Jobs for low- and high-skilled workers: gap widening as manufacturing remains stagnant

Manufacturing is crucial to the local economy — and it's starved for  workers - Louisville Business First

Over the last twenty years, the services sector—particularly in the areas of information technology (IT), banking, and finance—has been a major contributor to India's economic growth. However, from the year 2000, there has been a discernible downturn in traditional industries like clothing and footwear, which employ millions of low-skilled workers, coinciding with the growth of the services industry. The gap between high- and low-skilled occupations has become wider as a result of the manufacturing sector's continued stagnation, which has kept it at 14% rather than the desired 25%.

The establishment of Global Capability Centres (GCCs) by multinational companies in India has led to an increase in employment and income levels for a large pool of qualified IT professionals. However, India's manufacturing weaknesses have caused it to lag behind Bangladesh in textiles, Thailand in machinery, and Vietnam in electronics. This has caused the number of low-skilled employment being created nationwide to steadily fall.

A nation with 1.4 billion people cannot rely only on the services sector to create jobs; instead, all areas of the economy must contribute to employment development, according to economists. The Economic Survey 2023–24 estimates that in order to accommodate the expanding workforce, India must produce roughly 7.85 million jobs yearly in the non-farm sector. But according to the Centre for Monitoring Indian Economy, in June 2024, the country's jobless rate increased from 7% to 9%.

Reduction in Jobs Requiring High Labor

A concerning trend was noted in a recent World Bank report that was published earlier this month: over the previous ten years, the number of export-related jobs in India has decreased. Export-related direct employment reached a peak in 2012, accounting for 9.5% of all domestic employment, but it declined to 6.5% by 2020. The dominance of the service industry and high-skill manufacturing in India's export basket, according to the World Bank, is to blame for this fall. Trade has not created as many jobs as it once did since these sectors are not as well-suited to employing huge segments of the Indian workforce.

The World Bank's observation is consistent with the striking disparity between India's growing exports of manufactured goods and services. India's services exports account for 4.3% of the world's commercial services exports, while its products exports only make up 1.8% of the world's goods market, meaning that employment creation in the manufacturing sector is relatively low.

This is especially troubling because, between 2015 and 2022, China's withdrawal from low-skill manufacturing offered India with an opportunity that they have failed to seize. China's share of the low-skill production of clothing, leather goods, textiles, and footwear has decreased, but the countries that have benefited most from China's declining market share are Bangladesh, Vietnam, and even developed nations like Germany and the Netherlands.

The Center approved the establishment of seven PM Mega Integrated Textile Region and Apparel (PM MITRA) Parks in 2023 with the goal of expanding the scale of the Indian textile industry. The parks will develop world-class infrastructure at a cost of Rs 4,445 crore, with construction scheduled to begin in 2027–2028. The National Industrial Corridor Development Programme (NICDP), which is expected to require an investment of Rs 28,602 crore, sanctioned the establishment of 12 industrial smart cities last month under the direction of Prime Minister Narendra Modi's Cabinet Committee on Economic Affairs. Up until the time of publication, the Ministry of Commerce and Industry and the Ministry of Textile had not responded to an email inquiry regarding the growing skills gap.

Increase in Centers of Global Capability

India has emerged as a crucial market for global corporations to construct data analytics and software development centers, taking advantage of the enormous pool of qualified IT professionals in the nation, even as production in traditionally high-labor-intensive sectors has slowed.

Global Capability Centers (GCCs) are centers of excellence that have spread throughout India. With around 1,600 GCCs from international corporations in a range of industries, India has emerged as the global leader in computer hardware, comparable to China. Prominent corporations across several industries, including modern trade, fashion, finance, consumer electronics, vehicles, and shipping, have established significant offices in India to oversee essential activities including supply chain management, design, inventory control, and transportation.

While the development of more sophisticated GCCs and the shift from the early days of business process outsourcing (BPO) to the boom in the IT services sector have mostly occurred naturally with little assistance from the government, the Center is currently in talks with the sector about a new IT policy that would double the number of GCCs in the nation over the next five years.

The IT services industry, a leading indicator of skilled employment in India, has recently experienced a decline in recruiting, notwithstanding the growth of GCCs. Prominent firms that hire a lot of young Indians, including as TCS, Infosys, Wipro, HCLTech, and Tech Mahindra, have seen a decline in their workforce in 2024 compared to 2023, with a headcount reduction of over 61,000. It's important to remember that these businesses still employ a large number of entry-level engineers nationwide and have a sizable bench strength.

Reduction in Involvement in International Value Chains

The World Bank claims that one reason India hasn't been able to provide enough trade-related jobs is the country's low participation in global value chains (GVCs). 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.

Based on firm-level statistics from the World Bank, Indian exporters with GVC ties outperform those without them in terms of export performance and product and market diversification. However, because of problems including high transportation costs and challenges obtaining raw materials, India's participation in GVCs has been decreasing.

BVR Subrahmanyam, CEO of NITI Aayog, also emphasized in May 2023 the importance of India's poor integration into GVCs. Fundamental adjustments are needed for India to increase its participation, such as lowering rates and streamlining processes. Significantly, India's average tariffs increased from 13% in 2014 to 18.1% in 2022, which reduced India's competitiveness in relation to nations like Vietnam, Thailand, and Mexico.

Excessive Input Material Tariffs

High import taxes on essential intermediate inputs have increased production costs, which has reduced the competitiveness of Indian businesses in global markets, according to economists. Many trading partners, including the US, claim that tariff and non-tariff barriers are making it harder for India to participate in international commerce.

India's average Most Favoured Nation (MFN) tariff climbed to 18.1% in 2022 according to the WTO Tariff Profile, from 17.6% in 2019 and 13.4% in 2016. India looks to have undone the tariff reductions that were started in the early 1990s since 2017, and it is currently levying greater import tariffs than its counterparts.

The government did, however, announce tariff reductions on a number of goods in the FY25 Union Budget, including telecom equipment, medical equipment, mobile phones and related parts, marine products, solar energy products, critical minerals, leather and textiles, electronics, petrochemicals, and telecom equipment.

Although the World Bank views these tariff reductions as a positive step, more general tariff reductions may help end disparities and bring down the cost of imported intermediate inputs, especially in capital-intensive industries that are important to both labor- and raw material-intensive sectors.