Economic Survey 2026: Services saved the balance sheet, but manufacturing may secure the future

India’s services sector has been the country’s most reliable economic shock absorber. It has generated high-quality foreign exchange, strengthened the balance of payments and repeatedly insulated the economy from global volatility.

The Economic Survey 2025–26 acknowledges this role in clear terms, but read closely, it delivers a harder message: services-led success, while valuable, cannot substitute for the institutional and structural transformation that manufacturing-led growth compels.

The issue is not whether services have delivered. They have. The question is whether they are enough and whether their very success risks delaying tougher reforms.

The comfort of a services cushion

The macro numbers are strong. India’s total exports, goods and services, reached a record $825.3 billion in FY25, growing 6.1 per cent year-on-year. Services exports were the principal driver, rising 13.6 per cent YoY. The services trade surplus climbed to $188.8 billion, the “highest ever” recorded.

Even as the merchandise trade deficit widened to $283.5 billion, up 17.6 per cent year-on-year, the strength of services ensured the overall trade deficit remained contained at $94.7 billion.

The Survey notes, “The services trade surplus remains a key stabilising factor, consistently offsetting a large portion of the merchandise trade deficit, supported by strong growth in software, business services, and the expanding role of Global Capability Centres.”

Foreign exchange reserves remain “comfortable”, the current account is described as “stable”, and external debt is “moderate” with a favourable maturity profile.

On the surface, this is a story of macroeconomic resilience. But stabilisation is not transformation.

Why services do not force structural reform

Globally competitive services firms can operate despite domestic institutional weaknesses. They are less dependent on freight corridors, ports, power reliability or industrial land. They can scale without placing heavy demands on logistics networks or municipal governance.

Manufacturing does not have that luxury.

Export-led manufacturing requires reliable power, efficient ports, competitive logistics, predictable customs administration, labour flexibility and coordinated urban planning. When these systems underperform, competitiveness suffers immediately and governments are forced to reform.

The Economic Survey argues that improving medium-term exchange-rate outcomes is “inseparable from building a strong and competitive manufacturing base anchored in export growth”.

“Manufacturing exports remain the most reliable channel through which productivity gains, scale economies and global demand can be translated into durable current account improvement,” the Survey says.

Services can cushion shocks. They do not compel system-wide institutional upgrades.

The Survey says, “International experience indicates that services exports, by themselves, rarely generate the same degree of scale, employment linkages, or counter-cyclical support as broad-based manufacturing export growth.”

According to the Survey, “durable currency strength has rarely emerged as a by-product of financial openness or macroeconomic signalling alone. Instead, it has been grounded in the gradual build-up of export capabilities, particularly in manufacturing”.

That distinction is critical. Services provide macro comfort, but manufacturing builds structural strength.

The complexity gap

In 2023, India “ranks 44th out of 145 countries on the Economic Complexity Index (ECI)… Although this represents an improvement from India’s 57th position in CY 2013, its ranking has remained unchanged since CY 2019”.

The export basket “remains concentrated on goods such as refined petroleum, diamonds, jewellery, packaged medicines, and rice,” and “much of the country’s export growth comes from products that fall into low- and mid-complexity categories”.

Yet India ranks “second globally on the Economic Complexity Outlook Index (COI), which evaluates future potential to diversify into more sophisticated products based on existing capabilities”.

The country has the potential to diversify into advanced engineering, electronics, chemicals and machinery. But potential is not performance.

As the Survey says, “realising this potential, however, requires a strong and competitive domestic manufacturing ecosystem. To fulfil the potential indicated by the country’s COI ranking, the domestic manufacturing ecosystem needs to be further scaled up, product quality to be consistently maintained at scale, and a robust innovation, research and development ecosystem established”.

Services growth alone may not build that ecosystem.