India’s Service Sector Is Great for GDP, but It Does Little for the Job Crisis

Although the sector forms the major part of India’s GDP, it absorbed less than a third of the workforce in 2019.

In 2019, the service sector absorbed less than one-third of India’s workforce. 

(The Quint)

In December 2021, Urban Company filed a suit against its women ‘partners’ who were protesting against the company’s new policies. The new policies, amongst other things, proposed to penalise the partners if they did not complete a minimum of 40 orders. This incident sheds light on the precarity of jobs for those employed as ‘gig workers’. Gig work is a part of the service economy and the acceleration of this work has refuelled the interest in the question of whether India can provide a new model of growth led by the service sector.

Unlike most developed countries where the manufacturing sector played an important role in development, India leapfrogged from agriculture to services, bypassing manufacturing.

The contribution of services to India’s output started increasing at much lower levels of income compared to the developed nations.

Some scholars argue that India can pave the way for a service-led growth experience. We will examine below that this argument is flawed and that the different segments of the service sector need to be looked at separately. Further, we need to see if growth led by the service sector has led to the wellbeing of the people. We will look at the three aspects: divergence between the contribution of the service sector to output and to employment, heterogeneity of the service sector wherein the segments contributing most to the output fail to provide ‘decent’ employment, and conditions of employment in the relatively new but growing segment of services generated by the ‘gig economy’.

An Uneven Keel

Economic activities are usually categorised into three sectors: primary (extractive activities such as agriculture), secondary (transformative such as manufacturing), and tertiary, or the service sector. Today, more than half of India’s GDP comes from the service sector. In 2019-20, services contributed 55.8 per cent of the Net Value Added (NVA). A cursory look at Graph 1 shows a steady rise in the share of the service sector in NVA in the past decade.

Graph 1- Source: Statement 1.7 of NAS 2021 (This is NVA at basic prices)

Data from another publication helps us to take a long view of the contribution of the service sector. Its contribution rose from 29.54 per cent in 1950-51 (at 2004-05 prices) to 54.27 per cent of Gross Value Added (GVA) in 2020-2021 (at 2011-12 prices).

Graph 2- Source: https://statisticstimes.com/economy/country/india-gdp-sectorwise.php

However, before celebrating this achievement, we need to look at the extent and nature of employment generated by the service sector. In India’s case, the contribution of this sector to employment is the lowest, both relative to other countries and relative to output. Although services form the major part of India’s GDP, the service sector provided jobs to around only one-fourth of India’s workforce in 2016-17.

In 2019, the service sector absorbed less than one-third of India’s workforce. Although there has been some rise in the proportion of workers employed in the sector, it is less relative to the sector’s contribution to GDP. Among the top 15 services producer countries, India employed the lowest proportion of the workforce in this sector.

Graph 3- Source: Economic Survey 2016-17 as cited by www.equitymaster.com

The 'Surplus' Sector

According to National Accounts Statistics, the service sector consists of Trade, Repairs, Hotels, and Restaurants; Transport, Storage, and Communication; Financial Services; Real Estate, Ownership of Dwelling & Professional Services; Public Administration and Defence and Other Services. Graph 4 shows the share of different segments of the service sector to NVA over the last decade.

Graph 4- Source: Derived from Statement 1.7 of NAS (at constant prices), 2021

It is clear that all the sub-segments of the service sector do not contribute equally to the NVA. The most significant contributors are ‘trade, repairs, hotels, and restaurants’, and ‘real estate, ownership of dwellings and professional services’. These sub-segments are likely to provide low-skilled and low-income jobs such as waiters and delivery personnel. On the other hand, ‘financial services’ are likely to employ educated and skilled youngsters at possibly high incomes, but this segment contributes much less to India’s output.

A report brought out by Azim Premji University categorises services into three types: the surplus sector, the social sector, and the new services. The surplus sector represents a fall-back option for people with limited employment opportunities in agriculture and manufacturing. The employment generated here is often unorganised and characterised by low earnings. More than half of the employment generated by the service sector in 2016 was in the ‘surplus sector’.

Graph 5 shows that organised employment provided by many surplus sector sub-segments was less than 25 per cent. It also shows that ‘trade’, which contributes heavily to NVA, has a very low level of organised employment.

Graph 5 - Source: SWI 2018, page 84

The Travails of Gig Economy

The poor working conditions in some of the larger segments of the service economy are exemplified by the ‘blue-collared’ gig workers. Section 2(35) under The Code on Social Security 2020 defines gig work as “a person who performs work or participates in a work arrangement and earns from such activities outside of traditional employer-employee relationships”. Such a definition allows the company to simply name their workers as ‘partners’ and deprive them of their basic labour rights.

A recent report on gig workers shows that while ‘white-collar’ gig workers might be able to enjoy the flexible hours and supplementary income associated with gig work, most ‘blue-collared’ gig workers such as cab drivers and delivery personnel are stuck in precarious, low-paying jobs with long working hours.

These workers often have to bear the costs and the risks associated with the job.

According to the same report, many of these workers rely on gig work as their primary source of livelihood and struggle to make minimum wages. Additionally, companies exert tremendous control over them while presenting them as ‘partners’.

Why Service-Led Growth Isn't a Solution for India

When we look at India as a possible model for service-led growth, we should remember that the growth of a country cannot be independent of the development of its people. The arguments given above show that the service sector, as a whole, has failed not only to provide adequate employment, but also that for a large number of people, the employment provided is precarious and of informal nature.

It is clear that India’s service sector is very heterogeneous where on one hand, there are low-income, low-productivity segments such as trade, and on the other hand, there are high-income segments such as financial services, which generate lesser employment. This means that despite India’s distinctive role in the rapid growth of services, the sector as a whole is unlikely to provide a route out of poverty.

(Anjali Aggarwal works as a fellow for Teach For India and completed her graduation in Economics from University of Delhi. Archana Aggarwal teaches Economics at Hindu College, University of Delhi. This is an opinion article and the views expressed are the authors' own. The Quint neither endorses nor is responsible for them.)