Servicification of Manufacturing in India
India's manufacturing sector has the potential to generate more jobs by embracing the rising trend of servicification, which involves integrating services into firms' production, sale, and export processes. This trend has been highlighted in a working paper by the Centre for Social and Economic Progress (CSEP).
Key Findings
- Servicification has a positive correlation with employment across various sectors, especially textiles, electronics, rubber, plastics, and machinery.
- Services such as construction, transport, and distribution significantly support job creation in the manufacturing sector.
Mechanisms of Servicification
- Servicification contributes to manufacturing employment through:
- Imported service inputs: Manufacturing firms rely on imported intermediate inputs that are services, creating a positive employment impact.
- Upstream linkages: Services used as inputs in industries that produce further inputs, rather than selling directly to consumers, tend to increase employment.
- Less skill-intensive sectors, which are usually low-wage sectors, also benefit from servicification, potentially raising wages over time due to increased demand.
Policy Implications
To fully leverage the benefits of servicification, certain policy measures are recommended:
- Adopt a service-integrated industrial policy to enhance employment opportunities, particularly for low-skilled workers transitioning from agriculture.
- The dismantling of restrictive trade barriers in services is crucial for improving manufacturing output, exports, and employment.
- India has higher restrictions compared to the Organisation for Economic Co-operation and Development (OECD) and non-OECD averages in sectors like rail freight, storage, and courier services, as per the OECD’s Services Trade Restrictiveness Index (STRI).
- Joint liberalization of goods and services, whether unilaterally or through preferential trade agreements, should be pursued to acknowledge the complementarity between goods and services and to minimize adjustment costs of reforms.
