India has recently become the world’s most populous country, with 68% of its population working-age individuals between the ages of 15 and 64.
This demographic structure – often referred to as a demographic dividend – has the potential to generate very high economic growth if India can create productive employment opportunities for its large working-age population.
But data from labor force surveys indicates that this is a big challenge for the economy at present. Some 45% of the workforce continues to toil on farms in the agricultural sector, while in the non-agricultural sector, 74% of workers are employed in low-paying informal work in microenterprises.
Indeed, among young people aged between 15 and 29 years, approximately 28% are engaged as “unpaid helpers in household enterprises.” And here too, the agriculture sector remains the principal source of employment, accounting for 36% of employed youth.
India will need a radical reorientation of its growth strategy if it is to address the challenge of productive job creation and harness its demographic dividend, making the growth process more employment-intensive.
The Indian experience shows that growth alone cannot be the principal instrument of job creation, as it is the sectoral composition of growth that determines the quantity and nature of employment opportunities created.
India’s idiosyncratic structural transformation from agriculture to services – leapfrogging the phase of manufacturing growth – has generated limited opportunities for well-paid employment for those at the lower end of the education and skills ladder.
This contrasts with China’s experience, with its rapid decline in the employment share of low-productivity agriculture and boom in labor-intensive manufacturing for export.
Between 1978 and 2010, the share of employment in Chinese agriculture declined from 70.5% to 36.7%. In India, the corresponding shares declined at a slower pace from 71.1% to 51.3% during the same period.
The sluggish pace of structural change continues to pose a challenge for the Indian economy. While high-end services, in particular IT and finance, will remain an important source of employment for the highly skilled and educated, generating productive employment for the relatively low-skilled will require making industrialization, in particular labor-intensive manufacturing, a central focus of a national growth strategy.
Such a strategy will not only generate employment, but also enhance the earnings of those at the bottom of the income distribution who have a high marginal propensity to consume. A boost in domestic demand can create a virtuous circle of consumption of manufacturing goods and industrial development, accelerating the growth of output and employment in the manufacturing and services sector.
India must embrace a two-pronged approach to achieve labor-using industrialization — 1), encouraging the entry of more formal firms into labor-intensive sectors and 2), raising the competitiveness and productivity of the many small and medium enterprises that dominate labor-intensive industries.
The former merits special attention as international firms look to the Indian market as a way to diversify their businesses and investments beyond China.
Apart from addressing infrastructural bottlenecks, regulatory impediments and India’s complex tariff structure, attracting global investments requires strengthening the fundamentals of the economy, in particular human capital.
Despite improvements over the years, India’s literacy rate is still only about 74% for the population aged above 15 years, compared with almost 97% and 95% for China and Indonesia respectively.
Data from the Annual Survey of Education Report conducted over the past 15 years show that learning outcomes leave much to be desired, often impeding the ability of young job seekers to attain the jobs they desire.
These challenges are exacerbated by technological developments which reshape labor markets not only by making some jobs obsolete and creating new ones but also by retooling existing jobs that require new skill combinations.
Against this backdrop, policymakers need to adapt education and skilling systems to ensure that Indian labor can meet the complex and evolving skills demanded by an ever-changing world of work.
Over and above all these factors, India will not be able to realize its demographic dividend unless it can bring more women into the labor force and productive employment. At present, India’s female labor force participation rate stands at 37%, with 64% of all employed females in the agriculture sector.
Bringing more women into gainful employment not only requires addressing regressive social and cultural norms but also investment in childcare service provision, health, education and technology, and infrastructure services that allow more time for market work.
While it is important to bring more women into the labor force, it is equally important to improve their access to decent, productive and well-paying employment opportunities. India must adopt a macro-policy framework that supports gender-equitable inclusive growth and more jobs for women.
Harnessing India’s demographic dividend requires correcting the imbalances in the country’s structural transformation, in particular the failure of the labor-intensive manufacturing sector to become an engine of job growth.
Labor should be recognized as more than a mere factor of production whose cost has to be pushed down, but as human capital that must be nurtured to realize the potential of India’s demographic sweet spot.
Radhicka Kapoor is Professor at the Indian Council for Research on International Economic Relations (ICRIER).
This article was originally published by East Asia Forum and is republished under a Creative Commons license.