India

The services-led growth model and its divergence from manufacturing-driven development

India’s economic expansion since the 1990s has been led by the services sector, a pattern that diverges from the manufacturing-driven growth seen in other large developing economies. Between 2000 and 2009, nominal GDP grew by 186.5 percent, from $468.4 billion to $1.34 trillion, yet the share of manufacturing in output remained stagnant. By contrast, services contributed over 55 percent of GDP by the late 2010s, while manufacturing’s share hovered near 15 percent. This structural imbalance has constrained the creation of formal, low-skill jobs that typically absorb surplus labour from agriculture.

The roots of this services-led model lie in the liberalisation of the 1990s, which deregulated finance, telecommunications, and information technology. GDP per capita rose from $371 in 1990 to $442 in 2000, a gain of 19.1 percent over the decade, but manufacturing employment did not expand proportionately. The IT and business services sectors grew rapidly, with exports of software and services reaching over $100 billion by the early 2010s. However, these industries are capital-intensive and employ a relatively small, highly educated workforce. In 2019, GDP per capita stood at $2,041, yet the labour force participation rate remained below 50 percent, reflecting the limited reach of services-led growth.

The missing manufacturing transition and its impact on employment

The missing manufacturing transition is evident in the pattern of structural change. In the 2000s, GDP growth averaged 6.3 percent per year, and the GDP deflator rose by 93.2 percent over the decade, signalling persistent inflation that eroded the competitiveness of labour-intensive manufacturing. Unlike China, where manufacturing absorbed millions of rural migrants, India’s industrial sector contributed only about 25 percent of GDP at its peak in the 2010s. The 2010s saw average annual growth of 6.6 percent, but manufacturing’s share of employment stayed below 12 percent. This has left a large informal economy: over 80 percent of workers remain in unregistered enterprises with low productivity and no social protection.

The consequences for job creation are stark. Between the 1980s and the 2010s, the mean GDP per capita rose from $307 to $1,646, but the elasticity of employment to output fell. In the 1990s, GDP growth averaged 5.8 percent, yet formal sector jobs grew by less than 1 percent per year. The 2020s have reinforced this pattern: from 2020 to 2024, GDP grew by 46.2 percent, reaching $3.91 trillion, while unemployment remained above 6 percent. The pandemic year of 2020 saw a contraction of 5.8 percent, and the recovery has been led by services such as finance and digital platforms, not manufacturing.

By 2024, India’s GDP on a purchasing power parity basis reached $16.2 trillion, yet manufacturing’s share of GDP remained below 18 percent.

Structural barriers and the limits of services-led growth

Several structural factors explain the persistence of this model. India’s labour laws, which impose high costs on firms with more than 100 workers, discourage large-scale manufacturing. The average firm size in organised manufacturing is fewer than 200 workers, compared to over 1,000 in China. Infrastructure deficits, including unreliable electricity and poor logistics, raise production costs. The GDP deflator, which averaged 5.2 percent in the 2010s, fell to 3.1 percent by 2024, indicating subdued demand that further discourages investment in capital-intensive factories.

The services-led growth model has delivered high aggregate output but limited structural transformation. By 2024, India’s GDP on a purchasing power parity basis reached $16.2 trillion, making it the third largest economy globally. Yet manufacturing’s share of GDP remained below 18 percent, and the sector employed fewer than 60 million people. Without a shift toward labour-intensive manufacturing, the economy may struggle to generate sufficient formal employment for its young and growing population. The 2020s have shown that services can sustain growth, but the missing manufacturing transition leaves a gap in job creation that no other sector has filled.

The Persistence of Informal Employment Despite Economic Growth

Informal employment has remained a structural feature of the Indian labour market, persisting across decades of economic transformation. In 2024, India’s GDP per capita reached $2,694.74, a figure that underscores the limited formalisation of the workforce. The share of informal workers, defined as those without written contracts, paid leave, or social security, has hovered around 90 per cent of total employment for much of the post-1991 period.

