"Literature" in this context is used to connote what may be termed the genre of "Literary Fiction" as opposed to mere "Genre Fiction".
The distinction is exceptionally useful in the contemporary landscape to distinguish work with deeper merit (i.e. possessing more than mere entertainment value.)
- "Elevated beyond genre" is a way of connoting that a "genre" novel has social, philosophical, or literary value, as opposed to mere entertainment value.
This idea of literary elevation of genre fiction is reserved for relatively few genre authors--in speculative fiction those names include Swift, Orwell, Dick and Lem, although this list may extends beyond such Olympian heights.
The same type of "transcendence of genre" is afforded to comic book authors such as Alan Moore and Neil Gaiman, who elevated the "comic book genre" into the field of "literature".
The idea of dividing the medium into genres goes back to Plato, where such divisions were seen a useful and necessary.
Division of literature into genres is useful because it's allows practitioners and scholars to separate the forms in order to discuss, analyze, and create.
In the modern context, genre distinctions are a powerful marketing tool, allowing publishers to target consumers predisposed to specific types of content.
The problem with art is subjectivity, and everyone has their favorite authors. Joy derived from a work is legitimate, and notwithstanding of the "elevation" of the work. But a much stronger case for elevated work can be made for authors like Swift, Orwell, Lem and Dick.
From my perspective, as a Classical Scholar and Mythologist, all fiction was "genre fiction" before the modern literary fiction movement. This extends from Gilgamesh and Homer through Dumas and Jack London.
In many ways, speculative fiction is the most literary of the genres because the origins of speculative fiction, of which Swift is a paragon, is the facilitation of discussion of social issues that would be censured if made directly in context of contemporary society.
Thus Lem could use genre to be be subversive, avoiding the censure of overly literal bureaucrats who wouldn't catch the subtext, and this is a tradition which goes back to at least Homer, in that the Iliad was a heavily subversive work.
Further, genre opens the discussion of such topics to a wider audience than would normally be interested. (i.e. Hunger Games is probably more widely read, and at a much younger age, than treatises on information warfare and economic inequality.)
Another reason I find the terminology useful is to distinguish between genre authors who elevate the form (Lem, Dick) and literary authors utilizing genre (Murakami, Chabon). I'll read the work of the literary authors, admittedly superior stylists, but don't always find it as satisfying as the work of the pure genre writers, for which style is not a primary consideration. By contrast, of Cormac McCarthy I might say "He is a an author who transcends literary fiction to return it to its genre roots." (Possibly I am more attracted to McCarthy per my interest in fundamental ethical questions, the concept of the "personal code", and his allegorical approach.)