AI may lead to job displacement: India’s Economic Survey

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India’s Economic Survey 2024-2025 pointed out that while artificial intelligence (AI) is poised to bring about a transformative era with widespread automation of economically valuable tasks across multiple sectors, it could also lead to significant job displacement, particularly affecting workers in the middle and lower wage brackets. 

The Economic Survey emphasizes that policymakers must seriously consider the potential impact of automation, particularly in a country like India. Given that India’s economy is primarily service-based, with many workers in the IT sector performing low-value-added tasks, these positions are at high risk of being replaced by technology as businesses seek to cut costs.

The Economic Survey of the country, which examines national trends and aids in determining resource allocation for the budget, was presented by India’s Finance Minister Nirmala Sitharaman in Parliament on January 31. It was published one day before the announcement of India’s Union Budget, an annual financial report outlining the government’s planned spending, expected revenue, and expenditure for the upcoming fiscal year.

“Deployment of artificial intelligence presents both opportunities and challenges,” V Anantha Nageswaran, India’s Chief Economic Advisor, said during his press conference after the release of the Economic Survey. 

“Sometimes we all feel that technology eventually generates more jobs than it displaces. That is true, but the keyword is—eventually. What happens between and eventually is critical, and that is where I think we need to create supporting institutions, enabling institutions to train them, to prepare them and academic curriculums have to change, workplace practices have to change,” Nageswaran pointed out. 

“Technological transitions have not been painless in the past, particularly during the previous three industrial revolutions in the western world and we need to learn from them,” Nageswaran added.

The Economic Survey 2024-25 stressed that addressing the adverse effects of creative destruction requires a collective societal effort, such as developing new social infrastructure to foster environments where innovation drives inclusive growth. It further suggests that India must accelerate the establishment of strong institutions through a collaborative approach involving the government, private sector, and academia.

In its recommendations for leveraging AI, the Economic Survey highlights the importance of social infrastructure, which includes enabling institutions, insuring institutions, and stewarding institutions. These institutions are crucial for transitioning the workforce to medium- and high-skill jobs, where AI can enhance human productivity rather than replace it. However, establishing these institutions is a complex and time-consuming, requiring significant intellectual and financial resources focused on a unified objective, the Survey pointed out.

“The private sector, therefore needs to weigh the benefits of artificial intelligence against the social cost, which may be subterranean in nature and which may surface over a longer period, eventually affecting the employment that is necessary for running businesses smoothly,” Nageswaran said. 

Substantial unresolved challenges

The Economic Survey highlights several challenges that AI developers must address before widespread adoption becomes feasible. First, the practicality and reliability of AI systems are critical issues that need to be resolved. Second, AI requires significant infrastructure to scale, which will take time to develop. Lastly, AI models must focus on improving efficiency without sacrificing performance.

While AI is impressive in its current form, it is still in the developmental phase. It has a long journey ahead before it reaches the widespread adoption seen with technologies like personal computers and the Internet. The challenges that remain unresolved are substantial, and developers will require time to create cost-effective and resource-efficient solutions. 

Estimates regarding the potential impacts on the labor market may be overly optimistic. However, ignoring the ‘low probability-high impact’ nature of this issue could be extremely costly for a country like India.

The Economic Survey 2024-25 also points out that India’s employment challenge goes beyond simply increasing job numbers; it also involves improving the overall quality of the workforce. It notes that when labor and technology are appropriately balanced, they can complement each other. Historical evidence suggests that through careful integration and institutional support, automation increased the employment-to-population ratio throughout the 20th century. In this context, the future of work is centered on ‘Augmented Intelligence,’ where both human and machine capabilities are combined to enhance productivity and efficiency, ultimately benefiting society. Given India’s young, dynamic, and tech-savvy population, there is significant potential to develop a workforce that can harness AI to boost productivity.

Based on these observations, the Economic Survey advises that policymakers must balance technological innovation with the social costs associated with it, as AI-driven changes in the labor market could have long-lasting effects. The corporate sector must also approach the introduction of AI with sensitivity to India’s specific needs. While AI is still in its early stages, the survey notes that India has time to address these challenges, strengthen its foundations, and mobilize a nationwide institutional response. 

A magnified problem for India

While the impact of AI on labor will be felt globally, the challenge is particularly pronounced for India due to its large population and relatively low per capita income, the Economic Survey pointed out. 

If companies fail to implement AI in a way that considers long-term outcomes and handles its introduction carefully, the demand for policy intervention and the strain on fiscal resources to mitigate the effects will be inevitable. In response, the government may need to rely on taxing profits from labor-replacing technologies, as suggested by the IMF, to mobilize the necessary resources. This approach could lead to negative outcomes for everyone, hindering the country’s growth potential.

By using the time available during the early stages of AI development to build strong institutions, India can position itself to minimize the associated costs. This proactive approach could help shift the balance toward the benefits of AI, supporting a more favorable “cost-benefit” scenario in a labor-driven, services-dependent economy like India.

“As policymakers, it would benefit us to ask ourselves the question, “What were the problems in the world that demanded AI as the answer?” In other words, is AI a solution in search of a problem? This question is not easily answered as innovation does not always respond to a problem, rather emerges as a product of human ingenuity,” pointed out the Economic Survey’s chapter on ‘Labour in the AI era: Crisis or Catalyst.’ 

“Thus, in some sense, AI represents the human drive for improvement, for creating something previously thought impossible. However, when innovation has the possibility of coming at great societal cost, the value of innovation must then be judged in the context of its potential loss generation,” the survey added.

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