Integrating services into production can create more jobs, says CSEP

India’s manufacturing sector could generate more jobs by embracing the rising trend of servicification and integrating services into firms’ production, sale, and export processes, according to a new working paper by the Centre for Social and Economic Progress (CSEP).

 

Servicification has a positive correlation with employment across a range of sectors, especially textiles, electronics, rubber, plastics and machinery, the paper, ‘Servicification of Manufacturing: India’s Potential and Policy Priorities’, stated.

 

Services like construction, transport, and distribution play a significant role in supporting job creation in the manufacturing sector, the paper, based on empirical estimates, concluded.

 

Speaking with Business Standard, economist and visiting fellow at CSEP, Anirudh Shingal, who authored the paper, said that servicification contributes positively to manufacturing employment in India through two key channels- the use of imported service inputs and the upstream positioning of manufacturing firms in global value chains (GVCs).

 

“The positive association between servicification and manufacturing employment is observed via the backward GVC channel i.e. reliance on imported intermediate inputs that are services,” he noted. The second mechanism, he added, is through upstream linkages. “Services that are used as inputs in industries that produce inputs themselves, rather than producing for selling directly to final consumers, also tend to be associated with more employment.” 

 

On whether servicification can be linked to the chasm between soaring corporate profits and stagnating wage growth that the government has expressed concern about, Shingal acknowledged compositional shifts in manufacturing employment, such as the outsourcing of previously in-house service tasks, but said more granular data is needed to conclude.

 

“To know how outsourcing affects wage bills or employment categories, we would need data that can clearly identify which jobs or activities were moved out of the factory floor,” he said.

 

He emphasised that servicification appears to support employment in less skill-intensive segments of manufacturing as well. “The positive association between servicification and manufacturing employment is also observed in less skill-intensive sectors, which tend to be low-wage sectors. This could, over the long run, put upward pressure on wages in those segments as demand for such jobs increases, thereby reducing the wage-gap,” he added.

 

With the Centre looking to revitalise manufacturing through initiatives like the Production Linked Incentive (PLI) scheme, the paper has suggested that a more service-integrated view of industrial policy could help unlock employment gains, especially for low-skilled workers transitioning from agriculture. 

 

According to Shingal, one of the most critical policy takeaways is the need to dismantle restrictive trade barriers in services. “If there are unnecessary barriers to importing services, that not only affects manufacturing output and exports, but also manufacturing employment, as our findings suggest,” he said.

 

The OECD’s Services Trade Restrictiveness Index (STRI) indicates that India maintains relatively higher restrictions than OECD and non-OECD averages in areas like rail freight, storage, and courier services.

 

The paper also bats for the joint liberalisation of goods and services, whether unilaterally or under preferential trade agreements. This approach, Shingal said, acknowledges the increasing complementarity between goods and services and helps minimise adjustment costs of phased reforms.