Employment Trends and Challenges in India’s Services Sector

The services sector remains central to India’s economy and employment landscape. Recent data up to 2023-24 shows its growing share in total employment. A detailed analysis reveals structural challenges, especially in formal versus informal jobs. The sector’s employment elasticity has improved post-Covid but still lags behind agriculture and manufacturing. IASPOINT explores these trends, constraints to formalisation, and the impact of artificial intelligence (AI) on employment.

Rising Employment Share in Services Sector

The services sector’s share in India’s total employment rose from 26.9% in 2011-12 to 29.7% in 2023-24. This growth reflects the sector’s expanding role in the economy. However, output growth does not fully translate into proportional job creation. Employment elasticity, a measure of jobs created per unit of output growth, increased from 0.35 to 0.63 after Covid-19. Though positive, it remains less than one, indicating underperformance in job creation relative to output.

Formal and Informal Employment Composition

In the services sector, 51% of jobs are regular wage employment. Self-employment accounts for 45%, especially high in trade and transport. When informal jobs include regular wage jobs without social security, informal employment rises to 69%. Most enterprises (82.5%) are owner-driven or family-based, contributing to informality. Formalisation and job security are key policy priorities to improve employment quality.

Constraints to Formalisation

Informal employment arises from two sources – informal enterprises and formal enterprises lacking social security for workers. Formalisation imposes costs such as compliance, taxes, and reduced flexibility. For small informal enterprises, these costs threaten viability. Workers’ weak bargaining power and abundant low-skilled labour also reduce incentives for formalisation. Demand expansion, especially through income transfers to low-income groups, can encourage formalisation by increasing market size and profitability.

Social Security and Labour Market Flexibility

Formal enterprises hesitate to provide social security due to added costs and reduced flexibility. Outsourcing of services like cleaning and security reflects this trend. Government provision of social security as a public service could reduce employer burden. Existing schemes need enhancement to ensure minimum living standards and easy access. Financing such programmes may require broader income tax bases and lower exemption thresholds.

Impact of Artificial Intelligence on Employment

AI poses challenge to formal employment, especially in IT and fintech sectors. Studies suggest 40-50% of white-collar jobs could be lost to automation. While demand for AI specialists may rise, overall employment impact is likely negative due to reduced workforce needs. This calls for urgent reskilling and upskilling efforts. In the short term, AI-driven job losses may increase informal employment. Stimulating formalisation and resilient job creation is vital to mitigate this risk.

Questions for UPSC:

1. Point out the factors responsible for the growth of India’s services sector and analyse its impact on the overall economy.
2. Critically analyse the challenges of formalisation in India’s labour market and suggest policy measures to overcome them.
3. Estimate the potential effects of automation and artificial intelligence on employment patterns in developing countries, with suitable examples.
4. Underline the role of social security schemes in promoting labour welfare and discuss their financing challenges in India.

Answer Hints:

1. Point out the factors responsible for the growth of India’s services sector and analyse its impact on the overall economy.

1. Rapid expansion in sectors like IT, fintech, trade, transport, and communication driving services growth.
2. Increasing share of services in GDP and employment (29.7% employment share in 2023-24 from 26.9% in 2011-12).
3. Post-Covid rise in employment elasticity (0.35 to 0.63), indicating improved but still insufficient job creation relative to output.
4. Predominance of self-employment and informal enterprises supporting livelihood but limiting formal job growth.
5. Services sector growth boosts overall economic diversification and income generation but challenges remain in translating output growth into proportional employment.
6. Growth in services contributes to urbanization, rising consumer demand, and structural transformation of the economy.

2. Critically analyse the challenges of formalisation in India’s labour market and suggest policy measures to overcome them.

1. High compliance costs, taxes, and regulatory burdens deter informal enterprises from formalising.
2. Limited worker bargaining power and abundant low-skilled labour reduce incentives for formal jobs.
3. Formal enterprises avoid social security provision due to added long-term costs and reduced flexibility.
4. Predominance of owner-driven, family-based enterprises complicates scaling and formalisation.
5. Policy options – income transfers to low-income groups to boost demand and formal sector viability.
6. Government-provided social security schemes can reduce employer burden and encourage formalisation.
7. Rationalising tax regimes with broader bases and lower exemption thresholds can finance social security expansion.

3. Estimate the potential effects of automation and artificial intelligence on employment patterns in developing countries, with suitable examples.

1. AI and automation threaten 40-50% of white-collar jobs, especially in IT, fintech, and service sectors.
2. Demand rises for AI and big data specialists but overall employment likely declines due to reduced workforce needs.
3. Short-term risk of increased informal employment as displaced workers seek alternative livelihoods.
4. Need for urgent reskilling and upskilling to capture emerging high-paying AI-related jobs.
5. Developing countries face challenges due to limited social security and labour market flexibility.
6. Example – India’s IT sector may lose routine jobs but gain in AI-specialist roles, necessitating policy focus on education and training.

4. Underline the role of social security schemes in promoting labour welfare and discuss their financing challenges in India.

1. Social security schemes provide income protection, health insurance, and retirement benefits, improving worker welfare.
2. They reduce vulnerability of informal and formal sector workers lacking job security.
3. Government provision can ease employer costs and encourage formalisation of jobs.
4. Current schemes need enhancement to ensure minimum living standards and easy access.
5. Financing challenges include limited tax base, high exemption thresholds, and informal economy scale.
6. Possible solutions – broaden income tax base, lower exemption limits, and increase government budgetary support.