India’s Service Sector Outlook for FY 2025-26: Growth Drivers and Economic Impact

India’s service sector is a major contributor to economic growth, accounting for over 50 percent of the country’s Gross Value Added (GVA). In February 2025, service sector activity witnessed a sharp surge, fueled by rising demand both within India and internationally. This growth can be attributed to the advancements in technology, infrastructure, and workforce development.

We explore the opportunities, challenges, and future potential of India’s service sector in FY2025-26, highlighting its critical role in shaping the country’s economic trajectory.

India’s service sector has continued its strong growth trajectory in 2025, demonstrating a notable recovery in February. The HSBC India Services Purchasing Managers’ Index (PMI), complied by S&P Global, rose to 59.0 from 56.5 in January, which had marked its lowest level in over two years. The service PMI report published on March 5, 2035, attributes this resurgence to a sharp rise in new business orders, both domestically and internationally, driving increased output and a significant boost in employment.

India’s central government has made a note of its service sector’s positive performance. As of January 2025, the sector contributes over 50 percent to India’s gross value added (GVA), amounting to approximately US$1.4 trillion in FY2022-23. This share is projected to increase to 56 percent by 2047, driven by continued investment in technology, infrastructure, and skill development.

Growing dominance of India’s service sector globally

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As per a 2023 joint report of the World Bank and WTO, the global share of services in GDP has risen from 53 percent in 1970 to 67 percent in 2021. Further analysis of the report indicates that India has mirrored this trend.

The country is also a major player in global services exports, ranking seventh worldwide and second among developing economies, with a 4.3 percent share in global exports valued at US$338 billion in 2023.

Source: UN Trade and Development, UNCTADstat and the World Trade Organization

Leading segments under India’s service sector

India’s service sector is diverse, encompassing multiple high-growth industries that contribute significantly to economic expansion and job creation. Some of the major sub-sectors within the service sector include:

1. Information technology (IT) and software services
2. Business process outsourcing (BPO)
3. Financial services
4. Healthcare and medical tourism
5. Education and training
6. Telecommunications and internet services
7. Tourism and hospitality
8. Entertainment and media
9. Legal and professional services
10. Retail and e-commerce

Among these, sub-sectors such as IT services, financial services, and professional consulting are the most sought-after from India globally. The computer and information services industry accounts for 68 percent of India’s total service exports.

Key growth drivers for the service sector

India’s think tank agency, NITI Aayog, has said that the country’s services sector is shifting toward high-tech digital solutions, including e-commerce, fintech, cloud computing, and AI-driven services. This surge in adoption of high-tech digital solutions can be attributed to the rise in establishment of global capability centers (GCC), which provide outsourced technology and business functions.

According to Goldman Sachs, the potential for India’s share of global insurance and financial services is likely to rise by 2030. Indian states are registering record GVA growth in sectors like computer, transport, and professional services, with Maharashtra, Karnataka, and Tamil Nadu leading the way.

The central government-backed AI and digital infrastructure initiatives, such as the INR 5 billion (US$57.2 million) investment in AI Centers of Excellence and the National Geospatial Mission, are also reportedly influencing India’s position as a leader in digital services.

According to data from the Directorate of Economics & Statistics of various state governments, as published by the Ministry of Statistics and Programme Implementation (MoSPI), the top 10 states with the highest share of services gross state value added (GSVA) at constant prices for FY 2023-24 are as follows:

1. Maharashtra
2. Karnataka
3. Tamil Nadu
4. Uttar Pradesh
5. Gujarat
6. West Bengal
7. Telangana
8. Kerala
9. Rajasthan
10. Andhra Pradesh

Rising domestic demand for services

The Household Consumption Survey of 2022–23, released by the Ministry of Statistics and Program Implementation (MoSPI), revealed a growing domestic demand for services. The share of services in rural areas’ monthly per capita expenditure has increased from 10 percent in 1999-2000 to 20 percent in 2022-23, and in urban areas from 22 percent to 30 percent.

This shift highlights increased spending on health care, education, entertainment, and financial services, creating new opportunities for domestic businesses.

Foreign direct investment (FDI) in India’s service sector

India’s services sector continues to attract strong foreign investments, solidifying its position as a key driver of economic growth. According to the Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflows reached US$40.67 billion in FY2024-25 (April-December), with the services sector accounting for US$7.22 billion of the total.

From April 2000 to December 2024, India’s total FDI amounted to US$719.65 billion, of which the service sector contributed US$116.72 billion, approximately 16 percent of the overall FDI inflow in the country. This significant investment underscores the growing confidence of foreign investors in India’s economic potential and the increasing importance of the service sector in driving growth.

To further attract foreign investments into India’s service sector, the Union Budget FY2025-26 introduced a key reform in the insurance sector, raising the FDI cap from 74 percent to 100 percent. This policy change makes market entry easier for global players and enhances capital inflows into the sector.

Addressing key challenges

Despite the positive growth of India’s service sector over the past decade, several challenges hinder its full potential. One of the concerns is the workforce skill gap in the country, where a disconnect between industry demands and the availability of skilled professionals in IT, artificial intelligence (AI), and financial services poses a constraint on growth.

Another significant challenge is regulatory complexity, as frequent policy changes and varying taxation and compliance requirements across states create uncertainties for businesses. These regulatory inconsistencies can slow investment and expansion efforts.

Additionally, infrastructure bottlenecks remain a key issue, particularly in major business hubs such as Bengaluru. Urban congestion, inadequate digital infrastructure and limited resources can hamper business operations and restrict scalability.

One may note that the sector also faces global market risks, with a high dependence on outsourcing and exports, making it vulnerable to geopolitical disruptions and protectionist policies in major markets.

Strategic recommendations for businesses

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To ensure long-term growth for businesses in the service sector, companies must adopt the following measures: 

• Indian companies must evaluate the possibility of expanding digital service exports beyond traditional markets such as the U.S. and Europe. Tapping into emerging economies in Southeast Asia, Africa, and Latin America can unlock new opportunities. Additionally, fostering global partnerships in AI, fintech, and IT-enabled services will drive innovation and enhance competitiveness.
• The private sector must invest in workforce development in the country by aligning corporate training programs with government-led STEM education initiatives. This includes providing training to employees with future-ready skills through advanced learning platforms, including AI-driven training modules.
• Leveraging public-private collaboration is also essential. Strong partnerships between businesses and central and state government agencies in sectors such as transport, education, and healthcare can accelerate business growth. Investments in infrastructure and smart-city projects will integrate digital and physical services more effectively.
• Furthermore, businesses must expand beyond metro-cities to capitalize on emerging opportunities in Tier 2 and Tier 3 cities. With central government initiatives like BharatNet and rural connectivity programs, expanding operations into these regions can unlock new markets and foster inclusive economic development.

Key takeaways

India’s service sector is poised for sustained expansion, underpinned by strong policy support, digital innovation, and increasing foreign investment. As businesses navigate evolving market dynamics, those that capitalize on emerging opportunities in IT, financial services, and digital trade will remain at the forefront of growth. Addressing regulatory hurdles and workforce readiness will be critical to ensuring long-term competitiveness. For investors and businesses alike, India’s evolving service sector presents a compelling opportunity for sustained profitability and global market leadership.

(US$1 = INR 87.29)

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