Service sector: high growth, low employment generation?

Home > Blog > Service sector: high growth, low employment generation?

Service sector: high growth, low employment generation?

April 11,2019 0comments

As of now, the contribution of the services sector in producing the Gross Domestic Product (GDP) of India is more than 50%. Agriculture contributes around 14% and industry and manufacturing sector contribute the rest.

There is an economic perception that every economy has to pass through different phases of development. At the early stage of economic development, it is the agricultural sector that dominates the economy. After that, the industrial sector leads in generating growth and contributes mostly to the country’s GDP. At the highest stage of economic development, it is the services sector that surpasses the other two sectors. This pattern of economic development has been empirically observed in the case of most of developed countries.

There is a tendency among many policy-makers and observers to formulate the idea that for an economy, the higher the contribution of its services sector in GDP, the higher is the level of economic development. As a result, policy-makers of many countries often help their services sector to grow even at the expense of other sectors. The Indian economy is no exception and its services sector has been growing exponentially in the last few years.

Development should include the development of the people in an economy and not restrict itself to economic growth. This development of people can be measured by different estimates.

Employment generation

The Indian economy has been one of the fastest growing economies of the world. This high rate of growth started from 2003-04 and has been led by a growth in the services sector. The other main characteristic of this growth has been growing income inequality.

Economic models formulated by Nobel Laureate economists like Arthur Lewis shows how the development process reduces income inequality among the people by creating employment opportunities and raising wage rates. Many South East Asian countries, notably, Taiwan, Japan, and South Korea are the brightest examples of growth with equity. But India and many other countries like Pakistan are experiencing the development process in different ways.

Archana Agrarwal in an article in The Economic and Political Weakly (June 30, 2012), showed that the high growth of the services sector has not been matched by concomitant changes in the employment pattern. Secondly, the services sector in India has exhibited a dualism wherein the fastest growing service sectors are the high productivity and low employment generating ones. The third point is very important. She observed that much of the growth in services has necessitated the transfer of resources to the private corporate sector and has entailed the destruction of livelihoods of people dependent on such resources.

The growth of the services has been concentrated mainly in communication, business services, and financial services. It is known that these sectors are not employment generating areas. Why has this been so? As pointed out by Agrawal, some economists like James Gordon and Poonam Gupta (“Understanding India’s Service Sector”, IMF Paper, 2004) show that the normal pattern is for the share of services sector employment is to rise faster than the share of output. This means that labour productivity in the services sector increases. However, in sharp contrast, in India, the labour share in services employment has been mostly flat. This implies that productivity in the Indian services has been increasing over time. Some estimates show that software services, telecommunication and banking are precisely the segments which have been driving growth in the services sector. But at the same time, these are also the sectors which are characterised by low employment and skill intensive employment.

The 66th round of the National Sample Survey data pointed out that among the new employment created in the Indian economy, about 51% were self-employed, about 33.5% were casual labourors and only 15.6% were regular or salaried workers

Comment