India’s economy must grow at an exceptional rate of 12.2 per cent annually to resolve its underemployment crisis, according to Morgan Stanley economists, highlighting the danger that millions of young Indians could remain outside productive work, fueling social tensions across the country.
The nation’s labour market is grappling with both unemployment and underemployment, the Morgan Stanley team led by Chetan Ahya noted. Youth unemployment stands at 17.6 per cent—the highest in the region, while employment in agriculture has surged to a 17-year high, reflecting a shift of workers into the sector.
Without more robust industrial and export growth, faster infrastructure development, and comprehensive reforms to enhance skills and improve the business environment, India risks falling into a jobs trap, the Wall Street firm warned. Such a scenario could slow the country’s ambition to become a global growth engine and intensify outward migration pressures, especially as H-1B visas become costlier.
Underemployment encompasses jobs that fail to fully utilise a worker’s skills, education, or available hours. Unlike unemployment, underemployment is harder to measure, particularly given India’s broad employment definition, which counts anyone working at least one hour a week, including unpaid family labour, as employed. This contributes to high underemployment in the informal sector.
Youth Unemployment And Structural Challenges
The government’s projected growth rate of 6.3–6.8 per cent remains well below what is needed to tackle unemployment effectively. The outlook has been further complicated by a 50 per cent US tariff on Indian goods and higher US work visa fees. India’s economy expanded 7.8 per cent in the June quarter, exceeding expectations, but this is still insufficient to absorb the 84 million people expected to join the workforce over the next decade. Poverty continues to constrain household consumption, with about 603 million Indians living below the World Bank’s 2022 lower-middle-income threshold of USD 3.65 per day. The recently raised benchmark of USD 4.20 will likely push this number higher.
Adding to these pressures, rapid advances in artificial intelligence and automation threaten traditional service-sector jobs, a key employment avenue for India’s educated youth. Without significant investment in advanced manufacturing, technology, and skills development, the labour market risks falling further behind the needs of its young workforce.
In both India and Indonesia, underemployment is a pressing issue. In India, agricultural employment has risen against the broader economic trend, while in Indonesia, new jobs are largely informal and many pay below the minimum wage. Across Asia’s three most populous economies, China, India, and Indonesia, youth unemployment exceeds 15 per cent, well above the regional average of 8 per cent, and is consistently higher than headline unemployment rates.
India’s Jobs Challenge
India’s median age of 28.4 underscores the importance of addressing its employment issues. Youth unemployment at 17.6 per cent, coupled with subdued job creation over the past two years, highlights the country’s dual burden of unemployment and underemployment. Between FY19 and FY23, employment in the primary sector increased by 50 million, reaching 253 million, a 17-year high, despite agriculture contributing only 18 per cent to GDP while employing 42 per cent of the workforce. This reflects Covid-induced underemployment, with 603 million Indians, or 44 per cent of the population, still below the lower-middle-income line.
While India’s GDP is projected to grow at an average of 6.5 per cent over the coming decade, this will not generate enough employment. At least 84 million new entrants are expected in the workforce, and rising labour force participation rates from the current 60.1 per cent as of June 2024 would further amplify the challenge.
Morgan Stanley’s analysis suggests that to maintain a stable unemployment rate, GDP would need to grow at 7.4 per cent if participation remains constant, and 9.3 per cent if participation rises to 63 per cent. To tackle underemployment, the firm estimates that 12.2 per cent annual growth is required.
Achieving this demands stronger growth in the industrial and export sectors. Research shows that each manufacturing export job generates two additional jobs in related areas like logistics and transportation. India’s current global export share of 1.8 per cent is below its potential, suggesting considerable scope for expansion.
While policymakers have initiated reforms, Morgan Stanley emphasises the need to accelerate efforts, including infrastructure development, enhancing state-level business environments, and skilling the workforce. Over the medium term, AI may further reduce job opportunities, particularly in IT services and domestic services, which have traditionally absorbed India’s educated youth. Without a decisive, pro-growth, and pro-jobs agenda, the labour market could fall further behind the requirements of the country’s young population. |
