Unlocking India’s High-Growth Demographic Dividend Requires Investment in Human Capital

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India has recently claimed the title of the world’s most populous country, with a significant demographic dividend, as 68 percent of its population falls within the working-age group of 15 to 64. This demographic advantage, if effectively utilized, can lead to substantial economic growth by creating productive employment opportunities for the large working-age population.

However, current data from labor force surveys reveals a substantial challenge for the Indian economy. About 45 percent of the workforce is engaged in agricultural activities, with 74 percent of non-agricultural workers involved in low-paying informal work within microenterprises. Among individuals aged 15 to 29, approximately 28 percent work as unpaid helpers in household enterprises, with the agriculture sector remaining a predominant source of employment, constituting 36 percent of employed youth.

To fully leverage its demographic dividend, India needs a comprehensive reorientation of its growth strategy to address the crucial issue of productive job creation. The current sectoral composition of growth, which has seen a leap from agriculture to services, poses limitations in generating well-paid employment opportunities, especially for those with lower education and skills.

In contrast, China’s experience demonstrates the impact of a rapid decline in low-productivity agriculture employment and a surge in labor-intensive manufacturing for export. India’s slower pace of structural change, transitioning from agriculture to services without a significant focus on manufacturing, has hindered the creation of high-quality employment opportunities.

To overcome this challenge, India must prioritize labor-intensive manufacturing as a key element of its national growth strategy. This approach not only generates employment but also boosts the earnings of those at the lower end of the income distribution, fostering a positive cycle of consumption, industrial development, and overall economic growth.

Implementing a two-pronged approach involves encouraging formal firms to enter labor-intensive sectors and enhancing the competitiveness and productivity of small and medium enterprises dominating such industries. International firms seeking diversification beyond China present an opportunity for India to attract global investments, provided it addresses infrastructural bottlenecks, regulatory hurdles, and its complex tariff structure.

Moreover, India needs to strengthen its human capital by addressing educational and skilling systems. Despite progress, the literacy rate remains at 74 percent for the population aged above 15, compared to 97 percent in China and 95 percent in Indonesia. Policymakers must adapt education and skilling systems to meet the evolving demands of the job market, shaped by technological developments.

In addition, India must focus on increasing women’s participation in the labor force and productive employment. The current female labor force participation rate is at 37 percent, with 64 percent of employed females in the agriculture sector. Addressing regressive social norms and investing in childcare services, health, education, technology, and infrastructure are essential to bring more women into the workforce.

Ultimately, to fully harness India’s demographic dividend, structural imbalances must be corrected, especially the underperformance of the labor-intensive manufacturing sector. Labor should be viewed not merely as a production factor with a focus on cost reduction but as human capital requiring nurturing to unlock the true potential of India’s demographic advantage.