Leveraging Services for Building Capabilities: The Case for Integrated Industrial Strategy in India
Policy challenge is not choosing between services and manufacturing, but designing institutions that channel services growth into broad-based industrial upgrading
A background note can be accessed here: UNCTAD: The Service Sector Paradox
Dr. Anjali Tandon: Associate Professor, Institute for Studies in Industrial Development
SDG 8: Decent Work and Economic Growth | SDG 9: Industry, Innovation and Infrastructure
Ministry of Commerce and Industry | Ministry of Electronics and Information Technology |
Ministry of Micro, Small and Medium Enterprises | Ministry of Skill Development and Entrepreneurship
If services expand before manufacturing deepens, does India risk a form of “premature servicification” analogous to premature deindustrialisation, where employment rises without durable capability accumulation?
The risk arises when services-led growth is weakly anchored in domestic production systems. If services expansion primarily facilitates trade in imported goods (through improved logistics and digitalisation) rather than strengthening local manufacturing linkages, employment may increase without generating cumulative technological learning, with limited benefits in the long-term. Durable capability formation typically emerges within manufacturing ecosystems, where learning-by-doing, supplier development, and technological diffusion reinforce structural upgrading.
Low-productivity services such as construction can absorb large numbers of unskilled workers, but such employment is often informal and cyclical, limiting long-term skill deepening. At the other end, high-value segments like IT and business services offer greater productivity potential. Yet their spillovers remain constrained when the broader workforce lacks foundational education and technical capabilities, which often require education beyond secondary-level.
The policy concern, therefore, is not services growth per se, but its sequencing and degree of embeddedness. Without complementary investments in manufacturing depth, skills, and domestic supply chains, services expansion may not translate into sustained capability accumulation across the economy.
In India’s fast-growing platform and IT-enabled services ecosystem, how should policymakers address the risk that value capture becomes increasingly concentrated among a small set of firms, limiting broad-based productivity diffusion?
As platform and IT-enabled services scale, value capture can concentrate among early movers and large firms, potentially narrowing productivity gains to a limited segment of the economy. The policy objective should be to extend spillovers to Small and Medium Enterprises (SMEs) while preserving incentives for innovation and scale.
One approach is to promote platform architectures and digital infrastructure that are neutral with respect to merchant size and transaction value, ensuring that smaller firms can participate on comparable terms. Such neutrality reduces entry barriers without constraining firm growth.
Fiscal instruments also matter. Revenue generated from digital services can be channelled into broad-based digital inclusion, particularly digital skilling and capability-building programmes for SMEs. Such measures help smaller enterprises adopt digital tools, integrate into supply chains, and upgrade productivity.
The focus, therefore, is not on redistributing value ex post, but on widening participation ex ante, so that digital ecosystems function as diffusion mechanisms rather than entrenching segmentation within the services economy.
How should India rethink industrial policy so that high-productivity services (design, logistics, finance, digital tools) are treated as strategic intermediate inputs to manufacturing and exports rather than as a standalone growth story?
High-productivity services should be conceptualised as embedded intermediate inputs within manufacturing systems. For example, AI-driven predictive analytics can reduce equipment downtime and improve product consistency, directly enhancing industrial competitiveness. Similarly, advanced logistics, finance, and digital tools facilitate upgrading and export readiness.
Trade policy can reinforce this integration by encouraging bundling – exporting industrial goods alongside maintenance, remote servicing, and other after-sales services – thereby deepening manufacturing–services linkages.
Environmental compliance introduces another strategic dimension. As global markets increasingly scrutinise carbon content and emissions intensity, manufacturing competitiveness depends on robust monitoring, reporting, and verification (MRV) services. Strengthening MRV capabilities, particularly among SMEs, can lower compliance barriers and improve carbon accounting and market access.
India’s steady share in professional, scientific, and business services, including R&D, demonstrates the tradability of knowledge-intensive services. Aligning these capabilities with domestic manufacturing, including under the production-linked incentive schemes, can stimulate investment, accelerate technological upgrading, and strengthen global value chain integration.
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