India's labour market faces greater threat from AI: Economic Survey 2024-25

NEW DELHI: The Economic Survey on Friday highlighted the growing unease and anxiety around Artificial Intelligence disrupting labour markets, and warned that if companies do not optimise the introduction of AI over a longer horizon or handle it with sensitivity, demand for policy intervention and the demand on fiscal resources to compensate, may become inevitable.

The pre-Budget document cited an IMF paper to say that governments may be forced to tax incremental profit of corporates that use AI to replace labour. "It will leave everyone worse off and the country's growth potential will suffer, as a result," it warned. A labour-surplus country like India cannot afford protracted labour displacement, the Economic Survey asserted.

With an entire chapter dedicated to 'Labour in the AI era' -- a reflection itself of the seriousness being accorded to the issue -- the Economic Survey noted that while impact of AI on labour will be felt across the world, "the problem is magnified for India, given its size and its relatively low per capita income".

"If companies do not optimise the introduction of AI over a longer horizon and do not handle it with sensitivity, the demand for policy intervention and the demand on fiscal resources to compensate will be irresistible," it said. The state, in turn, has to resort to taxation of profits generated from the replacement of labour with technology to mobilise those resources, as the IMF suggested in its paper, it noted.

Economic survey calls for regulatory framework

The Survey called for regulatory framework tweaks to align AI use with societal values, and noted that structural changes to how children are educated will be needed too, in addition to safety nets that can shield existing workers from economic and social fallouts. Notably, it advocated a mechanism of enabling, insuring, and 'stewarding institutions' to help workers adapt to changing demands while providing essential safety nets.

The document, which details the state of the economy over the current fiscal year, went in-depth into the impact of AI on jobs, and not for the first time. The Economic Survey, even in 2024, had said the advent of AI casts a "huge pall of uncertainty" with regard to impact on workers across skill levels. On Friday, it highlighted that the rapid advancement of AI presents both unprecedented opportunities and significant challenges for labour markets worldwide.

These challenges, along with AI's experimental nature, create a window for policymakers to act. "Concerns and fears about Artificial Intelligence (AI) disrupting labour markets have intensified as developments in the field have continually demonstrated rapid progress over the last four years," it said. The increasing complexity of the models being developed today marks a paradigm shift in the field of AI, and in a few years, 'intelligent machines' will be capable of performing tasks that are predominantly handled by humans, it contended.

AI to outperform humans in critical decision-making

The Survey cited founder of the AI frontrunner OpenAI's recent blog post on how the company is expecting to have office-ready 'AI workers' by the end of 2025. Expectations, the Survey said, point toward a trend where AI begins outperforming humans in critical decision-making processes in areas like healthcare, criminal justice, education, business, and financial services among others.

"Further, with executives optimistic about the capabilities of AI and the cost-saving potential they expect it to possess, the impact of AI on the labour market, particularly entry-level jobs is turning into a point of concern for policymakers. "This economic displacement adds to a broader sense of unease about whether AI will exacerbate existing social and economic divides," it said.

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Coordination from all agents of economy is needed

Structural changes to how children are educated will be required in addition to safety nets that can shield existing workers from economic and social fallouts, it said. Utilising the window of time available during the nascent stages of AI to build robust institutions can ensure that the nation is well placed to minimise the costs as much as possible, it observed.

"This can then help tilt the scale towards the benefits, bringing a balance to the 'cost-benefit' aspect in a labour-driven, services dependent economy like India," it said. Navigating this transformation necessitates coordinated participation from all agents of the economy, according to the survey.

Gains from AI productivity widely distributed

A tripartite compact between the government, private sector and academia can ensure that the gains from AI-driven productivity are widely distributed. Learning from the lessons of the past, capacity building and institution building is the need of the hour for India to capitalise on the opportunity that lies ahead.

India's demographic advantage and diverse economic landscape position it uniquely to benefit from AI, the document said.

"However, achieving these benefits requires significant investments in education and workforce skilling, supported by enabling, insuring, and stewarding institutions. These mechanisms can help workers adapt to changing demands while providing essential safety nets," it said.