Which sectors generate the most jobs in India?

New Delhi: India’s economic liberalisation in 1991 was based on the assumption that it would make local industries more competitive by helping them capture world markets, which in turn would enable millions of Indian workers to move from low-productivity agricultural jobs to high-productivity factory jobs.

To what extent has this dream been realized a quarter of a century later?

Data from the KLEMS India employment and productivity database released recently by the Reserve Bank of India (RBI) shows that part of the promise has indeed been fulfilled. Millions of workers have indeed left farm jobs for non-farm jobs, and the pace of this transformation seems to have accelerated since the mid-2000s, when the engine of economic growth also gathered steam.

However, the data also show that the nature of job creation has been quite skewed in the post-liberalization era. While the rate of non-farm job creation in the post-liberalization era (3.39% per annum) is similar to the rate of job creation in the decade immediately preceding liberalization (3.59% per annum), job growth in the post-liberalization era has been very narrowly concentrated in a few sectors.

Data shows that nearly one-third of the new jobs added to the Indian economy in the post-liberalization era were in the construction sector alone. The construction sector was a major job creator even in the 1980s, but its share of new jobs was much lower then.

Since 1990-91, the construction sector has added almost as many new nonfarm jobs as the next four largest job-generating sectors—trade, miscellaneous services, transportation and warehousing, and education—combined. While the nation’s construction boom has helped people looking to get out of farm work find alternatives, it has not helped them move into highly productive work. As the accompanying table shows, construction has one of the lowest productivity rates among the largest job-generating sectors.

Undoubtedly, the sector’s productivity level is around 58% higher than that of the agricultural sector (agriculture, hunting, forestry and fishing). The construction sector’s productivity is also higher than that of the gems and jewellery and hotels and restaurants sectors. Nevertheless, the construction sector stands out as the only sector among the country’s major employers to have seen a decline in productivity over the past few years, even as more workers have joined its ranks. One reason for this may be the low level of job quality (measured in terms of workers’ education and experience) in the construction sector, suggests the KLEMS database.

While the agricultural sector has indeed contracted, economic transformation has been limited by a shortage of productive jobs and a lack of skilled workers.

One caveat is worth noting: Several of the KLEMS figures are estimated by interpolating (or extrapolating) from past employment and production data. So, one shouldn’t draw too much conclusions from year-on-year changes. Nevertheless, the database provides a fair sense of broad, long-term trends in India’s labor market.

In other Asian economies where there has been a shift from low-productivity jobs to high-productivity jobs, the manufacturing sector has played a large role in this shift. In India, the role of the manufacturing sector has been very limited.

Although the construction and service sectors have increased their share of total employment, the share of the manufacturing industry has remained almost the same as three decades ago.

Manufacturing accounted for one tenth of total employment in the 1980s and still accounts for about one tenth of total employment. Within manufacturing, the share of labour-intensive industries such as textiles and leather has actually declined over the past few decades.

Some economists, such as Pranab Bardhan of the University of California at Berkeley, argue that India’s tax system harms workers because it subsidizes investment in capital rather than labor, and that it should be replaced with labor subsidies.

The question remains whether the Indian political class has the will and imagination to implement policies that encourage investment in people over machines at a time when automation and artificial intelligence are threatening jobs around the world.

Dipti Jain in Bengaluru contributed to this article.

This is the first of a two-part data journalism series on India’s job challenges. The second part will examine India’s skill and education deficits in the job market.