In the next 10 years, the working-age population will continue to grow at a rapid pace. If participation rates stay low at the current level of 60%, India’s labour force is projected to grow by at least 85 mn. This number will be close to 150 mn if the participation rate rises to around the global average of 66%. If growth is maintained at 6.5% over the medium term, we estimate there will be a shortfall of 40 mn jobs, assuming a 60% participation rate (in other words, 40 mn will be unemployed). This shortfall increases to 110 mn jobs if the participation rate rises to 66%.
To make up for this jobs shortfall, we estimate that GDP growth rates would need to be between 8-11%. If we want to address underemployment, then the economy would need to grow at a rate of 12-14% for a certain period.
The numbers highlight the intensity and immensity of the jobs challenge. While it may seem like a lofty aspiration to talk about double-digit GDP growth in India when the economy grew by an average of 6.6% in the decade prior to the Covid shock, we note that there are three areas where policymakers can accelerate efforts to ensure a much faster pace of growth.
Improve last-mile connectivity
Policymakers must continue to emphasise capex growth, with a view to improving infra. The pace of investment should be accelerated and coordination improved with states for efficient last-mile linkages. There is also scope for better coordination among government agencies, and central and state governments to bring about seamless execution – especially in improving the last-mile connectivity of major infra projects so that the full benefits can be enjoyed sooner.As it is, GoI’s capex spending has slowed slightly, to 2.8% of GDP on a 12-month trailing basis, which is much lower than the original BE of 3.4% of GDP. Indeed, the recent slowdown in consumption is linked to weaker capex spending and job creation.Some observers are calling for personal I-T relief to boost consumption. We’d argue that a more sustainable way to generate consumption growth is via job creation and wage growth. So, rather than shifting focus and providing direct stimulus to consumption via redistribution or transfers, it would be better to double down on the existing approach and accelerate efforts to lift capex spending to stimulate employment growth for a sustained consumption boost.
De-regulate and focus on states
There needs to be a ‘whole-of-government’ approach to create a conducive environment for business investment. At GoI level, this will involve taking up reforms to de-regulate. At the state level, this involves reducing hurdles that businesses often face in the operating environment. For instance, FDI inflows are still concentrated in a few key states, such as Maharashtra, Karnataka, Gujarat, Delhi and Tamil Nadu (which together accounted for about 50% of total FDI inflows in FY2019-24), suggesting scope for more states to systematically improve the ease of doing business to complement what GoI has done. In this regard, GoI may need to devise an innovative incentivisation plan to encourage officials and states.
Skill the workforce Policymakers will need to formulate policies and create institutions in partnership with the private sector to match skills of the labour force to the ever-changing requirements of the corporate sector.
Finally, regarding the fiscal deficit, achieving higher rates of growth would help to improve fiscal sustainability as the revenue outlook would improve, as seen during FY2004 to FY2008. On the flip side, if the pace of jobs growth is still inadequate to match the growing labour force, it could lead to a vicious cycle in which a rise in social instability pressures leads policymakers to take up redistribution efforts again, potentially reintroducing macro stability risks.
