Widening Skills Gap in the Job Market | 19 Sep 2024

Source: IE

Why in News?

India's job market is experiencing an increasing divide between low-skilled and high-skilled employment. Over the past two decades, the services sector—particularly IT, banking, and finance—has been a major driver of economic growth. In contrast, traditional industries such as apparel and footwear, which provide low-skilled jobs, are stagnating.

What are the Current Trends of India’s Manufacturing & Service Sector?

• Service Sector:
  
  • Contribution to GDP and Employment: India's services sector contributes over 50% to the  Gross Domestic Product (GDP) and employs approximately 30.7% of the population while serving as a global hub for software services.
  • Recovery & Growth: The services sector made a remarkable recovery in FY 2022-23, posting a Year-Over-Year (YoY) growth rate of 8.4%. 
    • The Indian IT outsourcing market is projected to grow by 6–8% between 2021 and 2024.
  • GII Ranking: In September 2023, India maintained its 40th position in the Global Innovation Index (GII), driven by advancements in technologically dynamic, internationally tradable services. 
  • FDI: The service sector also attracted the highest Foreign Direct investment (FDI), receiving USD 109.5 billion from April 2000 to March 2024.
• Manufacturing Sector:
  
  • Manufacturing Stagnation: Manufacturing remains at around 14% of GDP, below the targeted 25%, widening the gap between high-skilled and low-skilled jobs.
  • Lagging in Manufacturing: India's manufacturing sector lags behind competitors such as Bangladesh, Thailand, and Vietnam, affecting low-skilled job creation.
    • Economists stress that India cannot rely solely on the services sector due to its large population of 1.4 billion.
  • Job Creation Needs: The Economic Survey 2023-24's estimate of needing 7.85 million non-farm jobs annually highlights the broader requirement for creating jobs across various sectors to accommodate the growing workforce.
    • The national unemployment rate increased from 7% to 9% in June 2024 as per the Centre for Monitoring Indian Economy (CMIE).

What are the Factors Contributing in the Decline in Employment in the Manufacturing Sector?

• Manufacturing Stagnation: Stagnation in manufacturing (contributing mere 14% of GDP) has hindered job creation in labour-intensive sectors.
  • India's services exports make up 4.3% of global commercial services exports, while its goods exports account for only 1.8% of the global goods market. This imbalance contributes to low job creation in India's manufacturing sector.
• Shift Towards High-Skill Industries: The rise of Global Capability Centres (GCCs) bypassing the manufacturing sector has led to increased job opportunities for high-skilled IT professionals, but this shift has not translated into sufficient low-skilled job creation. 
  • GCCs have proliferated in India, with nearly 1,600 established by multinational companies, focusing on data analytics and software development.
• Declining Export-Related Jobs: A World Bank report noted that export-related jobs in India have decreased from 9.5% of total domestic employment in 2012 to 6.5% in 2020. 
  • This decline is attributed to the dominance of India's service sector and high-skill manufacturing in its export basket, which are less effective at creating jobs for the broader workforce, leading to reduced job creation through trade.

• Limited Participation in Global Value Chains (GVCs): India's declining participation in GVCs has limited job creation, despite GVCs driving 70% of global trade. 
  • Challenges like raw material shortages and high transport costs have reduced India's trade involvement, according to the World Bank.
• High Tariff: High tariffs on intermediate goods have increased production costs for Indian manufacturers, reducing their global competitiveness. 
  • India's average tariff rose to 18.1% in 2022, up from 13% in 2014, making it harder to compete with countries like Vietnam and Thailand and worsening the decline in low-skilled job opportunities.
• India's Missed Opportunity in Low-Skill Manufacturing: India has struggled to seize the opportunity presented by China's exit from low-skill manufacturing between 2015 and 2022. 
  • Despite China's reduced presence in industries like apparel, leather, textiles, and footwear, countries like Bangladesh, Vietnam, and even advanced economies like Germany and the Netherlands have benefited from China's shrinking market share.
• Lack of Skill Development: Only 16% of India's labour force has received skill training, resulting in low employability due to insufficient vocational skills and education. The India Skills Report indicates that only 45% of graduates are considered employable.

What Initiatives Have Been Taken to Boost the Manufacturing Sector in India?

• PM MITRA Parks: In 2023, the government approved the establishment of 7 PM Mega Integrated Textile Region and Apparel (PM MITRA) Parks with an investment of Rs 4,445 crores to develop world-class infrastructure in the textile sector.
• National Industrial Corridor Development Programme: The Cabinet Committee on Economic Affairs approved setting up 12 industrial smart cities with an estimated investment of Rs 28,602 crores, aimed at enhancing manufacturing capabilities.
• Tariff Reductions: The Union Budget 2024-25 announced tariff cuts on various items, including medical equipment and textiles, aiming to reduce production costs and enhance competitiveness.
• Prime Minister’s Employment Generation Programme (PMEGP): This scheme supports entrepreneurs in establishing non-farm units, aiming to create jobs for traditional artisans and unemployed youth in rural and urban areas. 
  • From 2018-19 to January 30, 2024, the program has generated an estimated 37.46 lakh jobs.
• Pradhan Mantri Mudra Yojana (PMMY): It provides collateral-free loans up to Rs 10 lakh to individuals and micro/small businesses to promote self-employment. 
  • As of March 29, 2024, approximately 47.7 crore loans have been sanctioned under the scheme.

Way Forward

• Decentralised Community Action for Skills Identification: This approach helps in identifying potential workers and matching them with industries in need of specific skills, thus providing a targeted workforce to the manufacturing sector.
• Integrated Human Development: By converging education, health, skills, and employment at the local level, and leveraging women’s collectives, you can build a healthier, more skilled workforce, which is crucial for both the productivity and inclusivity of the manufacturing sector.
• Promote GVC (Global Value Chains) Participation: By improving integration into GVCs through reduced tariffs and simplified trade, Indian manufacturers can access larger markets, modern technologies, and global networks, making manufacturing more competitive.
  • The Union Budget 2024-25 announced tariff reductions on several key items, but the World Bank suggests that further reductions are necessary to eliminate cost disparities and improve competitiveness.
• Invest in Skill Development: Training workers in both high-skilled and low-skilled job sectors is essential to meet the evolving demands of modern manufacturing, particularly as it becomes more technologically driven.