Union Budget FY 2026-27: A Push for India’s Services Exports

2026-03-14 Information

Key Takeaways

Introduction

India’s services sector has emerged as one of the strongest performers of the economy, playing an increasingly important role in driving growth, productivity, and global integration. According to the World Bank, the share of services in India’s GDP rose to 49.9% in 2024, which is about 1.5 percentage points above the pre-pandemic average, an increase greater than the global average and the majority of developed economies. This expansion has been supported by productivity improvements driven by rapid adoption of digital technology and deeper integration of Indian firms into the global value chain.

The Union Budget 2026-27 further reinforces this trajectory through targeted tax reforms for IT services, incentives for cloud and data centres, simplified compliance mechanisms, and trade facilitation measures aimed at enhancing India’s global competitiveness in services trade. It also envisions making India a global leader in services, with a 10% global share by 2047 and in order to achieve this goal, setting up of a high level ‘Education-to-Empowerment and Enterprise’ Standing Committee has been proposed for Viksit Bharat.

The Committee will focus on identifying high-potential services sub-sectors capable of generating growth and employment. It will also address cross-sectoral policy and regulatory issues, including standards and accreditation frameworks, and explore avenues to further expand India’s services exports. The Committee will also assess the impact of AI and emerging technologies on jobs and skills, while proposing measures for AI integration in education, workforce upskilling and reskilling, AI-enabled job matching, formalisation of informal work, and attraction of global talent and skilled diaspora.

As the services sector evolves, services trade has emerged as an important contributor to India’s external sector performance, with rising exports supporting overall trade growth amid changing global conditions.

India’s Services Export Performance and Drivers

Growth and Recent Performance

India’s services exports have maintained strong momentum in FY2025-26, supported by sustained global demand for Indian services. Over the period April-January 2025-26, services exports are estimated at USD 348.4 billion.

Rising Contribution of Services Sector in Economic Growth

Amid geopolitical disruptions, services exports have emerged as a critical buffer for India’s external sector, helping mitigate external vulnerabilities and sustain trade stability. The increasing importance of services exports is clearly reflected in their rising contribution to overall economic activity.

Growing Share in GDP: India’s services exports share in GDP averaged 9.7% during FY23-FY25, marking a notable rise from 7.4% in the pre-pandemic period, and highlighting the growing role of the services sector in supporting economic growth. This stabilising contribution strengthened further in the first half (H1) of FY26, with the share of services exports in GDP increasing to 10%, highlighting the continued expansion and resilience of India’s services-led growth trajectory.

Supporting Labour Market Stability: The services sector has also emerged as a major source of employment generation. It accounts for nearly 30% of total employment. Over the past six years, the sector added nearly 40 million jobs, in the post-COVID recovery period, highlighting its role as an important labour market shock absorber.

Sectoral Drivers of Services Exports

According to the RBI’s survey on computer software and information technology-enabled services (ITES), software services exports increased by 7.3% year-on-year in FY25, reflecting sustained momentum in India’s digital services exports. During this period, computer services accounted for over two-thirds of India’s total software services exports, while BPO services remained the most significant component of ITES exports.

This strong performance reflects the broader resilience of India’s services sector, supported by the sustained expansion of software, BPM, consulting, and fintech segments, which continue to drive overall services exports. Supported by robust global demand for digital services, software services remain the largest component. It accounts for over 40% of total services exports and has expanded at an average rate of 13.5% during FY23-FY25 compared to 4.7% in FY16-FY20. Alongside this, business services exports have gained momentum in recent years, reinforcing the sector’s expanding contribution to India’s external sector strength. In FY23-FY25, Professional and management consulting has emerged as the second-largest contributor, growing at 25.9% and thereby resulting in increasing its share from 10.5% in FY16-FY20 to 18.3% in FY23-FY25 .

Together, these segments account for over 65% of services exports, highlighting India’s growing specialisation in cross-border and knowledge-intensive activities.

