NEW DELHI: India’s balance of payments runs on a quiet paradox. The country cannot sell enough goods to the world, yet it consistently avoids a full-blown external crisis. The reason is a services sector and a diaspora workforce that together compensate for what factories have failed to deliver. In FY25, India recorded a merchandise trade deficit of USD 283.81 billion. Its services surplus reached an all-time high of USD 188.8 billion. Remittances added another USD 135.4 billion. The combined cushion brought the current account deficit down to a manageable USD 23.3 billion or 0.6 percent of GDP. That is the balancing act the question is how long it holds and what it costs the broader economy that it must exist at all.
The Services Engine and Its Limits
India’s position in global services trade is genuinely strong. According to WTO data the country commands a 4.3 percent share of global commercial services exports ranking eighth worldwide. In digitally delivered services India ranks fifth with a 5.8 percent share worth USD 269 billion. IT and software alone account for over 40 percent of total services exports, growing at an average rate of 13.5 percent between FY23 and FY25.
India now hosts over 1,700 Global Capability Centres employing more than 1.9 million professionals, a footprint that grew at roughly 7 percent compounded annually between FY20 and FY25. This represents a meaningful shift toward higher-value, integrated work rather than pure cost arbitrage.
However structural headwinds are building. Generative AI is already slowing fresher hiring. TCS cut its intake target to 25,000 for FY27 from 44,000 in FY26. TeamLease data shows firms can fill only 30 percent of vacancies because of skills mismatches. Nasscom’s optimism about a USD 300 billion revenue milestone sits alongside an industry where 65 percent of employees report inadequate training in advanced tools. The engine is strong but it is not immune.
What Manufacturing Has Not Delivered
India’s goods export story is starkly different. Its share of global merchandise exports stands at 1.8 percent, ranking 18th globally. Manufacturing employs only 11 to 12 percent of the workforce, against 25 to 30 percent in China and South Korea at comparable development stages. The structural transformation that typically carries an economy from low to middle income, through factory floors absorbing surplus agricultural labour has largely stalled here.
The PLI scheme, backed by Rs 1.97 lakh crore across 14 sectors has produced uneven outcomes. Electronics is the clear success, with mobile phone production growing 28-fold to Rs 5.45 lakh crore in FY25 and electronics exports rising 32.46 percent to USD 38.58 billion. But total PLI disbursements across all sectors reached only Rs 23,946 crore by September 2025, which is 12 percent of the total allocation. Specialty steel saw 14 of 58 projects withdraw. Less than 5 percent of Indian workers receive formal vocational training, compared to over 50 percent in East Asian economies.
Logistics costs once cited at 13 to 14 percent of GDP, have been reassessed by a DPIIT-NCAER study at 7.97 percent for FY24. That is progress, but smaller firms still bear a disproportionate burden. Logistics costs for small manufacturers run at 16.9 percent of output against 7.6 percent for large corporates.
Agriculture and Pharmaceuticals: Half-Built Strengths
Agricultural exports reached USD 52 billion in FY25, driven by spices, rice and marine products. Yet processed foods account for only 20.4 percent of that basket. India’s Revealed Comparative Advantage index shows it leads in raw ingredients and minimal processing but remains deeply uncompetitive in composite and precursor foods. Thailand’s food sector contributes 25 percent of national GDP. India’s cold chain gaps fragmented landholdings and limited private investment continue to trap value inside the farm gate.
Pharmaceuticals tell a similar story of surface strength over structural fragility. Exports reached USD 30.5 billion in FY25, growing 10 percent year on year. However, China supplies 74 percent of India’s active pharmaceutical ingredient imports, up from 70 percent in FY23. For individual molecules, the dependence is near total. Norfloxacin imports from China carry a 99.9 percent concentration. Rifampicin intermediates and Methyldopa are sourced exclusively from China. The Bulk Drugs PLI scheme has commissioned 38 greenfield projects but cumulative sales stand at only Rs 2,720 crore against the Rs 6,940 crore outlay.
When the Cushion Thins
India’s BoP vulnerability becomes visible during external shocks. The 2013 Taper Tantrum and the 2022 dollar surge both triggered capital flight, forced the RBI to raise rates and sent borrowing costs across the domestic economy upward. In late 2025 and early 2026 rising crude prices and Strait of Hormuz disruptions pushed similar pressures. India imports nearly 90 percent of its crude oil. In April 2026 oil marketing companies paid USD 16.3 billion for crude a 50 percent cost increase despite a 4.3 percent fall in import volume. Net FDI fell to USD 1 billion in FY25 from USD 10.2 billion the year before. Foreign portfolio investors recorded a net outflow of USD 9.5 billion in CY2025. The overall BoP was projected to face a deficit of USD 65 to 70 billion, its third consecutive year in the red.
Furthermore services export benefits concentrate in Bengaluru, Hyderabad, Pune and Chennai. Northern and eastern India remain tied to low-productivity agriculture or Gulf remittances. When West Asian conflicts flare as they did through 2025, return migration pressures reduce household incomes across entire districts of Bihar, Uttar Pradesh and Kerala.
The Way Ahead
India’s external position is not in crisis, but its current configuration is not a strategy. The services surplus and remittance inflow manage the trade deficit they do not resolve it. Consequently, the road ahead requires simultaneous action on several fronts.
Ease of Doing Business 2.0 reforms must break the regulatory thresholds that trap micro firms and prevent them from scaling into medium enterprises. Dedicated freight corridor completion, coastal shipping expansion and digital freight exchanges would reduce logistics costs further and remove a persistent competitive disadvantage. India-UK and India-EU trade agreements if concluded well could open meaningful market access for textiles, pharmaceuticals and professional services, though analysts caution that FTAs without underlying cost competitiveness could widen import bills instead. The Union Budget FY27 has already raised the safe harbor transfer pricing threshold to Rs 2,000 crore and extended tax holidays for data centre infrastructure, which supports services. These are useful but are they sufficient?
India’s balance of payments currently works. The deeper question is whether an economy of 1.4 billion people, with a vast low-skilled labour force and persistent energy import dependency can build lasting external stability on software exports and diaspora remittances alone. The evidence from every comparable economy suggests it cannot. The services engine buys India time. What the country does with that time will determine whether the structural problems underneath get resolved or simply grow larger.
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