India’s Services Edge in the Age of Geopolitical Turbulences

When the United States and Israel launched strikes on Iran in late February 2026, it was not merely another Middle Eastern crisis but a stress test for the global order. For India, such instability carries particular consequences given its dependence on the region for oil and remittances. India imports about 90% of its crude from the Middle East and has roughly 10 million citizens working there. In 2025, India received nearly $135 billion in remittances, around 40% of which came from the region.

The economic implications of the ongoing conflict are already visible. Crude oil prices have surged nearly 40% in a fortnight, breaching $100 a barrel. The rupee has weakened and equity markets have witnessed sharp sell-offs. These are the early tremors. If the conflict persists, the aftershocks could be more severe, including a widening current account deficit, capital flight from Indian markets and potential pressure on remittance flows. This pattern is familiar from earlier oil shocks in 1973, 1980 and 1990, when energy crises quickly translated into balance-of-payments stress.

But will oil prices have the same impact on India’s CAD this time? Unlikely. India’s external balance today is structurally different from the past, largely due to economic reforms initiated in 1991.

Services Surge
Liberalisation is often narrated as a manufacturing story that dismantled the licence raj, opened markets and invited foreign capital. Yet the sector that responded most dramatically was services. The timing proved fortuitous. India’s economic opening coincided with the rise of the internet, enabling global firms to outsource technology and business services.

Companies such as Infosys, TCS and Wipro built offshore delivery models that allowed Western corporations to develop and maintain software through Indian engineers at a fraction of onshore costs. By the mid-2000s, India had become the world’s back office. By the 2010s, the country had evolved into a deeper participant in the global knowledge economy, designing systems, building digital products and running R&D operations for multinational companies.

Today the offshoring ecosystem extends far beyond IT services. India hosts more than 2,400 Global Capability Centres run by Fortune 500 companies that generate substantial dollar-denominated revenue. Numerically, the transformation is striking. Between 1990 and 2025, India’s services exports expanded roughly 68 times, compared with an 18 times increase in goods exports.

This structural shift is crucial in the current moment.

Various estimates suggest crude prices may average above $100 a barrel in 2026. Historically, whenever oil sustained such levels after 2010, India’s CAD widened beyond 4% of GDP. The exception was 2022, when discounted Russian oil softened the impact.

Will the present shock push the CAD back above 4%? Again, unlikely. The strength of services exports now offsets a meaningful portion of India’s energy import bill and helps keep the deficit contained.

Structural Shift
Risks remain. Portfolio outflows, geopolitical volatility and any slowdown in Gulf economies could still pressure India’s balance of payments. Yet India is entering this episode with a far stronger external position than during previous oil shocks.

Recent years have already tested this resilience. The global economy has faced repeated disruptions since the pandemic, including supply chain breakdowns, geopolitical fragmentation and technological upheaval. Each shock has highlighted the stabilising role of India’s services surplus.

The current Middle East crisis may yet de-escalate. Its deeper lesson lies elsewhere. The global order is undergoing structural change. Power rivalries, resource nationalism and the weaponisation of geography are becoming defining features of international politics. The Middle East, historically volatile, remains central to global energy flows.

India sits at the intersection of these pressures. It relies heavily on Gulf energy supplies, is closely linked to Gulf labour markets and must navigate competing geopolitical spheres. Building resilience against such shocks therefore becomes essential. Deepening the services economy is one of the most effective ways to achieve that.

The foundation already exists, but the next phase requires moving further up the technological ladder into artificial intelligence, advanced engineering and high-end research.

Over the past five years, global technology firms have invested nearly $1 trillion in artificial intelligence. This represents not just a technological trend but a shift in where economic value will be created in the coming decades. India is not absent from this race, but it is not competing at the scale its ambitions demand.

Government initiatives are a start. The ₹103 billion IndiaAI Mission announced in 2024, the $2.3 billion deep-tech fund of funds and ₹5 billion for AI education are important steps. Yet they may be insufficient relative to the opportunity ahead.

The global AI market could reach $5 trillion by 2034. To capture a credible share, India may require $50–70 billion in combined public and private investment over the next five years in computing infrastructure, human capital and R&D ecosystems. That equates to roughly 1.3–1.7% of GDP, comparable to what China invested in manufacturing during its take-off phase.

The “Smile Curve” theory illustrates why this matters. The highest value in a product’s lifecycle sits at the edges such as research, intellectual property, design and platforms. The middle stages, which involve execution and assembly, generate relatively lower margins.

India’’s services boom so far has largely occupied the middle segment of that curve. Moving deeper into advanced technology and product development would shift the country towards the higher-value ends where pricing power is stronger and intellectual property compounds over time.

The implication for India’s external balance is not simply that services exports will grow larger. They will become more valuable per dollar earned. That is the difference between building a buffer and building a fortress.

The present Middle East crisis may ease, but the structural forces behind it, including resource competition and geopolitical fragmentation, are unlikely to disappear. India’s trade balance will remain exposed to external shocks.

The services economy already provides a powerful cushion. Expanding into deep technology will determine whether that cushion evolves into durable economic armour.

 

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official position of any organisation or institution the author may be associated with.