Structural Weaknesses in India's Economy: Services Dominance and Manufacturing Stagnation

Indian Express - Opinion · 29 Jun 2026 · 2 min read
Prelims · Economy Mains · GS3 Economy High relevance

India's economy shows short-term stability with easing crude prices and foreign investments, but structural weaknesses persist with over-reliance on services sector IPOs, stagnant manufacturing exports, and widening trade deficits, raising concerns about sustainable growth.

Key points

Services Sector Dominance: Seven of the top 10 recent IPOs, including Reliance Jio and NSE, are from financial, retail, or other services sectors, highlighting India's skewed economic structure away from manufacturing.

FDI Inflows Pattern: In 2025-26, services, computer software, and trading attracted the largest FDI equity inflows, while manufacturing sectors like non-conventional energy and automobiles received limited foreign investment.

Trade Deficit Concerns: Goods exports grew by under 5% between 2021-22 and 2025-26, while imports surged by 26.5%, widening the merchandise trade deficit from $191 billion to $333 billion, with China accounting for half of this deficit.

Services Exports Resilience: Services exports now constitute nearly half of India's total trade, with the services trade surplus offsetting the goods deficit when oil is excluded, though IT exports face risks from AI advancements.

[GS3-Economy] AI Threat to IT Sector: Rapid AI deployment by firms like Anthropic and OpenAI poses existential risks to India's IT services model, questioning the sector's future role in global value chains and wealth creation.

Gig Economy Expansion: Low-end services like delivery platforms (Zepto, Zomato, Swiggy) have created millions of gig jobs, but these lack productivity and stability compared to formal manufacturing employment.

Income Inequality Marker: Apple's India revenues surpassing HUL's reflects deepening income inequality, with wealth concentration at the top impacting broader consumption patterns and economic stability.

Populist Policy Response: States spent Rs 1.68 lakh crore (0.5% of GDP) on cash transfers in 2025-26, comparable to India's R&D expenditure (0.6-0.7% of GDP), indicating misplaced fiscal priorities for long-term growth.

Way Forward: India must implement sector-specific production-linked incentives (PLIs) for manufacturing, upgrade vocational training for AI-ready skills, and rationalize welfare spending to fund infrastructure and R&D for sustainable growth.

Key terms

Merchandise Trade Deficit

The gap between a nation's imports and exports of physical goods. India's deficit widened to $333 billion in 2025-26, driven by stagnant exports and surging imports, reflecting structural weaknesses in manufacturing competitiveness and import dependence.

Gig Economy

A labor market characterized by short-term contracts or freelance work as opposed to permanent jobs. In India, platforms like Zomato and Swiggy employ over 10 lakh delivery riders, raising questions about job quality, social security, and economic productivity.

Production-Linked Incentive (PLI)

A government scheme providing financial incentives to boost domestic manufacturing in key sectors. Relevant for UPSC as it intersects industrial policy (GS3), governance (GS2), and India's self-reliance goals, though current FDI patterns show limited manufacturing traction.

AI Readiness Index

A measure of a country's preparedness to adopt and benefit from artificial intelligence technologies. India ranks 13th globally, but the rapid AI deployment by foreign firms threatens its IT services model, making this a critical GS3 (Economy/Technology) issue.