India’s trade narrative has taken an interesting turn. For the fourth consecutive month, merchandise exports have shrunk, a trend that typically spells trouble for the nation’s external accounts. However, the latest trade data reveals a surprising resilience. In February, India recorded an overall trade surplus of $4.4 billion, a figure that stands in stark contrast to the gloomy export numbers. What is the secret ingredient? The burgeoning services sector.

Services to the Rescue

The surge in services exports is the primary reason for this positive trade balance. In February alone, services exports jumped by a remarkable 23.6 percent, and they have grown by 14.1 percent in the financial year to date. This robust growth is effectively cushioning the blow from the 10.9 percent decline in merchandise exports for February, which are also flat year-to-date. As pointed out by experts, services are rapidly bridging the gap with merchandise trade, offering crucial support to India’s external account and the broader economy.

Advantage India in Services

Several factors are working in India’s favour when it comes to services. Unlike merchandise, services are less vulnerable to the vagaries of trade tariffs and geopolitical tensions. Furthermore, with the demographic shift in developed nations towards an ageing population, India, with its expanding and youthful workforce, is ideally positioned to provide competitive services. This advantage is clearly reflected in the rising revenues of the technology sector, a key component of India’s service exports.

Tech Sector Leads the Charge

Industry body NASSCOM projects that the technology sector’s export revenues will reach an impressive $224 billion in FY25. This growth is fuelled by the increasing presence of global capability centres (GCCs) in India. While global economic uncertainties might temper technology investments to some extent, current projections do not foresee a revenue decline. This outlook is significantly brighter than the near-term prospects for merchandise exports, offering a stable pillar for the Indian economy.

Broader Economic Impact

The expansion of the services sector is not just about external trade; it is also driving changes within the domestic economy. The share of households and commercial establishments in total electricity consumption has increased, indicating a shift in economic activity. Analysts note that the services sector’s contribution to India’s real GDP has risen from 46 percent to 55 percent between FY04 and FY24. This growth is likely fuelling domestic power demand, driven by an expanding middle class. The services sector is becoming a more significant engine of economic growth and is reshaping consumption patterns.

Policy Support is Vital

The services sector’s rise presents a golden opportunity for India. With appropriate policy support, the government can further empower this sector to capture an even larger share of the global market. This includes fostering a conducive regulatory environment, investing in skill development, and promoting innovation within the services industries. The continued ascent of the services sector is not just a trend; it could very well be the defining feature of India’s economic trajectory in the coming years.

What does this mean for India’s economic future? The robust services sector is not just offsetting the weakness in merchandise exports, it is charting a new course for India’s economic growth, making it more resilient and globally competitive. This shift towards a service-led economy could be the key to sustained prosperity and a stronger global presence for India.