India’s Productivity Challenge Is Especially Steep In Service Sectors

Context: Value-addition per worker needs to rise sharply in several fields for the country to enhance prosperity and reduce inequality.

India’s productivity problem

• Dominance of 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.
  • Today’s low and medium-productivity services would continue to generate most jobs going ahead.
  • Employment in high-productivity services remains at a low 5.8% (2018-19).
• Rigidity in service sector: There is still no proven method to raise productivity in low productive service sectors.
• Divergence in productivity gap: Gap between real gross value added per person between is productivity and low productivity sectors are increasing.
• Regional inequality: There is large variation across states in terms of value-added per worker, with Karnataka leading in terms of highest per worker real gross value added in business, real estate and professional services on back of information technology sector.
• Premature deindustrialization: In several of today’s developing economies, including India, share of manufacturing-sector jobs in economy’s employment reached its peak well below corresponding levels for developed economies.
• Demographic challenge: 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.
  • High-skill services cannot absorb the large proportion of educated youth that remain unemployed in search of good-quality jobs.

Way forward: Service jobs need to be more productive, sustainable and inclusive without putting undue pressure on workers

• Efficiency facilitation: Improvements in traffic facilities mean, a worker may not end up taking excessive risk in terms of vehicle speed to deliver orders on time.
• Better technology adoption, better managerial practices and soft skills help improve productivity.