Budget Focus on Services Sector: A Push for the Economy

India has established itself as a global leader in software development, IT-enabled services, knowledge process outsourcing, and software-related contract R&D services. Recognising this strong global position, the Union Budget 2026-27 proposed a range of reforms aimed at supporting and facilitating the growth of the IT and IT-enabled services sector.

Boosting Cloud Services Exports through Data Centre Incentives

One of Union Budget’s most distinctive initiatives is the introduction of incentives to attract global cloud service providers operating through India-based data centre infrastructure. Recognising the need to enable critical infrastructure and boost investment in data centres, the Budget proposes tax holidays until 2047 for foreign companies delivering cloud services to global clients using infrastructure located in India. In addition, related entities providing data centre services from India are proposed to benefit from a safe harbour margin of 15% on costs.

Safe Harbour Reforms for IT Services

To simplify compliance, the Union Budget proposed to consolidate software development services, IT enabled services, knowledge process outsourcing services, and contract R&D services relating to software development, under a single category of Information Technology services with a common safe harbour margin of 15.5%, while increasing the safe harbour threshold for IT services from ₹300 crore to ₹2,000 crore.

The safe harbour regime shall also be approved through an automated rule-driven process without the need for tax officer, and once opted for, IT services companies will be allowed to continue under the same safe harbour provisions for a period of five consecutive years at their discretion.

Advance Pricing Agreement (APA) Reforms

For IT services companies who want to conclude Advance Pricing Agreement (APA), the Budget also proposes to fast-track the Unilateral APA process for IT services companies, with an objective of concluding agreements within 2 years. The period of 2 years can be extended by a further period of 6 months on taxpayer’s request. The facility of filing modified returns available to entities entering into an APA is also proposed to be extended to their associated entities.

Unilateral Advance Pricing Agreement (APA)

Unilateral Advance Pricing Agreement (UAPA) under the Income-tax Act, 1961 refers to an agreement entered into between a taxpayer and the Central Board of Direct Taxes (CBDT) to determine, in advance, the price charged or its determination, for specified international transactions or specified domestic transactions, for a fixed period of time.

Additional Budget Initiatives for Supporting Services Sector

The Union Budget FY 2026-27 has also introduced initiatives aimed at strengthening India’s services ecosystem through skill development. Some of them relate to traditional medicine, medical value travel and tourism-linked infrastructure.

Strengthening India’s Care Economy

Driven by rapidly aging populations, increased life expectancy, and a rise in chronic diseases, the demand for caregivers has been increasing globally. According to ILO, plugging existing, significant, gaps in care services could generate almost 300 million jobs. Against this backdrop, the announcements of Budget 2026-27 in developing a strong Care Ecosystem, covering geriatric and allied care services is expected to expand the pool of India’s care giver professionals who can significantly contribute to this global demand.

New Drivers of Services Export Competitiveness

Rising GCC Footprint

India’s expanding services exports are increasingly supported by the country’s emergence as a global hub for Global Capability Centres (GCCs), which grew at a compound annual growth rate (CAGR) of around 7% between FY20 and FY25. GCCs have become a key channel through which services are delivered cross-border from India. As of FY24, India hosts over 1,700 GCCs employing more than 1.9 million professionals, making it the world’s largest hub for captive global operations.

Over time, GCCs have evolved from support-oriented functions into integral components of multinational firms’ global operations undertaking high-value activities such as product development, AI-enabled digital services, cybersecurity, analytics, and engineering, directly contributing to India’s exports of knowledge-intensive and digitally delivered services. Their expansion has been supported by India’s labour arbitrage, strong physical and digital infrastructure, cost competitiveness, SEZ-linked incentives, and a vibrant startup ecosystem, all of which enhance overall efficiency.

India’s AI and Digital Ecosystem

India’s growing capabilities in artificial intelligence and digital technologies further reinforce this export growth. According to the Stanford AI Index Report 2025, India ranks second globally in AI skill penetration , reflecting the availability of advanced digital talent supporting global service delivery. International organisations also highlight India’s improving technological readiness, with the country rising from 48th in 2022 to 36th in 2024 under UNCTAD’s Frontier Technologies Readiness Index. India additionally ranks among the leading countries in cloud infrastructure services , supported by one of the world’s largest populations that can leverage a significant mass of AI developers.

