeniable. However, the survey's insight that services exports alone cannot drive comprehensive economic transformation or currency stability is important. India's economic strategy must therefore pursue a dual approach – maintaining services export competitiveness while simultaneously building manufacturing export capabilities. Only this combination can deliver the durable external stability and structural transformation needed for Viksit Bharat.