This ratio has shown remarkable stickiness even as the economy expanded from a mean GDP of $353.5 billion in the 1990s to a mean of $2.18 trillion in the 2010s. The persistence of informal employment carries direct implications for productivity. Between 2000 and 2009, India’s GDP grew by 186.5 per cent, yet labour productivity in the informal sector remained a fraction of that in formal enterprises.

The share of informal workers has hovered around 90 per cent of total employment for much of the post-1991 period.

Fiscal and Social Consequences of a Dual Labour Market

Tax revenue has been constrained by the dominance of informal activity. With a narrow tax base, India’s central tax-to-GDP ratio has rarely exceeded 12 per cent, well below the OECD average. The Goods and Services Tax (GST), introduced in 2017, aimed to broaden the base by capturing value added across supply chains. However, compliance remains low among small firms.

In the 2020s, the mean GDP was $3.35 trillion, but the number of GST registrants has plateaued at roughly 14 million, against an estimated 60 million enterprises. The gap reflects the difficulty of taxing a workforce where the majority of transactions are cash-based and unreported. Social protection coverage is limited by the same structural divide.

India’s GDP growth averaged 5.44 per cent in the 2020s, but the share of workers covered by any form of social insurance, such as the Employees’ Provident Fund Organisation (EPFO), remains under 10 per cent. The mean GDP per capita in the 2020s was $2,343.79, yet public expenditure on health and social protection as a share of GDP is among the lowest in the G20. The informal workforce, lacking written contracts, is ineligible for unemployment benefits, maternity leave, or pensions.

Even the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which provides 100 days of wage employment per year, covers only a fraction of the labour force and offers no long-term security.

Sectoral Stagnation and the Limits of Formalisation Policy

The implications for productivity are compounded by the sectoral composition of informal work. Agriculture, which employs roughly 45 per cent of the labour force, contributes less than 18 per cent of GDP. In the 2010s, the mean GDP was $2.18 trillion, but agricultural value added per worker has stagnated. The shift of workers from agriculture to construction and low-end services has not reduced informality; these sectors are among the most informal in the economy.

The GDP growth rate in the 2010s averaged 6.64 per cent, but this expansion did not generate a commensurate increase in formal jobs. The 2020s have seen a partial reversal: the pandemic-induced contraction of 5.78 per cent in 2020 pushed millions back into informal work, and the recovery to 6.49 per cent growth in 2024 has not reversed that trend. Policy efforts to formalise the economy have had limited impact.

The demonetisation of high-value currency notes in 2016 and the introduction of the GST were intended to reduce cash transactions and expand the tax net. However, GDP per capita in the 2020s, at $2,694.74, remains low enough that many enterprises operate below the GST threshold. The number of formal jobs created annually, as measured by EPFO payroll additions, has averaged roughly 10 million per year since 2017, but this is less than the net annual increase in the working-age population.

The result is a persistent dualism: a small, high-productivity formal sector coexists with a vast, low-productivity informal one, limiting both fiscal capacity and social resilience.

The Demographic Dividend and Uneven Growth

India’s demographic profile has been a central theme in its economic narrative. The country entered a period often described as a demographic dividend in the 2000s, when the working-age population (15–64 years) began to grow faster than the dependent population. This structural shift is reflected in the GDP numbers: between 2000 and 2009, GDP grew by 186.5 per cent, the highest decadal expansion since independence.

The GDP per capita also rose sharply, from $442.75 in 2000 to $1,094.95 in 2009, a gain of 147.3 per cent. These figures suggest that a larger share of the population was entering productive age, potentially boosting output per worker.

The 2010s continued this trend, with GDP increasing by 69.2 per cent from $1,675.6 billion in 2010 to $2,835.6 billion in 2019. GDP per capita rose from $1,347.52 to $2,041.43 over the same period, a 51.5 per cent increase.

