November 05, 2023

Concerns of Service-led Growth and Employment

Sanjay Roy

THE trajectory of growth in India is often characterised by a service led growth which seems to be a general pattern of many developing countries undergoing pre-mature deindustrialisation. It is also evident from the fact that the importance of manufacturing and industry in India’s GDP remained more or less stagnant as the share of industry in India’s GDP only increased by 3 percentage points from an average of 24 per cent in the 1970s to 27 per cent in 2021-22. During the same period services share increased from 35 per cent to 48 per cent.

The steep rise in the share of services in GDP has been witnessed by many developing countries including China where the share of services in GDP is 51 per cent in 2021-22. The distinctive feature of China however is the share of industry in China’s GDP currently stands at 41 per cent, much higher than that of India. The difference is marked by the massive shrinkage of agriculture in GDP which shrank from 32 per cent to 8 per cent in China from the decade of 70s till the present while in case of India the share of agriculture still accounts 17 per cent of GDP. The important underlying fact therefore is that both industry and services grew much faster over time in China than that of India leading to a per capita income in China 5.2 times that of India’s in 2021-22. The crucial question is the sequence of relative importance of sectors in the trajectory of growth. In the 1990s when China’s services share picked up very fast, the share of industry in GDP has already reached close to 45 per cent.

Industrialisation played a crucial role in China’s growth making it the factory of the world.  Generally the development path follows a sequence of relative importance from agriculture to industry and then to services precisely because of the changing demand with rising per capita income. With a low per capita income the major share of income is spent to buy food and necessaries and then as income grows the relative importance of manufactured goods and services gradually increases. For instance, in the United States which in constant 2015 dollar records a per capita income that is more than 30 times that of India’s in 2021-22 has share of services more than 70 per cent of GDP. But surprisingly most of the developing countries while reaching an early and low peak of manufacturing share in GDP, moved towards a service led growth at a much lower per capita income.

As mentioned above a high share of services in GDP can be accompanied by very high share of industry as well. There is no conflict between the two. In fact in many cases a strong synergy emerges between the two where much of the manufactured goods has services embedded in them. Take the case of mobile phones. The phones become dysfunctional without network services and many of the manufacturing activities are preceded by and followed by many allied services. But the growth of services in a country is usually conditioned by the growth of manufacturing. In fact without the growth of manufacturing, services growth can only be conceived if it heavily relies on speculative activities related to financialisation of the economy that hardly requires any additional hardware or employment. Otherwise manufacturing has to drive the growth of services and not the other way round. Particularly due to its linkage effects, manufacturing creates huge number of direct and indirect employment and can moderate the income differences between the top and the bottom. In fact, within manufacturing the skill and income difference is much lower than that in services and that explains why services led growth entails higher inequality in income.

Not only India’s share of services in GDP is lower than that of China’s, even if the average of services growth in India was higher than that of China since 1991 but labour productivity in services in China is roughly 2.4 times that of India’s in 2021-22. This relates to the question of composition of service activities in various countries. It is important because the transfer of population from agricultural activities to non-agriculture is not by itself a virtue but it has to signify a transfer of population from low to high productivity activities. The transfer of population from low to high productivity activities has to happen in a gradual manner particularly in countries such as India where there is very high proportion of unskilled labour which is mostly underemployed or unemployed. Manufacturing or industrial growth seems to be the easier way of employing this vast number of unskilled labour for instance in primary industrial activities such as textiles, garments, mining activities, construction and then light engineering, and gradually moving up the skill scale. This is hardly possible in case of services. In the case of services skills are much more polarised between highly skilled activities relating to finance or IT and ITES at the one end and retail trade, non-professional personal services on the other end. Absorption at low end services simply transfers population from agriculture to services but in terms of productivity they both more or less seem to be situated at the same plane.

In terms of employment there has been a massive shift of population from agriculture to non-farm activities in the past three decades in India. In 1991 about 64 per cent of Indians were involved in agriculture which drastically reduced to 44 per cent in 2021. The 20 percentage point shift is being absorbed in services and industry accounting 30.7 per cent and 25.3 per cent share of employment respectively in 2021. In the same year the share of employment in services and industry in China is 47.4 per cent and 28.2 per cent respectively and both these figures are higher than India as China could shift a large proportion of people from agriculture to non-agriculture during these three decades.

In China people involved in agriculture in 2021 is only 24.4 per cent of the total employed. But it is not only about number of people shifted, more important point is the growth in productivity both in industry and services. Labour productivity in industry is about 4.7 times that of India’s and in services labour productivity on an average is 2.4 times higher in China. This basically depends on the composition of services employment and the nature of services activities that dominate the sector.

In case of India despite the fact of high growth in IT and ITES employment but that only accounts a very small share of the total services employment. The biggest employers are retail trade employing almost 45 per cent of total services employment in India and biggest spike recorded in terms of addition of employment in the last year is in non-professional personal services which includes some skilled activities such as barbers, beauticians or carpenters on the one hand but a large number of unskilled work such as gardeners, newspaper distributers, decorators, watchmen and so on.

In the last year according to CMIE, addition of employment in IT and ITES services was about 0.45 million, there has been a sharp drop in retail trade by 3.2 million while the rise in employment in non-professional personal services is in the tune of 3.29 million. Hence even if the growth is service-led, a large proportion of service workers are still employed in low-wage, low-productivity services. Employment in low-end services indicates that India’s services activities has to still go a long way that creates higher demand for high skilled jobs in IT and ITES. It is indicative of the fact that rising inequality may create demand for high-end services particularly in the financial sector and ITES but the low base of such demand would hardly be able to absorb a large section of the workforce. On the other hand, the dependence on exports of services is not sustainable for the longer run as too many competitors may emerge in the near future that may erode the initial advantage of India having been endowed with huge number of English literate workforce. To remain competitive in global service activities most importantly the supply of skilled labour force capable of being employed in emerging services requires a public funded robust education system that would make such training accessible to all.