India seems to be everyone’s favorite growth story nowadays. Despite valid concerns about the accuracy of official statistics, the Indian economy is projected to expand by 6.3% in 2024 – an undeniably remarkable feat given that its GDP exceeds $4.1 trillion. While it remains a lower-middle-income country with a per capita income under $3,000 (at market exchange rates), India’s rapid growth suggests that its economic potential may be greater than expected.
But any optimism about India’s economic prospects must be tempered by its inability to address two related challenges. The first is the unequal distribution of the benefits of rapid economic growth, which have accrued predominantly to the top 10-20% of income earners.
India’s failure to release any consumption figures since 2011-12 has made it difficult to produce reliable estimates of potential increases in inequality and poverty. Such estimates rely heavily on consumer expenditure surveys, typically conducted every five years. But Prime Minister Narendra Modi’s government scrapped the 2017-18 survey because the findings did not align with its preferred narrative. The government has refused to conduct subsequent surveys, even though up-to-date data are vital for informed policymaking.
Moreover, the decennial census, which was meant to be completed in 2021, has been postponed indefinitely. Consequently, neither the government nor citizens know how many people there are in India, where they live, or their living conditions and employment status. Nevertheless, various indicators suggest that the incomes of top earners have increased sharply while the wages of most workers, especially those in the bottom half of the distribution, have stagnated or declined.
The second major challenge facing India is that rapid GDP growth has not created enough jobs to accommodate its youthful population. With tens of millions of highly educated young people joining the workforce every year, unmet expectations and growing social unrest threaten to turn the country’s much-anticipated “demographic dividend” into a disaster.
India has long struggled with low job creation, especially over the past decade. According to the government’s own labor force surveys, the country’s worker-to-population ratio has declined from 38.6% in 2011-12 to 37.3% in 2022-23. Official statistics also show that the female workforce participation rate has fallen to just 20.8%. But even this figure is inflated, as the government includes “unpaid helpers in family enterprises” in its definition of workers.
This approach to labor data is unique to India. Categorizing unpaid helpers as “self-employed,” even though they earn no income, runs counter to international best practices, which clearly define employment as work that is remunerated, either in the form of wages and salaries or earnings from self-employment. Moreover, other forms of unpaid labor in India, such as housework and caregiving, are not classified as employment. Notably, women who continue to perform the vast majority of household labor are not considered part of the workforce.
China's Economic Engine Is Running Out of Fuel
Earlier this month, the ratings agency Moody’s cut its outlook on China’s s... →
Excluding unpaid workers reveals a far lower workforce participation rate than official figures suggest. In 2022-23, 48% of men in India were engaged in paid employment, compared to just 13% of Indian women, resulting in one of the world’s lowest female workforce participation rates.
This underscores the biggest shortcoming of India’s much-vaunted growth model: its inability to generate employment opportunities, even relatively low-paid and poor-quality jobs, despite rapid increases in aggregate GDP. It should come as little surprise, then, that real wages have remained largely stagnant over the past decade.
Notably, even among agricultural workers, who experienced the highest real wage growth (albeit at a modest average annual rate of 0.9%), real wages actually declined between 2014-15 and 2021-22 in major states like Haryana, Kerala, Punjab, Rajasthan, and Tamil Nadu. Meanwhile, about half of India’s workforce remains employed in low-productivity sectors that account for just one-fifth of national income.
Consequently, mass consumption has remained constrained, which may explain the government’s unwillingness to conduct consumer-spending surveys. This contributed to a sharp decline in domestic investment, which fell from a peak of 42% of GDP in 2006-07 to roughly 31% in 2022-23. Moreover, basic human-development indicators, particularly those related to nutrition, have remained poor and even worsened in recent years, related to low public spending on health, education, and social protection.
Regrettably, creating more high-quality jobs does not appear to be one of the Modi government’s top priorities. Instead, the government’s economic strategy has focused on “incentivizing” a select group of corporate investors through taxpayer-funded subsidies and regulatory changes. The needs of the vast majority of micro, small, and medium-size enterprises, which employ most of India’s workforce, are often overlooked. Moreover, these companies have been adversely affected by policy mistakes such as the demonetization project that abruptly nullified 86% of India’s currency in 2016 and the poorly designed and hurriedly implemented Goods and Services Tax of 2017.
Without far-reaching reforms aimed at boosting employment and guaranteeing living wages, India will struggle to achieve genuine economic success. The general election due in April and May offers Indian voters a chance to reorient the economy toward a more sustainable, equitable path. They must not squander it.