The Female Participation Puzzle

Yet, despite these gains, the female labour force participation rate (FLFPR) remained persistently low. According to World Bank data, India’s FLFPR hovered around 20 to 25 per cent during the 2010s, far below the global average of roughly 47 per cent. This disconnect between rising education and growth on one hand, and stagnant female workforce engagement on the other, constitutes a puzzle for policymakers.

India’s FLFPR hovered around 20 to 25 per cent during the 2010s, far below the global average of roughly 47 per cent.

Several structural factors explain this paradox. First, the nature of India’s growth has been capital-intensive rather than labour-intensive. The services sector, which contributed over 50 per cent of GDP by the late 2010s, generates fewer jobs for women than manufacturing or agriculture. Second, social norms around women’s domestic responsibilities and mobility restrictions remain strong, particularly in rural areas.

The 2020s data show that the COVID-19 pandemic exacerbated these trends: GDP contracted by 5.8 per cent in 2020, and FLFPR fell further as women withdrew from the workforce to absorb increased household care burdens. By 2024, GDP had recovered to $3,909.9 billion, but female participation had not returned to pre-pandemic levels.

Structural Constraints and Policy Gaps

The demographic dividend itself may be narrowing. The 2020s have so far recorded a mean GDP growth of 5.4 per cent, lower than the 6.6 per cent average of the 2010s. The GDP deflator, a measure of inflation, fell from 10.5 per cent in 2010 to 2.4 per cent in 2019, but the 2020s have seen more volatile price pressures, with the deflator at 3.1 per cent in 2024. These macroeconomic conditions do not favour the creation of the large-scale, formal-sector jobs that could draw women into the labour force.

Without a shift towards more labour-absorbing sectors, the demographic dividend risks being squandered.

Education levels have risen significantly, especially among younger women. The literacy rate for women aged 15–24 exceeded 90 per cent by the late 2010s, according to National Sample Survey data. Yet, the link between education and employment remains weak. Many educated women face a mismatch between their qualifications and available jobs, which are often informal, low-paid, or located far from home.

The GDP per capita in 2024 stood at $2,694.74, a 41.3 per cent increase from $1,907.04 in 2020, but this growth has not translated into commensurate improvements in female employment rates.

Policy interventions have attempted to address this gap. The government’s Production Linked Incentive (PLI) scheme, launched in 2020, aims to boost manufacturing and create jobs. However, early evidence suggests that the scheme has not yet significantly altered the gender composition of the workforce. The 2020s GDP growth of 46.2 per cent from 2020 to 2024, while robust, has been driven largely by the services and technology sectors, which employ fewer women.

Unless the structure of growth changes, the demographic dividend may benefit only half the population.

In summary, India’s demographic window of opportunity is open, but the female participation puzzle remains unresolved. The country’s GDP expanded from $267.5 billion in 2020 to $390.9 billion in 2024, yet female labour force participation has not followed suit. The reasons are structural, social, and macroeconomic. Without deliberate policy to create inclusive, labour-intensive growth, the demographic dividend will remain a missed opportunity.

Aadhaar and UPI: The Twin Engines of Digital Formalisation

India’s digital public infrastructure (DPI) has reshaped the interface between the state, financial institutions, and citizens since the 2010s. The Aadhaar biometric identity system, launched in 2009, had enrolled over 1.3 billion residents by 2023, creating a unique identification layer that reduced duplication and leakage in welfare transfers.

The Unified Payments Interface (UPI), introduced in 2016, processed transactions worth INR 139 lakh crore (approximately USD 1.7 trillion) in the financial year 2023–24, up from INR 0.1 lakh crore in 2016–17. These platforms have driven formalisation by linking digital identities to bank accounts and mobile phones, a combination known as the “India Stack.”

Measurable Gains in Financial Inclusion and Fiscal Savings

The impact on financial inclusion is measurable. The number of bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY) reached 530 million by 2024, with 67 per cent in rural or semi-urban areas. Aadhaar seeding of these accounts enabled direct benefit transfers (DBT) that saved the government an estimated INR 2.7 lakh crore (USD 33 billion) between 2013 and 2023 by eliminating ghost beneficiaries.

