Widespread adoption of AI across services sector can significantly replace jobs

Indian labour market indicators have improved in the last six years, as per the Periodic Labour Force Survey data, with the unemployment rate declining to 3.2 per cent in 2022-23.

With artificial intelligence taking roots in several spheres of economic activity, job market must adapt while steering the technological choices towards collective welfare is key.

Disruptions due to the adoption of AI

The biggest disruption for the future of work is the accelerated growth in AI, which is poised to revolutionise the global economy. India would not remain immune to this transformation. AI is being recognised as a general-purpose technology, like electricity and the internet, which is phenomenal in its rapid pace of innovation and ease of diffusion. As AI systems continue to get smarter and adoption increases, the future of work will be reshaped.

While AI has considerable potential for boosting productivity, it also has the potential to disrupt employment in certain sectors. Routine tasks, including customer service, will likely witness a high degree of automation; creative sectors will see extensive usage of AI tools for image and video creation; personalised AI tutors can reshape education and sectors like healthcare can witness accelerated drug discovery.

Research done in the context of the US informs that Generative AI (GenAI) may have a far higher impact on reshaping jobs than replacing jobs.33 According to IMF (2023) and IMF (2024), almost 40 per cent of global employment is exposed to AI, with the exposure of advanced economies being 60 per cent due to the prevalence of cognitive-task-oriented jobs.

The study develops an index of potential AI complementarity, which suggests that about half of these may be negatively affected by AI. At the same time, the rest could benefit from enhanced productivity through AI integration. It finds that employment highly exposed to AI is 26 per cent for India, divided into 14 per cent for occupations with high complementarity and 12 per cent for those with low complementarity.

India, with its vast demographic dividend and a very young population, is uniquely situated as AI poses both risk and opportunity. According to Capital Economics (2024), the current diffusion and adaptation of AI in India remains low compared to US, Europe, and the developed Asian economies.

The manufacturing sector is less exposed to AI as industrial robots are neither as nimble nor as cost-effective as human labour. In inventory and supply chain management, AI applications could rather be complementary to labour. Nevertheless, at particular risk is the BPO sector, where GenAI is revolutionising the performance of routine cognitive tasks through chatbots, and employment in the sector is estimated to decline considerably in the next ten years. In the following decade, however, gradual diffusion of AI is expected to augment productivity. Uses of AI to identify health risks out of digitalised health data, predict weather, and complementing teachers in grading tests and translating texts are some of the development gaps that AI can plug.

Widespread adoption of AI across the services sector can significantly reshape and even replace jobs. Based on job postings data from India’s largest job website, interpret a near-exponential increase in the demand for AI-related skills since 2016. They find that the demand for AI skills by businesses has a negative impact on the need for non-AI roles and on the top percentile of wages, due to the displacement of high-skilled, managerial positions and non-routine, intellectual tasks.

Given the affinity of India’s population to work with technology, as seen with the digital public infrastructure, proactive interventions by the Government and industry can position India as a key player in the AI age. Employees or job seekers would need skills beyond communication, collaboration, and presentation, such as analytical thinking and innovation; complex problem solving, critical thinking; learning and self-development; technology design and programming; and resilience and adaptability, to face the AI challenge.