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28 Oct

India’s productivity challenge is especially steep in service sectors

India’s productivity challenge is especially steep in service sectors

Value-addition per worker needs to rise sharply in several fields for the country to enhance prosperity and reduce inequality

It is known that productivity is the key to economic prosperity. How do we raise the productivity of service workers? This is one of the biggest challenges that India faces which hasn’t yet received much attention.

Why is this important? First, low and medium-productivity service sectors (services except real estate, business and professional services) and construction account for over 70% of non-farm employment in India. This is based on productivity measured via a crude proxy in terms of real gross value added per worker. Second, there is still no proven method to raise productivity in these service sectors. Third, while India aims to expand employment in manufacturing, there is no doubt that today’s low and medium-productivity services would continue to generate most jobs going ahead.

In 2004-05, around 66% of those employed in India’s non-farm economy were working in construction, trade, transport and communication, hotels, restaurants and personal services, along with public administration and defence. By 2018-19, this proportion had increased to 72%. Employment in high-productivity services—namely business, real estate, and professional services—as a share of non-farm employment rose to 5.8% from 3.8% during the same period.

Over these 15 years, the share of low-medium productivity services in real gross value added in the non-farm economy fell by 10 percentage points to 47% and that of high-productivity services rose by 7 points to 25%. As a result, the gap between real gross value added per person between the two rose rapidly (see trend chart). In line with economic theory, the productivity of manufacturing seems to lie between high-skill and low-medium skill services, with construction the worst performer.

In 2004-05, around 66% of those employed in India’s non-farm economy were working in construction, trade, transport and communication, hotels, restaurants and personal services, along with public administration and defence. By 2018-19, this proportion had increased to 72%. Employment in high-productivity services—namely business, real estate, and professional services—as a share of non-farm employment rose to 5.8% from 3.8% during the same period.

If a large number of young Indians are to find jobs as gig workers such as cab drivers, delivery partners, security- and personal-service workers and retail-sales executives, how do we measure their efficiency? The current matrix of going by the time taken to deliver an order, for example, is not appropriate; to overcome the negative impact of factors such as traffic conditions that are beyond a worker’s control, a worker may end up taking excessive risk in terms of vehicle speed to deliver orders on time.

Further, sectors such as manufacturing and traditional retail have restricted work hours. In the former, it leads to concentrated production efforts, while in services traditionally, customers are required to make purchases during specific time bands, which results in higher sales per hour. However, with relatively new services such as ‘any day, any time deliveries’, longer opening hours lead to dispersed consumer orders, which in turn could result in fewer hourly orders against the counter-factual situation of limited hours.

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