India needs to recalibrate its strategies and adopt a holistic approach that bridges the gap between traditional sectors like manufacturing and emerging sectors like new-age services
India's journey post-economic reforms reveals a consistent decline in the capital-output ratio coupled with a noticeable growth in the capital-labour ratio. The reduction in capital-output ratio signals an enhanced capital productivity due to technological innovations, whereas the increase in capital-labour ratio indicates a shift towards more capital-intensive production methods driven by technological advancements in manufacturing. This dual trend could lead to an excess of labour, especially as agriculture is already experiencing a surplus. With potential negative impacts on overall employment, it becomes crucial to pivot towards the service sector, which not only dominates in terms of national output but also holds significant employment generation potential.
India has witnessed a notable rise in the capital-worker ratio (doubling from 2.8 between 1994-2002 to 5.6 between 2003-2017), pointing to a move towards greater capital intensity, particularly in the manufacturing and utilities sectors. On the other hand, the capital-output ratio has been on the decline. Remarkably, India's capital intensity now surpasses other nations at similar developmental stages, even outperforming China. Moreover, broad sectoral trends indicate an increase in the capital-output ratio within primary and secondary sectors, while there has been a sharp decline in the tertiary sector. Despite the rising capital-worker ratio, the aggregate stagnant trend in the capital-output ratio (estimated at 3.2 as of 2017), is largely due to the tertiary sector's expanding contribution to national income without commensurate growth in capital intensity of production.
The capital-output ratio has been on the decline. Remarkably, India's capital intensity now surpasses other nations at similar developmental stages, even outperforming China.
The surge in capital intensity can be attributed to a decrease in relative capital costs, owing to subsidies for technological upgrades in export-oriented sectors, and labour market inflexibilities. However, this rise in capital intensity need not necessarily translate into improved productivity, calling into question the efficiency of capital utilisation. Moreover, this trend has adversely affected job creation, with national employment growth rates declining from 1.4 percent during 1999-2011 to -0.2 percent in 2011-17. Real wage increases in the manufacturing sector, correlated with higher capital-labour ratios, highlight the need for price controls and enhanced support for Micro, Small and Medium Enterprises (MSMEs) to foster job growth. However, the trend of substituting unskilled labour with capital, though beneficial for some industries, indicates a reluctance to choose labour preservation over capital investment.
The services sector emerges as a key player in employment generation, owing to its increasing share in national employment and high employment elasticity. Accounting for over half of the national income and about 30.7 percent of total employment, this sector is pivotal for employment expansion efforts. However, the reality that most low-skilled workers aspire to join the manufacturing sector, with only skilled workers finding opportunities in modern services, underscores the importance of investing in skill development and diversification. This tendency suggests a balanced migration from agriculture to both manufacturing and services for enhanced growth and improved living standards.
Table 1: Labour Income Share in Broad Sectors
| Broad Sectors | 1980-81 | 1993-94 | 2002-03 | 2007-08 | 2017-18 |
| Agriculture, Forestry and Fishing | 57.6 | 56.1 | 54.8 | 55.1 | 55.9 |
| Mining and Quarrying | 58.4 | 30.9 | 29 | 27.9 | 29 |
| Manufacturing | 38.9 | 30.7 | 30 | 25.7 | 30.5 |
| Electricity | 35.5 | 23.4 | 26.8 | 31 | 33.6 |
| Construction | 79.1 | 79.9 | 78.4 | 71.3 | 77.5 |
| Services | 57.8 | 54.8 | 52.5 | 45.6 | 53.3 |
| Market Services | 51.9 | 44.8 | 42.7 | 38.4 | 44.9 |
| Non-Market Services | 61.9 | 64.4 | 65.2 | 57.3 | 65.8 |
| Total economy | 55.1 | 50.7 | 49.5 | 45.2 | 50.8 |
Source: RBI
Despite the conventional growth pathway from agriculture to manufacturing and then services, India has leapfrogged directly to services as its primary growth driver. This shift from agriculture to services is not a new phenomenon—it picked up pace in the 1990s with the Information and Communication Technology (ICT) revolution and the services sub-sectors have since exhibited a higher growth rate than GDP. The export expansion through the take-off of software and IT-enabled services (ITES) caused the services sector to occupy a greater share of national income than industry—a characteristic which is usually associated with middle-income countries. However, given India’s population and demography, the services growth can be labelled modest with greater scope for acceleration in the future.
