The Role and Growth of Trade in Services in India’s Foreign Trade

India’s story of economic growth is often told through the lens of factories, exports of textiles, or the promise of “Make in India.” But quietly, in the background, another sector has been doing the heavy lifting for the country’s foreign trade balance: services. From the coder writing code for a bank in New York to the accountant closing books for a company in London, millions of Indians are exporting expertise rather than goods, and the numbers show just how significant this shift has become.

What exactly is trade in services 🔗

Trade in services refers to the cross-border exchange of intangible outputs, things you cannot put in a container and ship, such as software development, consulting, banking, insurance, tourism, and transport. Unlike merchandise trade, which involves physical goods crossing customs checkpoints, services trade often happens instantly and digitally, or through people and companies physically moving across borders.

The World Trade Organization’s General Agreement on Trade in Services (GATS) classifies this trade into four distinct routes, known as “modes of supply.” Understanding these modes helps explain why India has become so competitive in specific segments of the services economy.

The four modes of supplying services 🔗

India has built its services export strength almost entirely around Mode 1, since digital delivery does not require visas, work permits, or physical travel. This is precisely why the sector has scaled so fast despite persistent global restrictions on the movement of people.

Why services trade matters so much for India’s external balance 🔗

India runs a chronic deficit in merchandise trade. It imports far more crude oil, gold, electronics, and machinery than it exports in physical goods. Services trade is what keeps the overall picture from looking far worse.

According to commerce ministry estimates, service exports for FY 2025-26 stood at an estimated US$418.31 billion, compared to service imports of US$204.42 billion, producing a services trade surplus of roughly US$213.89 billion. That surplus is what substantially offsets India’s merchandise trade deficit, which is why economists watch the services number so closely every quarter.

The Reserve Bank of India’s own balance of payments data for the fourth quarter of FY 2025-26 showed net services receipts rising to US$60.4 billion, up from US$53.3 billion a year earlier, with computer services and other business services leading the increase. The RBI’s own annual report has flagged that a robust services trade balance, particularly in software and business services, is expected to keep supporting India’s current account through 2026-27, alongside steady remittance inflows from Indians working abroad.

The star performer: IT and IT-enabled services 🔗

If services trade is India’s engine, software exports are its biggest cylinder. The country’s information technology and business process management (IT-BPM) industry has grown from a niche outsourcing hub in the 1990s into a global technology powerhouse.

Industry estimates place India’s IT sector revenue at close to US$315.4 billion by February 2026, of which around US$246.4 billion came from exports. The United States remains by far the largest buyer of Indian software and technology services, followed by markets across Europe, including the United Kingdom.

What is driving this growth 🔗

A few structural factors explain why IT services have scaled so consistently:

• Cost and talent advantage: India produces a large pool of English-speaking engineering graduates every year, keeping delivery costs competitive for Western clients.
• Digital-first delivery: Software and consulting services can be delivered entirely online, sidestepping the visa and mobility restrictions that limit Mode 4 trade.
• Global Capability Centres (GCCs): Multinational companies are increasingly setting up captive technology and research centres in Indian cities, deepening the country’s role beyond simple outsourcing.
• Emerging hubs beyond metros: Cities such as Coimbatore, Nagpur, and Vizag are now attracting significant IT hiring, spreading the benefits of the sector geographically.

Beyond software: the other pillars of India’s services exports 🔗

While IT dominates headlines, India’s services export basket is more diversified than it often gets credit for.

Travel and tourism 🔗

Foreign tourists visiting India, whether for leisure, business, or medical treatment, count as a services export under Mode 2 of GATS. India’s medical tourism industry, in particular, has grown steadily as international patients seek affordable, high-quality treatment.

Transport services 🔗

Indian shipping lines, airlines, and logistics companies earn foreign exchange by carrying goods and passengers for international clients, a segment that has gained relevance as India’s trade volumes with the rest of the world expand.

Financial and business services 🔗

Banking, insurance, and professional consulting services, from legal process outsourcing to financial research, have become an increasingly important export category, often bundled together with software exports under the “business services” head in official statistics.

Services trade is outpacing merchandise trade 🔗

One of the clearest trends in India’s external trade over the past decade has been the divergence in growth rates between goods and services. In FY 2025-26, services exports grew close to 8 percent year-on-year, while merchandise exports rose only marginally, edging up from around US$437.70 billion to US$441.78 billion. Meanwhile, non-petroleum merchandise trade excluding gems and jewellery saw its surplus narrow slightly, underscoring how much of India’s export resilience now rests on services rather than physical goods.

This is not a one-year blip. Structural shifts in global demand, particularly the rise of cloud computing, artificial intelligence services, and remote-delivery consulting, have consistently favoured knowledge-based economies like India over manufacturing-heavy exporters facing tariff pressures and supply chain disruptions.

Foreign investment is following the services boom 🔗

Global capital has taken notice. Total FDI equity inflows into India reached an estimated US$58.85 billion in FY 2025-26, and within that, computer software and hardware alone attracted US$13.9 billion, a sharp jump from US$7.8 billion the previous year, while the broader services sector, covering financial services, banking, insurance, and business outsourcing, drew another US$10 billion. Cumulatively, since April 2000, the services sector has attracted well over US$127 billion in FDI equity, making it one of the largest recipients of foreign capital in the Indian economy over the past two and a half decades.

States such as Maharashtra and Karnataka continue to dominate these inflows, largely because they host India’s biggest technology clusters, in Mumbai, Pune, and Bengaluru, which act as magnets for both global capability centres and venture capital.

The untapped potential still on the table 🔗

Despite the impressive numbers, India’s services trade still has significant headroom to grow.

• Mode 4 restrictions: Movement of skilled Indian professionals abroad, especially for short-term project work, remains constrained by visa regimes in major markets like the US and EU. Easing these barriers through trade agreements could unlock a large pool of currently underused talent.
• Diversification beyond IT: Sectors such as legal services, architecture, education, and healthcare exports remain relatively small compared to their potential, given India’s skilled workforce.
• Trade agreements: Bilateral and regional trade pacts increasingly include dedicated services chapters. Expanding and deepening these commitments could open new markets for Indian professionals and firms.
• Domestic infrastructure: Continued investment in digital infrastructure, data centres, and connectivity is essential to sustain export competitiveness as global demand for AI-driven and cloud-based services accelerates.

Government initiatives such as Software Technology Parks of India (STPI) and Special Economic Zones have historically played a role in nurturing this sector by offering tax incentives and streamlined regulatory support, and continued policy attention will likely determine how much of this untapped potential India manages to capture.

What do you think? 🔗

What do you think? As global demand shifts toward AI-driven and cloud-based services, do you think India’s IT sector can maintain its current pace of export growth, or will competition from other emerging economies start eating into its market share? And should India prioritise easing Mode 4 mobility barriers for its professionals over further digitising Mode 1 services delivery?

References

1. https://www.wto.org/english/tratop_e/serv_e/cbt_course_e/c1s3p1_e.htm
2. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2252272&lang=1&reg=3
3. https://www.business-standard.com/amp/markets/capital-market-news/india-posts-usd-7-1-billion-current-account-surplus-in-q4-fy26-says-rbi-126060900331_1.html
4. https://www.tribuneindia.com/news/balance-of-payments/indias-service-trade-remittances-to-support-current-account-balance-in-fy27-rbi-annual-report
5. https://www.ibef.org/industry/information-technology-india
6. https://www.investindia.gov.in/india-fdi-investment-key-sectors