Introduction
India now earns almost as much from selling services abroad as from selling goods. In 2025-26, service exports stood at about USD 418 billion against goods exports of about USD 442 billion. Thirty years ago, services were a negligible part of the export basket.
Inward remittances from Indians working overseas add another USD 144 billion or so. Taken together, services and remittances now outweigh merchandise as sources of foreign exchange. This write-up examines one economic consequence of that shift: the pressure it places on labour-intensive goods exports such as garments, footwear and leather products.
Understanding "Dutch Disease"
"Dutch disease" is the term economists use when a booming export sector strengthens a country's currency and, in doing so, weakens its other export industries.
The name comes from the Netherlands. The Groningen natural gas field was discovered in 1959, and by the 1970s gas exports had grown very large. The resulting inflow of foreign currency pushed up the value of the Dutch guilder. A stronger guilder made the country's traditional manufactured exports costlier for foreign buyers, and those industries lost ground and shed jobs.
The lesson is not that the boom was harmful overall; the Dutch economy gained substantially from gas. The point is that a single dominant source of foreign earnings can reshape the exchange rate, and sectors that compete mainly on price absorb most of the adjustment.
The Indian Parallel
India's version of the phenomenon is driven not by a natural resource but by skills. Software, IT-enabled services, global capability centres and professional services bring in a large and steady stream of dollars. Remittances add a second steady stream.
Both inflows increase demand for the rupee. The rupee therefore trades at a stronger level than it would if India's foreign earnings came mainly from merchandise. For a services firm billing in dollars at high margins, this is manageable. For a garment or footwear exporter working on thin margins against competitors in Bangladesh, Vietnam or Cambodia, even a modest difference in the exchange rate can decide whether an order is won or lost.
In short, the sectors where India is most successful abroad are, unintentionally, making its labour-intensive sectors less price-competitive.
How the Export Mix Has Changed
The balance of India's foreign earnings has turned decisively towards skill-intensive activity over three decades.
| Source of foreign earnings | 1995-96 (USD bn) | 2025-26 (USD bn) |
|---|
| Labour-intensive manufactured exports | 24 | 187 |
| High-skill manufactured exports | 8 | 254 |
| Services exports | 6 | 412 |
| Remittances | 8 | 144 |
In the mid-1990s, labour-intensive goods were the largest export category, so they had a strong influence on where the rupee settled. Today, high-skill manufacturing and services together earn more than three times as much as labour-intensive goods. The exchange rate is now anchored largely by sectors that can tolerate a stronger rupee, and that level is less comfortable for price-sensitive industries.
India's strengths in pharmaceuticals, engineering goods, automobiles, chemicals and electronics underline the same point: its comparative advantage increasingly lies in skilled rather than low-wage work.
Figures as reported in the Times of India, 5 July 2026; the services figure for 2025-26 appears as both USD 412 bn and USD 418 bn in that report.
Other Cost Pressures on Labour-Intensive Sectors
The exchange rate is one factor among several. Labour-intensive exporters also point to the following:
- Cost of formal employment: statutory leave, holidays and allowances in the organised sector raise the effective cost per worker relative to some competing Asian economies.
- Scale thresholds: the new labour codes raised the workforce size above which prior approval is needed for retrenchment from 100 to 300 workers. Large-scale garment units of the kind seen in Bangladesh often employ several thousand.
- Gratuity: eligibility has been extended to fixed-term employees after one year of service, which adds to labour costs for seasonal, order-driven businesses.
- Infrastructure and inputs: logistics, power tariffs, land prices and procedural requirements are frequently cited as cost disadvantages.
A counterpoint is that infrastructure and procedural costs apply equally to services and skill-intensive manufacturing, which have nonetheless grown strongly. That suggests these factors weigh most heavily where margins are thinnest and labour is the main cost.
The Way Forward
Deliberately weakening the rupee to help labour-intensive exports is unlikely to be a durable answer. It would raise import costs, add to inflation and could be offset by capital flows.
Two broad approaches are discussed by economists, and they are not mutually exclusive:
- Build on existing strengths. Invest in a workforce that can use artificial intelligence and other new technologies to raise productivity. This positions India for the high-value exports likely to grow fastest in the coming decades.
- Lower the non-currency costs of labour-intensive production. Better logistics, competitive power and land costs, quicker procedures, and trade agreements that improve market access can partly offset a stronger rupee. Duty remission and drawback mechanisms also matter for these thin-margin sectors.
The balance between the two is a policy choice. The first favours long-term competitiveness; the second addresses the near-term need for large-scale employment for workers moving out of agriculture.
Conclusion
India's rise as an exporter of services and skilled manufactures is a clear success, but it carries a hidden cost. Large and steady inflows from services and remittances keep the rupee stronger than labour-intensive industries would prefer. This is India's own form of Dutch disease.
Recognising the mechanism helps frame the choices ahead. Exporters in garments, footwear and similar sectors will need to compete on productivity, scale and efficiency rather than on a cheap currency.
