Photo: iStock (iStock)
Photo: iStock (iStock)

Opinion | India and the promise of service revolution

India’s demographics will become the new growth driver if investments in human capital stock is scaled up

India faces the Fourth Industrial Revolution that will impact entrepreneurs, consumers, young and old alike. The First Industrial Revolution used steam power to mechanize production, the second used electric power to create mass production, the third used electronics to automate production, and the fourth is building on the digital revolution. Five decades of rising capabilities and falling costs in digital communication have resulted in global service revolution. It is reshaping existing industries, transforming labour markets, and changing the way we relate to one another. The services sector now dominates the manufacturing sector, and account for more than 70% of gross domestic product (GDP) in developed economies. Services also contribute to the bulk of GDP in developing countries. Young workers who leave the farm for the cities are increasingly absorbed into urban services jobs instead of manufacturing.

Unlike China, India’s growth has been spearheaded by rapid growth in services than manufacturing. Trade in services has grown at a much faster pace than trade in goods. Labour productivity growth in services is above that in industry, and productivity growth in services in India matches labour productivity growth in manufacturing sectors in China. The Fourth Industrial Revolution has also resulted in new forms of globalization that is benefitting late comers to development.

However, technological changes have also raised concerns. Will skill-biased technological change reduce jobs and lower the value of workers and jobs that lack technological complementarity? These challenges can be managed by investing more in human capital stock, innovating the way we educate, start building buffers for India’s demographic dividend, and better manage sources of inequality, gender discrimination, and in machine learning. Everybody will need to work together productively, to grasp the benefits, and manage the risks.

As a latecomer to development, India is well-positioned to shape its future, and benefit more from new industrial revolution if policy focus could be increased on how to tap into its demographic dividend and the opportunities created by technological changes. Investments in physical infrastructure matter more for manufacturing sector, but the importance of investment in human infrastructure has increased with services as the new growth driver. In the UK and US, investments in human capital have already surpassed investments in physical infrastructure. Late comers to development in Africa and South Asia have fallen behind on human capital stock, given the rapid pace of technological change.

New Growth Escalators

Empirical analysis of firm-level data has shown that technology promotes global growth convergence between developed and developing economies. Productivity growth in developing countries has held up relatively well for firms that are at the technological frontier (see Ejaz Ghani, “The Service Revolution in South Asia", World Bank). Digital technologies open new avenues of sustainable, inclusive, and smart development. The fear of premature de-industrialization in India is well placed. But one should not ignore new growth escalators that have emerged. Services are now an active component of most growth and jobs strategy. Local industry associations now give services a seat at the policy table.

What to do? Many more jobs will be redefined in terms of the tasks they do, and large numbers of new jobs will be created that will require different skills, technological know-how, problem solving, and critical-thinking skills, as well as collaboration and empathy. India, as a latecomer to development, will benefit from all of them. India has one of the youngest populations in the world that is eager to learn. By 2020, the median age in India will be just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan.

India’s young population will increase economic growth through many channels. The first is the human capital stock channel. India’s demographics will become the new growth driver if investments in human capital stock is scaled up. As more people reach working age, they can be easily trained and provided skills to join new industries. Fiscal space will be created by the demographic dividend to divert resources from spending just on children to investing in higher education and skills. The second channel is the rise in women’s workforce that naturally accompanies a decline in fertility. The third channel is the increase in savings rate, as the working age also happens to be the prime period for saving. The fourth channel is an additional boost to savings that occurs as the incentive to save for longer periods of retirement increases with greater longevity. The fifth channel is a massive change in mindset and a shift towards a middle-class society that is already in the making.

Technology is already the largest sector of the world economy, eclipsing even financial services. It includes five of the top 20 public companies by market capitalization. There are at least three times as many connected devices in the world today as there are people. New digital platforms are already bringing connecting people to markets, connecting small and medium enterprises (SMEs) to global trade, and promoting gender revolution. The skills needed for work are changing, and new jobs will require specific skills—a combination of technological knowhow, problem solving, and critical-thinking skills, as well as soft skills such as perseverance, collaboration and empathy. Investing in human capital will be the magic wand that will prevent India from facing a demographic curse. India’s biggest asset is its young population.

Policy makers need to scale up emphasis on sound infrastructure delivery plan, both physical and human infrastructure investments, but increase the importance of investment in human capital stock. Our understanding of how infrastructure investments interact with rapid urbanization, public private partnerships, and how the use of digital technology optimizes the use and minimizes the cost of education and social needs is still evolving. Decisions made today will have an impact on India’s demographic dividend for decades.

Ejaz Ghani is lead economist at the World Bank.

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