UPI’s zero-cost transaction model accelerated adoption: monthly UPI transactions rose from 1.8 million in October 2016 to 13.4 billion in August 2024.

UPI’s zero-cost transaction model accelerated adoption: monthly UPI transactions rose from 1.8 million in October 2016 to 13.4 billion in August 2024. The share of digital payments in total non-cash retail transactions increased from 5 per cent in 2016 to over 40 per cent by 2023.

Formalisation of the economy has been a secondary effect. The Goods and Services Tax (GST) network, built on the same DPI architecture, registered 14 million taxpayers by 2024, compared to 8 million under the pre-GST regime. E-way bill generation for inter-state goods movement reached 100 million per month in 2023, up from 30 million in 2018.

The number of firms filing income tax returns rose by 60 per cent between 2014 and 2023, partly due to data triangulation from Aadhaar and GST returns. Formal sector employment, as measured by Employees’ Provident Fund Organisation (EPFO) net additions, averaged 1.5 million new subscribers per month in 2023–24, compared to 0.6 million per month in 2017–18.

Productivity Gains and the Persistence of Structural Divides

Total factor productivity (TFP) growth has been a contested area. India’s TFP growth averaged 2.1 per cent per year between 2000 and 2019, according to the Reserve Bank of India, but decelerated to 1.4 per cent between 2015 and 2019. The adoption of DPI may have contributed to productivity gains in sectors like retail, logistics, and financial services.

For instance, the average cost of a digital payment in India is INR 0.25 (USD 0.003), compared to INR 5–10 for cash handling. The time saved per transaction, estimated at 15–20 minutes for cash-based welfare payments versus instant digital transfers, freed up labour for other economic activities. A 2023 study by the National Institute of Public Finance and Policy (NIPFP) estimated that Aadhaar-linked DBT reduced the administrative cost of welfare delivery by 1.5 per cent of GDP annually.

However, productivity gains have not been evenly distributed. The informal sector, which accounts for over 80 per cent of employment, has seen slower adoption of digital tools. Micro-enterprises with less than five workers reported only 12 per cent usage of digital payments in 2022, compared to 65 per cent for firms with over 20 workers.

The digital divide in rural areas persists: internet penetration in rural India was 37 per cent in 2023, against 67 per cent in urban areas. The gender gap in digital financial inclusion also remains: only 29 per cent of women in India owned a mobile money account in 2021, compared to 47 per cent of men, according to the Global Findex database.

The macroeconomic data from the 2010s and 2020s provides context. India’s GDP per capita rose from USD 1,347 in 2010 to USD 2,041 in 2019, a 51.5 per cent increase, and further to USD 2,695 in 2024, a 41.3 per cent rise over the first five years of the 2020s. GDP growth averaged 6.6 per cent in the 2010s, but the 2020s saw a sharp contraction of 5.8 per cent in 2020 followed by a recovery to 6.5 per cent in 2024.

The GDP deflator, a measure of inflation, fell from 10.5 per cent in 2010 to 2.4 per cent in 2019, before rising to 3.1 per cent in 2024. These numbers suggest that while DPI has improved efficiency in specific channels, broad-based productivity acceleration remains constrained by structural factors such as labour informality and infrastructure gaps.

The widening income gap between India's richest and poorest states

India’s economic growth over the past four decades has not been evenly distributed across its states. The aggregate figures mask a persistent and, in many cases, widening divergence between the richer, more industrialised states and the poorer, agrarian ones. This divergence is most clearly visible in the contrast between the high-growth decades of the 2000s and 2010s and the relative stagnation of the 1980s and 1990s.

For instance, GDP growth averaged 6.3 per cent in the 2000s and 6.6 per cent in the 2010s, compared to 5.7 per cent in the 1990s, but the benefits of this acceleration have been concentrated in a handful of states. States such as Maharashtra, Gujarat, Tamil Nadu, and Karnataka have consistently outperformed the national average. Their per capita GDPs are now several multiples of those in states like Bihar, Uttar Pradesh, and Odisha.

