Demographic advantage, Indian economy’s sweet spot

India stands at a critical juncture with its demographic advantage and rapid economic growth. With 63% of its population in the working-age group and the median age around 28 years, India has the potential to harness its demographic dividend to propel itself as a global economic giant. However, challenges related to labour force participation, skilling, and technology adoption need to be addressed to sustain this growth.     

Key Challenges

• Labour Force Participation Gap: India, while being the world’s fifth-largest economy  globally, faces a significant issue with labour force participation. Despite 63% of the population being of working age, the labour force participation rate was only 55.2% in 2022 (ILO report). This gap is concerning as it suggests that a large portion of the working-age population is not actively contributing to the economy, limiting India’s potential.
• Services led growth: India’s economic growth is primarily driven by the services sector, which, though highly productive, cannot absorb large numbers of workers due to its skill and capital-intensive nature. The manufacturing sector, which has the potential to provide more labour-intensive employment, lags behind. This sectoral imbalance highlights the need for a more diversified growth strategy, where manufacturing is boosted to complement the services sector.

For India to fully harness its demographic dividend, it must focus on developing industries that can absorb a larger workforce. Manufacturing, along with sectors like tourism, logistics, and labour-intensive production, can create broader employment opportunities, addressing both the labour force participation gap and the uneven growth between sectors.

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What needs to be done? 

• Need to Maintain or Accelerate Growth
  • Enhancing Productivity: To sustain or enhance India’s economic growth trajectory, a focus on productivity improvement is essential. This requires not only increasing output but also optimising the inputs used to achieve that output. Maximising productivity ensures that economic growth is both efficient and sustainable.  
  • Role of State Governments: While the central government has made notable progress in improving the ease of doing business, the role of state governments is increasingly critical. States are where the implementation of reforms becomes actionable, and they must now lead efforts to drive further improvements in the business environment and regulatory frameworks.
    • Centre-State Collaboration: Effective and unified reform strategies necessitate strong collaboration between the Centre and the states. A coordinated approach ensures that both levels of government work together to address challenges and implement reforms comprehensively, creating a more conducive environment for economic growth.
• Need for Labor-Intensive Growth: The Economic Survey 2023-24 reveals crucial insights into India’s growth dynamics:
  • Declining Capital-to-Output Ratio: Advances in technology have reduced the capital needed to produce the same amount of output. This indicates greater efficiency but also highlights a need for balancing capital and labour.
  • Increasing Capital-to-Labour Ratio: The cost of employing a worker has increased, which is problematic for a country like India that has a surplus of labour. This shift highlights the need for strategies that better utilise India’s abundant labour force.                                    
    • India’s current reliance on capital-intensive growth is not well-suited to its labour-rich demographic. A shift towards more labour-intensive industries and practices is necessary to fully leverage the available workforce.
• Challenges for MSMEs and Large Businesses
  • MSME Reluctance: Micro, Small, and Medium Enterprises (MSMEs) are hesitant to scale due to fears of increased compliance and regulatory burdens. Their growth is stymied by the complexity of existing regulations and outdated labour laws.
  • Large Businesses’ Hesitation: Large enterprises are reluctant to invest in labour-intensive sectors due to the high costs and complex and burdensome compliance requirements and outdated labour regulations.
  • Need for Proactive Implementation: To address these challenges effectively, states need to take a proactive role in implementing labour reforms. The new labour codes, designed to simplify and modernise regulations, must be actively put into practice to reduce compliance burdens and support both MSMEs and large businesses in scaling up and entering labour-intensive sectors.  Although labour codes have been streamlined from 44 into 4, the implementation has stalled in many states, creating uncertainty for businesses and investors.
• Need to move away from Agriculture sector
  • Agricultural Sector: Agriculture employs 45% of the workforce but contributes only 18% to GDP. Enhancing agricultural productivity and exploring alternative employment opportunities are crucial for economic balance.
  • Unorganized and Non-Agricultural Sectors: Around 19% of the workforce is in fragmented, low-productivity sectors. These areas, which are often unregulated and lack technological advancement, need significant reform and support.
  • High-Growth Potential Sectors: Sectors such as toys, apparel, tourism, and logistics offer substantial employment opportunities and can help address the employment gap. Focusing on these sectors will promote economic diversification and skill development, leading to higher-value job creation.
• Importance of Skilling: India faces a significant skills shortage, with only 4.4% of the workforce aged 15-29 being formally skilled, underscoring a critical gap between education and market needs. Current skill-imparting institutions, such as ITIs, are not adequately aligned with the evolving demands of industries, further contributing to this challenge.
  • Industry Participation: To address this, public-private partnerships can be fostered to create better synergy between government-led skills training programs and industry requirements. Industry involvement should shape curriculum design and on-the-job training, ensuring that the workforce is equipped with the right skills. 
  • Cultural shift: Encouraging lifelong learning is essential, promoting continuous skill development and adaptability to keep up with changing job roles. However, in India, there is a strong cultural obsession with securing government jobs, often seen as stable and prestigious. This mindset can limit individuals from exploring opportunities for continuous skills enhancement and adapting to the evolving needs of the private sector. To foster a growth-oriented mindset, it’s important to promote a culture of ongoing learning beyond initial employment, encouraging individuals to be more flexible and open to diverse career paths in today’s dynamic job market.
• Education Policy: The NEP emphasises foundational skills and cognitive development. However, it must be periodically reviewed and updated to stay relevant in a rapidly changing global context.
• Impact of AI/ML: Artificial Intelligence (AI) and Machine Learning (ML) are reshaping the job market. While these technologies pose risks to low-skill, repetitive tasks—such as data entry—they will not replace all jobs. The need for human oversight and intervention remains crucial, particularly for complex and nuanced tasks that AI cannot fully replicate. A balanced approach is essential to maximise the benefits of AI/ML:
  • Appropriate Regulations: Implementing thoughtful regulations ensures that AI/ML technologies are used responsibly and ethically, safeguarding against potential misuse.
  • Harnessing Benefits: Leveraging AI/ML’s capabilities can drive innovation and efficiency across various sectors, contributing significantly to economic growth.
    • Market Projections: The AI/ML market is expected to grow to $826.73 billion worldwide by 2030, indicating substantial potential for economic impact and technological advancement.
    • India’s Advantage: India has the second-largest talent pool globally in AI/ML. However, there is a significant gap between demand and supply. This gap presents a critical opportunity for growth, provided that the country can effectively mobilise and utilise its talent pool to meet the growing global demand.

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Conclusion

Employing a large, young, and aspirational population presents a significant challenge, but it is a more favourable situation compared to the difficulties associated with an ageing population. India finds itself in a unique “sweet spot” with its substantial demographic dividend, offering both opportunities and responsibilities. To fully capitalise on this advantage, it is essential to invest in advanced technologies and skill development, ensuring that the labour force is not only utilised effectively within India but also positioned to contribute to the global stage. By harnessing its demographic dividend, India can drive substantial economic growth and innovation, benefiting both the nation and the world at large.

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