Structural Transformation of Jobs from Manufacturing to Services: Will It Work for India?

Abstract

India has struggled with the question of what to make in India—manufacturing or services. The Economic Survey 2014–2015 articulated that this was a false choice. Instead, India faced a choice between two disparate types of sectors, unskilled-intensive and skilled-intensive, in both of which India possessed a comparative advantage. Two years down the line, the Economic Survey 2016–2017 suggested that labour-intensive sectors may be more effective in addressing India’s job challenge. The World Economic Outlook Report 2018 has suggested that a rapid replacement in the share of manufacturing jobs by services is likely to have a welfare-enhancing effect on developed and developing economies alike. As the Economic Survey 2014–2015 suggested that this is both a positive and a policy question. This article re-examines this question of manufacturing versus services in the Indian context to contribute to this debate. Specifically, we use the KLEMS India dataset to examine the dynamics of labour productivity associated with (a) a steady shift in the composition of the workforce towards the services sector and (b) investment in human capital proxied by changes in the labour quality index. Contrary to the WEO’s policy prescription, our findings suggest that an increasing prevalence of informal job contracts in services could potentially weaken the positive relationship between labour quality and labour productivity. Additionally, we observe that India’s labour force seems to be rapidly shifting towards services sub-sectors with lower productivity. This mechanism is likely to obstruct any potential gains in productivity, associated with an optimal relocation of factors of production. JEL codes: J21, J24, O14, C31, C33