In 2024, India’s GDP per capita reached $2,694.74, a figure that rose from $1,347.52 in 2010. Yet the gap between the richest and poorest states has grown. In 2019, the per capita income of Maharashtra was roughly three times that of Bihar. This disparity is rooted in differences in governance, infrastructure, and human capital.

Governance, infrastructure, and human capital as drivers of divergence

Governance quality varies sharply. States with stronger fiscal discipline, better law and order, and more efficient bureaucracy have attracted more private investment. Gujarat, for example, saw its GDP per capita grow from $1,347.52 in 2010 to $2,041.43 in 2019, a 51.5 per cent increase. In contrast, Bihar’s per capita income grew more slowly, constrained by weak institutional capacity and political instability.

The result is a self-reinforcing cycle: richer states attract more investment, which further boosts growth, while poorer states struggle to break out of low-growth equilibria. Infrastructure deficits are a key factor. The richer states have better roads, ports, power supply, and digital connectivity. In the 2000s, India’s GDP grew by 186.5 per cent, from $468.4 billion to $1.34 trillion, driven largely by services and manufacturing in these states.

Poorer states, lacking basic infrastructure, have been unable to participate fully in this expansion. For example, Uttar Pradesh, with a population of over 200 million, has a road density far below the national average, limiting access to markets and employment. Human capital disparities compound these problems. Literacy rates in Kerala exceed 95 per cent, while in Bihar they remain below 70 per cent. This gap in educational attainment directly affects labour productivity and the ability to attract high-value industries.

India’s GDP per capita grew from $270.97 in 1980 to $2,694.74 in 2024, a tenfold increase, but the benefits have been skewed.

India’s GDP per capita grew from $270.97 in 1980 to $2,694.74 in 2024, a tenfold increase, but the benefits have been skewed. States with higher human capital have seen faster growth in services and technology, while poorer states remain dependent on low-productivity agriculture.

The pandemic's role and the need for targeted policy intervention

The COVID-19 pandemic exacerbated these trends. In 2020, India’s GDP contracted by 5.8 per cent, the sharpest decline in decades. Richer states, with better healthcare infrastructure and fiscal buffers, recovered more quickly. By 2024, GDP growth had rebounded to 6.5 per cent, but the recovery was uneven. Poorer states, with weaker health systems and higher rates of informal employment, suffered deeper and longer-lasting economic damage.

The divergence is not merely economic; it has social and political consequences. States with higher growth have seen faster improvements in health and education outcomes, while poorer states lag. Infant mortality rates in Kerala are around 10 per 1,000 live births, compared to over 40 in Uttar Pradesh. This gap reflects differences not only in income but also in the quality of public services.

The data show that the mean GDP per capita in the 2010s was $1,645.83, but this average conceals a wide range. The richest states have per capita incomes more than four times those of the poorest. Addressing these disparities requires targeted policy interventions. Investment in infrastructure and human capital in poorer states is essential.

The central government’s fiscal transfers, such as those recommended by the Finance Commission, have attempted to narrow the gap, but their impact has been limited. The growth in GDP per capita in the 2020s, at 41.3 per cent, has been faster than in the 1990s (19.1 per cent) but still insufficient to close the gap. Without sustained effort, the divergence between India’s states will continue, undermining the country’s overall development prospects.

The 1980s–1990s: From Fiscal Stress to Crisis and Correction

India’s macroeconomic stability has been punctuated by distinct phases of inflation management, fiscal stress, and external vulnerability, each shaping the trajectory of growth. The 1980s opened with a GDP deflator averaging 8.7 percent, with a high of 11.5 percent in 1980, while GDP growth averaged 5.7 percent per year. This decade saw a gradual easing of price pressures, with the deflator falling to 8.4 percent by 1989, but fiscal deficits widened as public spending rose, culminating in a balance-of-payments crisis in 1991.

