The Hidden Imbalance Behind India's Economic Growth
The service-heavy approach by India is technologically impressive, but it has failed to solve the challenge of productive employment for its vast semi-skilled workforce
Published : November 24, 2025 at 2:41 PM IST
|Updated : November 24, 2025 at 5:29 PM IST
By Prof. N.Siva Prasad
For three decades, India's economic narrative has been dominated by two towering success stories: its information technology services boom and the steady flow of remittances from its diaspora workforce. Together, these sectors have generated hundreds of billions in foreign exchange, created millions of jobs, and positioned India as a global economic player. Yet beneath this impressive facade lies a structural vulnerability that could define the country's economic future.
The Scale of Success—and Its Limits
The numbers tell a compelling story of growth. IT services exports reached $194 billion in Financial Year 2023-24, employing over 5.4 million professionals in gleaming office towers across Bengaluru, Hyderabad, and Pune. Remittances, meanwhile, poured in at $135.46 billion in Financial Year 2024-25, representing more than 10% of India's current account inflows — a lifeline sent home by millions of Indian workers from the Gulf to Silicon Valley.
But here's the paradox: while these knowledge-economy victories capture headlines, India's largest export category remains something far more traditional—merchandise exports worth $437 billion in Financial Year 2023-24. The problem isn't the size of this sector, but its composition and the structural weaknesses it reveals.
Unpacking the Manufacturing Reality
India's merchandise exports tell a complex story when examined closely:
Engineering goods dominate the landscape, comprising 26.7% of exports at approximately $116.7 billion. This encompasses everything from auto components to heavy machinery—sectors that showcase India's industrial capabilities but often rely heavily on imported components.
Electronics, while smaller at 8.8% of exports ($38.6 billion), represents the future with impressive 32% year-on-year growth. The smartphone assembly boom has put India on the global electronics map, yet the sector remains heavily dependent on imported semiconductors and components.
Pharmaceuticals contribute roughly 7% ($30.5 billion), reflecting India's emergence as the world's pharmacy through generic drugs and vaccine production—one of the few sectors where India has achieved genuine value-addition leadership.
Textiles and apparel generate $36.6 billion in exports, including ready-made garments (44%), cotton textiles (33%), and synthetic fibres (13%). This labour-intensive sector should be India's manufacturing crown jewel, yet it has been losing global market share to competitors like Bangladesh and Vietnam.
Agriculture and allied products account for 11.9% of exports ($51.9 billion), with rice alone contributing $12.5 billion. This sector demonstrates India's agricultural strength but also highlights the economy's continued dependence on traditional commodities.
The Employment Paradox—And What India Missed
The development trajectories of China, South Korea, Taiwan, and Vietnam offer valuable blueprints that highlight India's missed opportunities and potential paths forward.
China's Evolutionary Approach: China's 'Made in China 2025' initiative strives to secure China's position as a global powerhouse in high-tech industries, aiming to reduce China's reliance on foreign technology imports and invest heavily in its own innovations. But this high-tech focus came after decades of building manufacturing depth. China began with state-directed investment in heavy industries, then created export processing zones that attracted global supply chains, gradually moving up the value chain from assembly to innovation.
South Korea's Chaebol Model: South Korea applied a policy of export-oriented industrialisation, closing entry to foreign products except raw materials, while chaebols were guaranteed loans from the banking sector and played key roles in developing new industries, markets, and export production. This evolved through distinct phases: transition to export-oriented industrialisation in the 1960s, heavy and chemical industry drive in the 1970s, and information technology industry promotion in the 1980s and 1990s. The government-chaebol partnership created vertically integrated industrial giants that could compete globally while generating mass employment.
Taiwan's Flexible Networks: Taiwan's business groups are smaller and less vertically-integrated than Korean chaebols, allowing for greater adaptability in global supply chains. This flexibility enabled Taiwan to become a critical node in electronics manufacturing, from semiconductors to consumer devices.
Vietnam's Recent Success: Vietnam is following Japan's model of export-oriented industrialisation, with Vietnamese agricultural imports rising fast and following Japan's historical growth pattern. Vietnam's manufacturing miracle demonstrates that late industrialisers can still capture global market share through targeted industrial policy and foreign investment attraction.
Each model shared common elements: state coordination of industrial development, export orientation from early stages, gradual movement up value chains, and most importantly, manufacturing-led employment creation at scale.
This data exposes a fundamental challenge: India's most globally visible sectors—IT and remittances—employ relatively few people compared to the country's massive workforce. Manufacturing and agriculture remain the true employment engines, yet they haven't scaled to match India's demographic advantage.
The IT sector, despite its $200 billion contribution, primarily serves urban, highly educated workers. Meanwhile, sectors with genuine mass employment potential—textiles, food processing, light manufacturing—remain underdeveloped compared to Asian peers who have built their economic miracles on exactly these industries.
The contrast with East Asian success is instructive. Each built manufacturing depth through state coordination and export orientation, creating mass employment while moving up value chains. India's service-heavy approach, though technologically impressive, hasn't solved the challenge of productive employment for its vast semi-skilled workforce.
Emerging Vulnerabilities
This structural imbalance creates three critical vulnerabilities:
External dependence risks: Tightening US visa policies could impact IT services growth, while Gulf nations' increasing focus on local employment could reduce remittance flows. India's growth model remains hostage to policy decisions made in Washington and Riyadh.
Import dependency trap: Many of India's export success stories mask a troubling reality—heavy reliance on imported components. Electronics assembly, for instance, adds limited value while creating jobs, but true manufacturing depth remains elusive.
Employment-growth disconnect: High-value exports in engineering and electronics don't automatically translate to mass employment opportunities, unlike labour-intensive sectors that remain underdeveloped.
Charting a New Course
The path forward requires acknowledging that sustainable growth demands more than service sector excellence—it needs manufacturing depth, employment intensity, and reduced external dependence.
Deepening manufacturing value chains means moving beyond assembly to component production, especially in electronics and machinery. This requires patient capital investment and technological upgrading across industrial ecosystems.
Revitalising labour-intensive industries could unlock India's demographic dividend. Textiles, garments, food processing, and light manufacturing have proven elsewhere that they can create millions of jobs while building export competitiveness.
Fostering indigenous innovation in pharmaceuticals and advanced technologies can help India graduate from cost competitiveness to product leadership, creating higher value-added employment.
Adopting proven industrial strategies: Learn from China's sequential manufacturing-to-high-tech approach, South Korea's government-business coordination, and Vietnam's focused labour-intensive export industries.
The Decade Ahead
India today commands nearly $570 billion across IT services ($194 billion), remittances ($135 billion), and merchandise exports ($437 billion). Yet the composition of this impressive total reveals the central challenge: too much dependence on external job markets, too little depth in domestic manufacturing employment.
The coming decade will determine whether India can transform its economic structure from one built on service exports and diaspora earnings to one anchored in diversified, employment-intensive manufacturing. The stakes couldn't be higher—not just for economic growth, but for the productive employment of the world's largest workforce.
Success will require moving beyond the comfort zone of IT services excellence toward the harder challenge of building manufacturing depth. Only then can India's economic growth can lead to sustainable prosperity rather than continued structural vulnerability.
(Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat)
