Enclaves and Absorption Constraints: India’s Services-Led Development from a Structural Perspective

Hinh T. Dinh

No 2619, Research papers & Policy papers on Economic Trends and Policies from Policy Center for the New South

Abstract: This paper provides a structural assessment of India’s services-led development trajectory, and its integration into global value chains (GVCs) between 2012 and 2022. Applying an analytical framework that categorizes services into knowledge (KS), enabling (ES), and local (LS) sectors, the study utilizes sixteen OECD indicators to move beyond the narrative of India as a ‘services champion’ and reveal a more complex economic reality. The analysis identifies three central structural patterns, beginning with the ‘enclave’ nature of the flagship IT export sector (J62–63), which maintains productivity levels comparable to high-income benchmarks, but is shallowly linked to the domestic economy, with a labor-income share that plummeted from 26% to 11% over the decade. Second, a stark absorption arithmetic reveals a productivity-absorption tradeoff in which the most productive sectors employ the fewest workers. Consequently, with an agricultural workforce still near 248 million, IT expansion alone cannot fulfill for India the labor-reallocation function traditionally performed by manufacturing. Finally, the paper identifies a constraint-driven posture in which India’s manufacturing share has stalled at post-industrial levels (16% of GDP) despite aggressive policy interventions such as ‘Make in India’. This trajectory is framed not as a choice, but as the ‘path left available’ because of the global capital intensification of manufacturing, which has significantly weakened its labor-absorption capacity. The paper concludes that while India’s services-led path is viable, it requires a ‘Big-Push’ policy characterized by the public coordination of investments that the market alone will not align. Aggregate convergence depends on scaling knowledge services beyond IT, and upgrading the productivity of ‘absorbing’ LS through AI-enabled tools. Ultimately, India’s convergence challenge is harder than that of comparable manufacturing-led economies because services are more heterogeneous in terms of productivity and employment generation, and the country’s immense scale magnifies the difficulty of the absorption arithmetic.

Date: 2026-07
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