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Journalism of Courage
Over the past two decades, India’s economic growth has increasingly been driven by the services sector, particularly in Information Technology (IT), banking, and finance. But the expansion of the services sector since the turn of the century has coincided with a noticeable decline in traditional industries such as apparel and footwear, which provide livelihoods for millions of low-skilled workers. The stagnation in manufacturing, which continues to remain at around 14 per cent and well short of the targeted 25 per cent, has exacerbated the divide between high-skilled and low-skilled jobs.
Although job creation and income levels for a large pool of qualified IT professionals have increased, particularly with multinational companies establishing data analytics and software development hubs known as Global Capability Centres (GCCs) in India, the country’s manufacturing weaknesses have caused it to fall behind Bangladesh in textiles, Thailand in machinery, and Vietnam in electronics. This has led to a consistent decline in the creation of low-skilled jobs across the country.
Economists have highlighted that a country with a population of 1.4 billion cannot rely solely on the services sector and will need all sectors of the economy to contribute to job creation. According to the Economic Survey 2023-24, India needs to create nearly 7.85 million jobs annually in the non-farm sector to accommodate the growing workforce. However, the Centre for Monitoring Indian Economy reported that the national unemployment rate surged from 7 per cent to 9 per cent in June 2024.
Decline in Labour-Intensive jobs
A new World Bank report released earlier this month identified a worrying trend: export-related jobs in India have been declining over the past decade. Direct employment linked to exports peaked at 9.5 per cent of total domestic employment in 2012 but fell to 6.5 per cent in 2020. The World Bank attributed this decline to the dominance of the service sector and high-skill manufacturing in India’s export basket. Since these sectors are less suited to absorbing large portions of the Indian workforce, job creation due to trade has diminished.
The World Bank’s observation aligns with the stark contrast between the growth of services and manufacturing exports from India. While India’s services exports constitute 4.3 per cent of the world’s commercial services exports, goods exports barely account for 1.8 per cent of the global goods market, resulting in low job generation in the manufacturing sector.
This is particularly concerning, as India has been unable to capitalise on the opportunity presented by China’s exit from low-skill manufacturing between 2015 and 2022. Despite a decrease in China’s participation in low-skill manufacturing of apparel, leather, textiles, and footwear, countries such as Bangladesh and Vietnam, and even advanced economies like Germany and the Netherlands, have become the primary beneficiaries of China’s shrinking market share.
With an aim to boost scale in the Indian textile sector, the Centre in 2023 had approved the setting up of seven PM Mega Integrated Textile Region and Apparel (PM MITRA) Parks to develop world-class infrastructure with an outlay of Rs 4,445 crore for a period up to 2027-28. Last month, the Cabinet Committee on Economic Affairs chaired by Prime Minister Narendra Modi had also approved setting up of 12 industrial smart cities under the National Industrial Corridor Development Programme (NICDP) with an estimated investment of Rs 28,602 crore. Query emailed to the Ministry of Commerce and Industry and Ministry of Textile over the widening skills gap remained unanswered till press time.
Rise in Global Capability Centres
Even as manufacturing in traditionally high-labour-intensive sectors has slowed, India has emerged as a key market for multinational companies to establish data analytics and software development centres, leveraging the large pool of qualified IT engineers in the country.
These centres, known as Global Capability Centres (GCCs), have proliferated in India. With close to 1,600 GCCs from multinational companies across various sectors, India has become to the world what China is for tech hardware. Leading companies from sectors such as modern trade, apparel, finance, consumer electronics, automobiles, and shipping have established major headquarters in India to manage core functions including design, inventory, supply chain management, and transportation.
While the transition from early business process outsourcing (BPO) days to the IT services sector boom and the establishment of more advanced GCCs has largely been evolutionary with minimal government support, the Centre is currently discussing a new IT policy with the industry, aiming to double the number of GCCs in the country over the next five years, as reported by The Indian Express.
However, despite the rise in GCCs, the IT services sector, a bellwether of Indian skilled employment, has recently seen a slump in hiring. Leading companies like TCS, Infosys, Wipro, HCLTech, and Tech Mahindra, major recruiters of young Indians, have witnessed a significant drop in their workforce in 2024 compared to 2023, with their collective headcount reducing by more than 61,000 individuals. It is worth noting that these companies still have a substantial existing bench strength and continue to be major employers of entry-level engineers in the country.
Declining Participation in Global Value Chains
Low participation in Global Value Chains (GVCs) is one reason India has struggled to generate sufficient trade-related jobs, according to the World Bank. Around 70 per cent of international trade involves GVCs, but despite rapid economic growth, India’s trade in goods and services has decreased as a percentage of GDP, and its participation in GVCs has declined over the past five years.
The World Bank’s firm-level data showed that Indian exporters with GVC linkages demonstrate stronger export performance and greater diversification in products and markets compared to those without such connections. However, India’s participation in GVCs has been declining due to issues such as difficulties in procuring raw materials and high transport costs.
In May 2023, NITI Aayog CEO BVR Subrahmanyam also highlighted that India’s limited integration into GVCs is a significant issue. For India to improve its participation, fundamental changes, including reducing tariffs and simplifying procedures, are required. Notably, India’s average tariffs rose to 18.1 per cent in 2022, up from 13 per cent in 2014, making India less competitive compared to countries like Vietnam, Thailand, and Mexico.
High Tariffs on Input Materials
Economists have noted that high import tariffs on key intermediate inputs have raised production costs, making Indian producers less competitive in international markets. Tariff and non-tariff barriers are increasingly hindering India’s participation in global trade, according to several trade partners such as the US.
The WTO Tariff Profile for 2022 also indicates that India’s average Most Favoured Nation (MFN) tariff increased to 18.1 per cent, up from 17.6 per cent in 2019 and 13.4 per cent in 2016. Since 2017, India appears to have reversed the tariff reductions initiated in the early 1990s, now imposing higher import tariffs than its peers.
However, in the FY25 Union Budget, the government announced tariff reductions on various items, including medical equipment, mobile phones and related parts, critical minerals, solar energy products, marine products, leather and textiles, precious metals, electronics, petrochemicals, and telecom equipment.
While these tariff cuts are a positive step, the World Bank suggests that further tariff reductions across the board could help eliminate disparities and lower costs for imported intermediate inputs, particularly in capital-intensive industries relevant to both raw materials and labour-intensive sectors.
