Human Capital for India’s High Growth Demographic Dividend

India, the world’s most populous country, has a demographic dividend of 68% working-age individuals aged 15 to 64. This demographic structure can generate high economic growth if India can create productive employment opportunities for its large working-age population. However, data from labour force surveys shows that 45% of the workforce still works in the agricultural sector, with 74% in low-paying informal work in microenterprises. The agriculture sector remains the principal source of employment for 36% of employed youth.

India needs a radical reorientation of its growth strategy to address the challenge of productive job creation and harness its demographic dividend. Growth alone cannot be the principal instrument of job creation, as the sectoral composition of growth determines the quantity and nature of employment opportunities created. India’s structural transformation from agriculture to services has generated limited opportunities for well-paid employment for those at the lower end of the education and skills ladder.

China’s experience contrasts with India’s slow pace of structural change, with a decline in the employment share of low-productivity agriculture and a boom in labour-intensive manufacturing for export. To generate productive employment for the relatively low-skilled, a national growth strategy should focus on industrialization, particularly labor-intensive manufacturing. This 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.

India needs to adopt a two-pronged approach to achieve labour-using industrialisation: encouraging formal firms to enter labour-intensive sectors and raising the competitiveness and productivity of small and medium enterprises dominating these industries. This is particularly important as international firms seek to diversify their businesses and investments beyond China. Strengthening the economy, particularly human capital, is also crucial. India’s literacy rate is only 74% for the population aged above 15 years, compared to 97% and 95% for China and Indonesia, respectively. Technological developments reshape labour markets, making some jobs obsolete and creating new ones, while retooling existing jobs that require new skill combinations. Policymakers need to adapt education and skilling systems to ensure Indian labour can meet the complex and evolving skills demanded by an ever-changing world of work.

India’s demographic dividend cannot be realized without bringing more women into the labour force and into productive employment. Addressing regressive social and cultural norms, investing in childcare service provision, health, education, and technology and infrastructure services, and improving access to decent, productive, and well-paying employment opportunities are also essential. India needs to implement a macro-policy framework that promotes gender-equitable growth and job creation for women.

Harnessing India’s demographic dividend requires correcting imbalances in the country’s structural transformation, particularly the failure of the labour-intensive manufacturing sector to become an engine of job growth. Labour should be recognized as human capital that must be nurtured to realize the potential of India’s demographic sweet spot.

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