The external imbalance was stark: the current account deficit reached 3.0 percent of GDP in 1990, and foreign exchange reserves fell to cover only two weeks of imports. The 1990s brought a sharp correction. After the 1991 crisis, the government devalued the rupee by 18 percent and initiated structural reforms. Inflation, as measured by the GDP deflator, dropped from 10.7 percent in 1990 to a decade low of 3.1 percent in 1999, a decline of 71.2 percent over the decade.

GDP growth, however, was volatile, averaging 5.8 percent, with a trough of 1.1 percent in 1991. Fiscal consolidation was partial: the central government’s fiscal deficit averaged 5.7 percent of GDP in the early 1990s but remained above 4 percent through the decade. The external sector stabilised, with the current account deficit narrowing to 0.6 percent of GDP by 1999, supported by rising software exports.

The 2000s–2010s: Rapid Expansion, Inflation Spikes, and Uneven Discipline

The 2000s were a period of rapid expansion and moderate inflation. GDP growth averaged 6.3 percent, with the decade’s growth rate rising 104.7 percent from its start to its end. The GDP deflator averaged 5.7 percent, lower than in the 1980s and 1990s, though it rose to 7.0 percent in 2009. Fiscal discipline improved markedly after the Fiscal Responsibility and Budget Management Act of 2003; the central government’s fiscal deficit fell from 4.5 percent of GDP in 2003 to 2.7 percent in 2007.

External balances strengthened, with foreign exchange reserves climbing from USD 38 billion in 2000 to USD 283 billion in 2009, providing a buffer against the global financial crisis. GDP per capita more than doubled, from USD 443 in 2000 to USD 1,095 in 2009, a growth of 147.3 percent. The 2010s saw a deceleration in growth and renewed inflation challenges. GDP growth averaged 6.6 percent, but the decade ended with a low of 3.9 percent in 2019.

The GDP deflator averaged 5.2 percent, with a spike to 10.5 percent in 2010, driven by food and fuel prices. The Reserve Bank of India responded with a tight monetary policy, raising the repo rate to 8.5 percent by 2011. Fiscal consolidation resumed after the 2008 stimulus: the central fiscal deficit fell from 5.8 percent of GDP in 2010 to 3.4 percent in 2019. The current account deficit widened to 4.8 percent of GDP in 2012 but narrowed to 0.7 percent in 2019, helped by lower oil prices. GDP per capita rose from USD 1,348 in 2010 to USD 2,041 in 2019, a gain of 51.5 percent.

Foreign exchange reserves climbed from USD 38 billion in 2000 to USD 283 billion in 2009, a growth of 147.3 percent.

The 2020s and the Shifting Inflation-Growth Trade-off

The 2020s have been defined by the pandemic shock and a subsequent recovery. GDP contracted by 5.8 percent in 2020, the steepest decline in four decades. The GDP deflator fell to 2.3 percent in 2020, reflecting weak demand, but rose to 3.1 percent in 2024. Fiscal policy turned expansionary: the central government’s fiscal deficit widened to 9.2 percent of GDP in 2021, before declining to 5.6 percent in 2024.

External balances remained stable, with foreign exchange reserves reaching a record USD 642 billion in 2021. GDP growth rebounded to 9.7 percent in 2021 and averaged 5.4 percent over the first five years of the decade. GDP per capita reached USD 2,695 in 2024, up 41.3 percent from 2020. The trade-off between inflation and growth has shifted over time.

In the 1980s and 1990s, high inflation often accompanied moderate growth, with the deflator averaging 8.7 percent and 8.7 percent respectively, while growth averaged 5.7 percent and 5.8 percent. The 2000s offered a more favourable combination: lower inflation (5.7 percent) and higher growth (6.3 percent). The 2010s saw a similar average growth rate (6.6 percent) but with higher inflation variability. The 2020s have so far produced a volatile growth path, with inflation contained below 4 percent after 2022. Fiscal discipline has been uneven, with deficits rising in crisis periods and contracting during recoveries, while external balances have generally improved, reducing vulnerability to sudden stops.