A background note can be accessed here: UNCTAD: The Service Sector Paradox
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?
India is not merely at risk of “premature servicification” – it is already living it. Instead of shifting labour from agriculture into large-scale, labour-intensive manufacturing, as East Asian economies did, India moved directly into services. Much of this expansion occurred in small, informal, low-productivity activities with limited scope for skill deepening or technological upgrading. As UNCTAD notes, rapid service-sector growth in developing economies does not automatically translate into durable capability accumulation.
Two structural factors explain this trajectory. Domestically, post-independence strategy prioritised capital-intensive industry and higher education but did not cultivate a broad base of labour-intensive manufacturing. Externally, global manufacturing consolidated in China, raising entry barriers for latecomers.
The result is growth without sufficient quality employment. However, current shifts in global supply chains, efforts at China+1 diversification, and new trade agreements create an opening. To avoid locking in low-productivity services, India must embed services such as design, logistics, and digital systems, within a revitalised manufacturing strategy so that employment growth coincides with capability formation.
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?
India’s digital and platform economy is expanding rapidly, but value capture is becoming concentrated among a handful of firms that control data, customer access, and digital infrastructure. Smaller enterprises often rely on these ecosystems yet lack bargaining power, technological depth, or secure income streams. UNCTAD highlights this global pattern: digitalisation can modernise transactions while leaving workers and small firms in precarious, low-value roles.
Policy responses must operate on three fronts.
First, competition policy needs upgrading. In digital markets, dominance stems less from price-setting and more from data aggregation and network effects. Regulatory institutions require technical expertise, faster enforcement tools, and forward-looking market assessment capacity.
Second, data governance frameworks must ensure portability and interoperability so that SMEs can switch platforms and innovate without prohibitive costs.
Third, enterprise support systems must go beyond mere platform onboarding. SMEs require access to logistics networks, working capital, digital compliance support, and standards integration. Models such as ONDC illustrate how public digital infrastructure can decentralise access, but issues of scaling and institutional coordination remain critical.
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?
India’s policy discourse often treats services and manufacturing as parallel growth engines. In practice, high-productivity services such as design, engineering, logistics, finance, and digital technologies function as strategic intermediate inputs that determine manufacturing competitiveness.
Reframing industrial policy means aligning these domains institutionally. Efficient logistics lower export lead times and inventory costs. Advanced design and engineering services enable movement up the value chain. Digital tools enhance quality control and resource efficiency. Financial services determine whether smaller manufacturers can scale and integrate into global supply chains.
Three institutional shifts are required.
First, trade and industrial policy must be jointly structured so that free trade agreements reinforce domestic production ecosystems rather than operate independently of them.
Second, skills architecture must integrate production capabilities with digital and managerial competencies, ensuring workforce mobility across manufacturing-service interfaces.
Third, industrial clusters should be ecosystem-based, embedding service providers alongside factories to accelerate knowledge spillovers and technological diffusion.