Rapid growth in data consumption, cloud adoption, and AI deployment is accelerating investments in digital infrastructure, with India’s data centre capacity projected to increase from around 1.4 GW in 2025 to nearly 8 GW by 2030. This expansion strengthens India’s ability to deliver digitally enabled services globally. The country’s rising innovation ecosystem is reflected in growing AI start-ups , venture investment, and one of the fastest growth rates in generative AI patent filing worldwide.

Global Trade Agreements Boosting Services Exports

India’s expanding network of trade agreements has played an important role in strengthening market access for its services sector across global markets. These agreements provide greater mobility for professionals, and new opportunities for Indian service providers across a wide range of services.

India-UK CETA

The Agreement on Social Security Contributions along with mobility and market access commitments in CETA is expected to enhance India-UK partnerships in the service sector, leveraging the high skills and innovative service sectors of both countries.

India-EU Free Trade Agreement (FTA)

India-Oman Comprehensive Economic Partnership Agreement (CEPA)

Expanded ICT Ceiling: The ceiling for Intra-Corporate Transferees (ICTs) has been enhanced from 20% to 50%, enabling Indian companies to deploy a larger number of managerial and specialist personnel.

India-New Zealand Free Trade Agreement (FTA)

These provisions create unprecedented opportunities for Indian youth and professionals to gain global exposure.

India-European Free Trade Association (EFTA) Trade and Economic Partnership Agreement (TEPA)

India-Australia Economic Cooperation & Trade Agreement (Ind-Aus ECTA)

Comprehensive Economic Cooperation and Partnership Agreement with Mauritius

The agreement grants Indian service providers access to around 115 subsectors across key service industries, expanding opportunities and strengthening bilateral economic cooperation.

Global Investment Strengthening Services Exports

Rising foreign investment in India’s services sector support the rapid expansion of Global Capability Centres and deepening international trade partnerships, which have helped in strengthening India’s position as a preferred destination for globally delivered services.

Services-sector FDI inflows accounted for an average 80.2% of total FDI during FY23-FY25, up from 77.7% in the pre-pandemic period, reflecting growing investor confidence in India’s services export ecosystem. Investment has remained concentrated in information and communication services (25.8%) and professional services (23.8%), reflecting India’s strength in digital and knowledge-intensive activities.

These sectors highlight how digitally enabled and knowledge-intensive services, supported by global partnerships, continue to drive foreign investment aligned with India’s expanding services exports.

Conclusion

India’s services exports have recorded strong and consistent growth in recent years, emerging as one of the most resilient drivers of the country’s external sector performance. Building on its kartavya, the Union Budget 2026-27 further reinforces services export growth through targeted tax reforms, digital infrastructure incentives, skill development initiatives, and measures aimed at enhancing global competitiveness of India’s services sector.

With talent, technology, and global partnerships converging, India’s services sector stands poised to carry the nation’s growth story onto the global stage.

References

Ministry of Finance

https://www.indiabudget.gov.in/economicsurvey/doc/echapter.pdf

https://www.indiabudget.gov.in/doc/budget_speech.pdf

https://www.pib.gov.in/PressReleasePage.aspx?PRID=2219981&reg=3&lang=2

https://incometaxindia.gov.in/Rules/Income-Tax%20Rules/103120000000007832.htm

https://www.indianembassyusa.gov.in/pdf/advance_pricing_agreement_guidance_with_faqs_(tpi-43).pdf

https://incometaxindia.gov.in/Rules/Income-Tax%20Rules/103120000000007189.htm

Ministry of Commerce & Industry

https://www.pib.gov.in/PressReleasePage.aspx?PRID=2228785&reg=3&lang=1

https://www.pib.gov.in/PressReleasePage.aspx?PRID=2219146&reg=3&lang=1

https://static.pib.gov.in/WriteReadData/specificdocs/documents/2025/dec/doc20251218737701.pdf