India’s productivity challenge is especially steep in-service sectors

Synopsis: While low-productivity services will continue to employ the majority of the country’s workforce, there is no clear-cut policy path to improve the productivity of workers in these sectors.

Introduction

It is known that productivity is the key to economic prosperity. But the policy solutions needed to raise the productivity of service workers remains one of the biggest challenges for India and hasn’t yet received much attention.

Why is this important?

First, low and medium-productivity service sectors (services except real estate, business and professional services) and construction account for over 70% of non-farm employment in India.

Second, while India aims to expand employment in manufacturing, there is no doubt that today’s low and medium-productivity services would continue to generate most jobs going ahead. For instance, in 2004-05, around 66% of those employed in India’s non-farm economy were working in construction, trade, transport and communication, hotels, restaurants and personal services, along with public administration and defence. By 2018-19, this proportion had increased to 72%.

Why India should develop suitable policies for low and medium-productivity service sectors?

One, Premature De-Industrialisation had limited the employment opportunities in India. India has been pushing for manufacturing expansion via its Make in India campaign. But manufacturing would not be able to generate jobs at scale across India the same way it did in other Asian economies like Japan, South Korea and China, given increasingly high levels of automation.

Two, high-skill services cannot absorb the large proportion of educated youth that remain unemployed in search of good-quality jobs.

Three, with a change in patterns of demand towards services and the emergence of new types of services via the shared economy, there is evidence that the structure of occupations is changing and labour markets may be polarizing further. This could lead to greater inequality, which has been the case in many developed countries as well.

Four, the current measure of labour efficiency by the time taken to deliver an order, for example, is not appropriate. Similarly, restricted working hours available for manufacturing and traditional retail sectors may not suit the working style of low and medium-productivity service sectors backed by technology.

Source: This post is based on the article “India’s productivity challenge is especially steep in-service sectors” Published in “Livemint” on 26th Oct 2021.

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