With the nation integrating 8-10 million new workers annually into the workforce while still facing a 6.5 percent unemployment rate, substantial job creation in the private sector has become imperative. However, the service sector's growth is uneven, where value addition is skewed towards high-tech services, while job opportunities are mostly found in low-skill, low-value-added services. Additionally, the skill gap or mismatch among Indian graduates further complicates the situation, making the services sector a viable employment source only in the foreseeable future. Bridging the manufacturing and services growth models, alongside significant investment in skill development and higher education, appears to be a viable solution to address employability gaps in Indian labour markets.
Table 2: Distribution of Employment in broad sectors of the Indian Economy: 1980-2017 (in percentage)
| Broad Sectors | 1980-81 | 1994-5 | 2003-04 | 2008-09 | 2017-18 |
| Agriculture, Forestry and Fishing | 69.8 | 63.5 | 57.4 | 51.9 | 42.3 |
| Mining and Quarrying | 0.5 | 0.7 | 0.6 | 0.6 | 0.4 |
| Manufacturing | 10.4 | 10.4 | 11.3 | 11.6 | 11.5 |
| Electricity | 0.3 | 0.3 | 0.3 | 0.3 | 0.5 |
| Construction | 2 | 3.8 | 5.3 | 7.9 | 11.6 |
| Services | 16.9 | 21.4 | 25.1 | 27.6 | 33.8 |
| Market | 9.1 | 12.6 | 16 | 17.8 | 22.2 |
| Non-Market | 7.8 | 8.7 | 9.1 | 9.8 | 11.6 |
| Total economy | 100 | 100 | 100 | 100 | 100 |
Source: RBI
The skill gap among Indian workers represents a significant barrier to fulfilling the service sector's labour demands despite various national schemes aimed at addressing this issue. The Skill India Mission, aimed at job-role-specific training aligned with market demands, and the National Apprenticeship Promotion Scheme (NAPS), which promotes apprenticeships, are notable efforts in this direction. The emergence of new service categories within startups and in content creation, supported by governmental incentives like the National Content Creators Awards, induces job-seeking and engagement in employment opportunities in the creator economy.
The Skill India Mission, aimed at job-role-specific training aligned with market demands, and the National Apprenticeship Promotion Scheme (NAPS), which promotes apprenticeships, are notable efforts in this direction.
However, challenges such as the lack of standardised training, inadequate industry engagement, inefficient use of funds, and low placement rates are critical areas that need improvement. The Indian government's encouragement of startups through Startup India and its focus on inclusive growth via Stand-up India, alongside infrastructure and business-facilitation programs like Digital India, Bharatmala Pariyojana, and Ease of Doing Business reforms, are steps towards mitigating these challenges. These initiatives aim to remove infrastructural and bureaucratic obstacles, fostering a more business-friendly environment.
A recent study focusing on India’s 2030 employment landscape projects a 22 percent rise in employment, denoting an equivalent 97 basis point decline in unemployment rates accompanying India's achievement of a US$ 5 trillion economy goal by 2028. In this context, job creation in the services sector and through the expansion of industrial value chains allied with the service sector exhibit massive potential in urban centres—poised to witness significant job creation in the long run, with an employment elasticity of 0.12. These dynamics underscore the urgency for India to recalibrate its strategies and adopt a holistic approach that bridges the gap between traditional sectors like manufacturing and emerging sectors like new-age services. The Indian workforce is growing, with nearly 600 million people aged between 18 and 35 years in the country. Through strategic interventions to address employability gaps, India can unlock the full potential of the demographic dividend embedded in its young labour force, ensuring that its economic growth is sustainable and inclusive for all.
(Note – For a more detailed analysis, please see - Arya Roy Bardhan, Debosmita Sarkar, Soumya Bhowmick and Nilanjan Ghosh, India Employment Outlook 2030: Navigating Sectoral Trends and Competencies, April 2024, Observer Research Foundation.)
Arya Roy Bardhan is a Research Assistant at the Observer Research Foundation.
Debosmita Sarkar is a Junior Fellow with the Centre for New Economic Diplomacy at the Observer Research Foundation.
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Arya Roy Bardhan is a Research Assistant at the Centre for New Economic Diplomacy, Observer Research Foundation. His research interests lie in the fields of ...
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Debosmita Sarkar is a Junior Fellow with the SDGs and Inclusive Growth programme at the Centre for New Economic Diplomacy at Observer Research Foundation, India. ...
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