Source: The post India’s Shift to a Services-Led Economy and Its Challenges has been created, based on the article “Services led exports are a mixed blessing for us” published in “Live mint” on 19th December 2024
UPSC Syllabus Topic: GS Paper3- Indian Economy- changes in industrial policy and their effects on industrial growth.
Context: The article highlights India’s shift to a services-led economy, driven by strong service exports surpassing merchandise exports. It notes India’s success in high-value services but warns of job inequality, uneven sectoral growth, and the need to address economic disparities. India’s Shift to a Services-Led Economy and Its Challenges.
For detailed information on Challenges with India’s service-driven growth
Why Are India’s Service Exports Outshining Merchandise Exports?
- In November 2024, India’s service exports were projected to surpass merchandise exports.
- The trade deficit reached a record $37.9 billion in November, but strong service exports were a positive sign.
- Services are less affected by tariffs and geopolitical issues compared to goods.
What Makes Service Exports Resilient?
- Unlike goods, services face fewer protectionist barriers and geopolitical risks.
- Despite challenges in IT and AI disruptions, Global Capability Centres (GCCs) have emerged as key growth drivers.
- GCCs offer higher-end services and better value realization than traditional IT companies.
How Is India’s Service Sector Different from China’s Manufacturing?
- While China became the global factory for low-cost goods, India moved up the value chain in services.
- From basic IT tasks like Y2K fixes to customized software and GCCs, India’s talent pool drives high-value services.
- India ranks fifth globally in service exports and aims for $2 trillion annual exports by 2030.
What Are the Challenges of a Services-Led Economy?
- Limited Job Creation: Services create fewer jobs than manufacturing. Fresh workers from rural areas are easily trained for factory work, but services demand higher education and skills.
- Income Inequality: Services pay higher wages than manufacturing, leading to increased income disparities.
- Sectoral Employment Mismatch: Agriculture and industry employ 69% of the workforce, while services employ only 31%, despite services contributing 55% to GDP.
- Stagnant Manufacturing Growth: Manufacturing remains at 17% of GDP, showing India’s leapfrogging from agriculture to services skipped the middle manufacturing phase.
- Social Discontent Risk: Uneven growth between employment and sectoral output can spill over into social tensions, threatening national progress.
Question for practice:
Examine the reasons behind the resilience of India’s service exports compared to merchandise exports and their implications for the economy.
