The jobs overhang on growth

The country needs to create enough productive jobs if it is to sustain its high growth

India has been recording healthy economic performance, with gross domestic product (GDP) growth exceeding the 7 per cent mark over the last three years. For sustained and inclusive high growth, it is critical to accelerate employment generation in the economy. This becomes even more crucial given India’s favourable demographic structure, with the share of the working-age population rising to 68 per cent from 62 per cent two decades ago.

 

India is enjoying this demographic dividend at a time when most major economies, including the United States, the European Union and Japan, as well as Asian peers such as China and Thailand, are ageing. However, to benefit from this demographic dividend, it is important for employment growth to keep pace with the expansion in economic activity and the growing labour force.

 

Our analysis based on the International Labour Organization’s modelled estimates shows that employment growth had lagged population growth in the 15+ age category during 2001-2020. However, the pace of employment among individuals aged 15+ has picked up post-pandemic (2021-2025) outpacing the population growth in this age category. Since the pandemic, employment in this age category has grown at 3.5 per cent versus 1.1 per cent in the preceding five years, and a low of 0.5 per cent in the period between 2006 and 2010. Employment elasticity, which measures the growth in employment vis-à-vis economic growth, improved to 0.46 during 2021-2025, from 0.22 in 2011-15 and a low of 0.08 during 2006-2010.

 

India’s unemployment rate has stabilised around 3.1 per cent (Periodic Labour Force Survey or PLFS) since 2023, moderating from 6 per cent in 2018. Though this is encouraging, it is important to understand that the measurement criteria might not be fully capturing the extent of unemployment, given the high share of self-employment and the prevalence of disguised unemployment in sectors like agriculture. Moreover, the data may understate the extent of unemployment in an economy like India that is characterised by seasonal, casual and irregular employment.

 

The country’s employment scenario faces several long-standing challenges such as low labour force participation rate (LFPR), persistent education-skill mismatches, youth unemployment, and higher informality in jobs. India’s LFPR, according to the PLFS, improved to 59.3 per cent in 2025, from 49.8 per cent in 2018. However, India’s LFPR remains below the global average of 61 per cent, trailing several Asian countries including Vietnam, Singapore and Indonesia.

 

This is largely due to low female labour force participation — at 32 per cent in India compared with 68 per cent in Vietnam and 59 per cent in China and Thailand.

 

With rising aspirations and education-skill mismatch, the unemployment rate is disproportionately higher among individuals with higher levels of education. Furthermore, there is high youth (15-29 years) unemployment at 9.9 per cent (2025). There is a predominance of self-employment in India, particularly in rural India and  among women. While rising self-employment is a positive feature for the employment landscape, it could also be indicative that the economy is not generating adequate job opportunities. The share of self-employed in India was as high as 56.2 per cent in 2025, higher than the pre-Covid level of 52.1 per cent. Moreover, the share of casual labourers was 20.2 per cent. A high share of self-employed and casual workers is indicative of informality in the Indian labour market.

 

India is going through this challenge of job creation at a time when the global labour market landscape is grappling with increasing use of artificial intelligence (AI) and automation risks. These aspects seem to be already weighing on the hiring trends in the formal employment market in India. Our analysis of a sample of 236 companies from the Nifty 500 showed flat net employee addition in FY26, compared to strong gains seen in the post-pandemic period (FY22-FY23). Specifically, net job addition was weak in banking/finance and IT sectors.

 

A look at sector-wise job creation shows that agriculture absorbs the largest chunk of the workforce at 43 per cent, even though it contributes only about one fifth to India’s GVA (gross value added). This reflects low labour productivity and disguised unemployment in the agriculture sector. There is an urgent need for labour to move from agriculture to more productive sectors. Also, employment opportunities should be created in higher-value agriculture and allied/ ancillary activities like horticulture, floriculture, animal husbandry, poultry, and food processing.

 

Coming to manufacturing, the sector’s share in total employment has stagnated at 10-12 per cent. This contrasts with the experience of several East Asian economies, where labour-intensive manufacturing played a key role in economic growth. Furthermore, India’s manufacturing exports data shows that the share of labour- and resource-intensive manufacturing items has moderated to 20 per cent during 2021-2025, from 29 per cent during 2006-2010. While the rising share of India’s technology-intensive exports is a positive development, there needs to be a continued focus on labour-intensive manufacturing exports, such as textile and apparel, leather and footwear, gems and jewellery, toys and sports goods.

 

The services sector has emerged as a key growth engine, employing around 32 per cent of the workforce. Relatively high-skilled and high-productivity sectors such as IT, software and business services and banking/finance have been the large employment generators in urban areas.

 

However, India should provide focused support to other labour-intensive services like travel, trade, hospitality, health care and education that have the potential to generate employment at scale. Wholesale and retail trade is the largest employment generator in the services sector, employing around 11 per cent of the total workforce, followed by transport and storage (4.5 per cent) and education (3.3 per cent).

 

To sustain India’s encouraging growth momentum, the government needs to create more productive job opportunities while accelerating investment in human capital to ensure the availability of an adequately skilled workforce. Given that a substantial proportion of India’s workforce is in the informal sector, the government needs to specifically focus on implementing stronger social protection measures.

 

The Code on Social Security (2020) has brought the unorganised sector workers and gig workers into the social security framework. There are also government policies for pension, health and insurance coverage for informal workers. While the government has been moving in the right direction, it still has a long way to go on this front. India has this golden opportunity of a demographic dividend at a time when the world is ageing. But it could become the country’s biggest bane if this large workforce is not employed productively.

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The writers are, respectively, chief economist and senior economist at CareEdge Ratings.

The views are personal