Manufacturing, often hailed as the backbone of industrial progress, contributes 13–14% to India’s GDP as of 2025, with ambitions to elevate this to 25% under initiatives like Make in India. The sector spans traditional industries like textiles and automobiles to emerging areas such as semiconductors and electric vehicles. Despite its potential, manufacturing faces structural hurdles: high input costs, fragmented supply chains, and reliance on imported components. The Production-Linked Incentive (PLI) scheme, targeting 14 sectors, aims to address these gaps by boosting domestic production and exports. However, progress remains uneven. For instance, while electronics and pharmaceuticals have seen investments, sectors like steel and capital goods lag due to global oversupply and cyclical demand.
In contrast, the services sector contributes over 54% to India’s GDP, driven by IT, finance, healthcare, and education. This dominance reflects India’s early bet on globalization, leveraging its English-speaking workforce to become a global IT hub. Companies like TCS and Infosys exemplify this success, with IT exports exceeding $250 billion annually. Services have proven resilient amid global headwinds, growing at 6–8% annually even as manufacturing stagnates. The sector’s agility stems from lower capital intensity, scalability, and integration with global value chains. For example, India’s IT services account for 55% of the global outsourcing market, a testament to its competitive edge.
Employment patterns further highlight this divergence. Manufacturing employs 12–14% of India’s workforce, constrained by automation and skill mismatches. The sector’s formal job creation has been sluggish, with MSMEs contributing 45% of manufacturing output but struggling with access to credit and technology. Services, however, absorb 35–40% of the workforce, including high-skilled roles in IT and low-skilled jobs in retail and hospitality. Yet, this growth is uneven: while IT employs 5 million directly, sectors like tourism and logistics remain underdeveloped, reflecting regional disparities.
Source: Bloomberg; CA Investment Research
Productivity metrics reveal another layer. Manufacturing productivity in India is 40–50% lower than in China and Vietnam, hampered by infrastructural bottlenecks and regulatory delays. The sector’s capital-output ratio has worsened, with ₹6–7 of capital needed to generate ₹1 of output, compared to ₹3–4 in services. Services, particularly IT and finance, thrive on knowledge capital, yielding higher margins. For instance, the IT sector’s revenue per employee is $50,000–$60,000, dwarfing manufacturing’s $15,000–$20,000.
Global integration also differs starkly. Manufacturing exports, at $450 billion in FY25, are concentrated in petroleum, gems, and pharmaceuticals, with limited value addition. The PLI scheme aims to diversify into electronics and telecom, but challenges like inverted duty structures persist. Services exports, however, exceed $350 billion, dominated by IT, but also include emerging segments like R&D and consulting. Notably, IT services contribute 7–8% to manufacturing exports through embedded software and automation solutions, though this synergy remains underutilized.
Policy responses have been asymmetric. Manufacturing benefits from targeted interventions: the PLI scheme’s ₹2 trillion outlay, GST rate rationalization, and industrial corridors like Delhi-Mumbai. Services, however, rely on broad reforms: digital infrastructure (UPI, Aadhaar), FDI liberalization, and skill initiatives like Skill India. The 2025 Union Budget’s focus on R&D tax breaks for IT and logistics parks underscores this dual approach.
Looking ahead, India’s growth will hinge on balancing these sectors. Manufacturing needs scale and innovation, while services must deepen their global footprint.