Services sector needs employment-intensive structural transformation

The services sector is a key driver of the Indian economy, contributing around 55 per cent of gross value added (GVA) and employing roughly 188 million. Two recent NITI Aayog reports on the sector’s employment trends and GVA dynamics, however, reveal that behind the headline numbers lies a tale of dualism. Over the past six years, the sector has added nearly 40 million jobs, emerging alongside construction as India’s main labour absorber. Yet, while the sector’s employment elasticity, a measure of how growth translates into jobs, rose sharply to 0.63 post-Covid, this revival hides contrasting realities. High-value segments such as information technology (elasticity 0.88), finance (0.95), health care (0.94), and transport (0.89) are thriving, buoyed up by digitisation, platform economies, and global demand. But these subsectors employ only a fraction of the workforce. In contrast, trade, education, and personal services — the traditional pillars of employment — remain labour-intensive but exhibit weakening job responsiveness. Subsectors such as telecommunications (-0.79) and insurance (-1.31) report persistently negative elasticities, reflecting capital-intensive growth, which displaces jobs rather than create them.

 

This “growth-employment disconnect” seems to be defining India’s services story. Modern services are capital-intensive and globally tradable, generating high productivity but few jobs. Traditional services are labour-intensive but low-value, sustaining livelihoods. The result is a vast “missing middle”, a divergence between elite, globally connected jobs and millions of informal-service livelihoods, which lack stability or social protection. Nearly 87 per cent of services workers remain outside formal safety nets, and even among the educated, informality persists. The gender divide is equally striking. Only 10.5 per cent of rural women are engaged in services, as against 60 per cent in urban areas. Rural women earn just ₹213 a day, less than half of men’s wages. However, in certain segments of information technology (IT), health care, and education, women generally earn more than men, a rare case of parity in India’s labour market.

 

Geographically, India’s services transformation mirrors its broader economic disparities. Karnataka, Maharashtra, Telangana, and Tamil Nadu dominate high-value services like IT, finance, and real estate. Bihar, Madhya Pradesh, and Uttar Pradesh, meanwhile, remain tethered to traditional, low-productivity activities like retail and trade. Research finds a strong correlation between a state’s services-sector intensity and per capita income — the more a state relies on modern services, the richer it becomes. Encouragingly, there are early signs of “catch-up”: Lagging states are now growing faster in services, even if convergence remains incomplete.

 

Clearly, these numbers underscore why the sector’s next phase of structural transformation needs to be employment-intensive. To this end, a set of policies has been proposed, including formalising service enterprises and protecting gig workers and those in small and medium enterprises; investing in women’s and rural digital skills; embedding technology and green skilling; and developing Tier-II and -III cities as new services hubs. Further, the government’s plan to launch a comprehensive “Annual Survey of Service Sector Enterprises” early next year also marks a turning point. Access to granular, enterprise-level data, covering everything from hospitality and logistics to fintech, signals increased attention towards the sector and fostering its role in generating employment at scale.