Budget a crucial opportunity to capitalise further on expanding services sector

All eyes will be on the Union government's strategies to drive growth, enhance competitiveness, and address emerging challenges to unlock the full potential of the burgeoning services sector

India's leapfrogging from an agrarian economy to a services-led one sparked much debate for decades for missing manufacturing the traditional manufacturing-driven growth path. But today, it's indisputable that this sector is driving the nation's GDP, fuelling employment in high-skilled services, and recently making significant strides in competing with goods exports.

The sector contributes 55.3 per cent of the GDP, and in the last quarter (Q2 FY2025), it accounted for 47 per cent of total goods and services sector exports. Even though the Covid-19 pandemic shattered the industry, it rebounded strongly and has been one of the key growth drivers in the post-pandemic recovery.

One of the highlights lately has been the impressive export performance, especially at a time when the merchandise deficit has been on a steady rise. India's share in global services exports has risen significantly, from under 2 per cent in 2005 to 4.6 per cent in 2023, with India’s services growth (CAGR of 10.9 per cent) surpassing the world's (CAGR of 6.3 per cent) by a considerable margin.

This robust growing share stands in stark contrast to the relatively modest merchandise export share (of 1.8 per cent), underscoring the increasing importance of services in balancing the trade account and economic growth.

Initially driven by ‘offshoring’ models, India's services exports have evolved significantly, moving up the services value chain and evolving into sophisticated global capability centres (GCCs). With over 2,975 GCCs today, many are delivering services in e-R&D, product innovation, data analytics, artificial intelligence, and professional consulting, catering to global markets. With maturity, India is also significantly diversifying beyond traditional IT-BPM services (IT, finance, and human resources, among others). Growth is cutting across industries and giving rise to emerging sectors such as non-IT professional services, fin-tech, telemedicine, edu-tech, quick-commerce, and e-tourism sectors. This diversification has enhanced the sector's resilience to global shocks and is opening new avenues for growth and employment opportunities.

Moreover, given the nature of offerings, the sector is rapidly growing across the country and beyond major Indian cities, thereby ensuring that the benefits of this growth are reaching smaller towns, emerging hubs, and diverse communities. In other words, the sector has broadened India's growth base by leveraging digitisation to deliver solutions anytime, anywhere, and across all industries, fostering a more equitable, inclusive, and resilient economic structure.

Going forward

Growth in the sector has been an outcome of a significant rise in services demand, rapid urbanisation, and digitisation. In addition, the government has fostered an enabling environment by building the necessary ecosystem, enhancing skills and facilitating market access for the sector to thrive.

Going forward solidifying its position as a preferred destination for global businesses will entail seeking high-quality and cost-effective services. India will have to focus on a myriad of factors while advancing in the space.

First, advancements in technologies like AI, cloud computing, and big data analytics are revolutionising the way services are delivered, creating new business models. This means India will have to keep up its pace of adoption of new frontier technologies and develop a highly-skilled workforce through targeted education and training programmes to meet global demands. To its advantage, India boasts the highest AI skill penetration globally, positioning it well to capitalise on the burgeoning opportunities in frontier technologies. To tap into the potential of this skilled and young workforce will require a strong emphasis by the government on upskilling and re-skilling, ensuring they are trained in state-of-the-art technologies in their specialised fields.

The second would be to address data security, regulatory compliance, and the ethical use of technology as adoption scales. Implementing stringent data protection frameworks and building resilient cybersecurity measures will be essential. This is where the government can step up its efforts to build a robust and resilient digital infrastructure while bridging regional disparities in connectivity.

The third focus should be to reduce internal barriers to services trade and foster a more open and competitive domestic market. While global economic uncertainties, geopolitical tensions, and the rise of protectionist trade policies pose potential challenges, there is a possibility that industrial countries may not erect as many trade barriers in services (as in the manufacturing sector).

Creating a supportive policy environment through tax incentives, access to affordable financing, and streamlining regulatory frameworks will help India retain its position as a global service amidst rising competition from peer nations.

The upcoming Budget presents a crucial opportunity to capitalise further on the expanding services sector. All eyes will be on the government's strategies to drive growth, enhance competitiveness, and address emerging challenges to unlock the full potential of the burgeoning services sector.

(Rumki Majumdar is an economist at Deloitte India. Debdatta Ghatak is a manager at Deloitte India.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.