Pallepati Sai Abhijeet Rao

Adhyayan Foundation for Policy and Research

The Promise and the Paradox

India became the world’s most populous country in 2023, surpassing China, with a population of 1.4 billion (Ellis-Petersen and correspondent 2023). Additionally, with an average age of 29 years, India has a fifth of the world’s youth population, resulting in a demographic dividend which has the potential to alter the economic fortunes of the nation and its people. The United Nations Population Fund defines demographic dividend as “economic growth resulting from a shift in a population’s age structure, mainly when the working-age population is larger than the number of dependents (United Nations Population Fund, n.d.).”

India is currently undergoing a dramatic demographic transition, with a rising share of the working-age population relative to dependents. The transition presents a one-time chance for the acceleration of economic growth and is likely to be a key driver in realising India’s vision of a $5 trillion economy (Ministry of External Affairs 2021).

Comparative international experience points to the transformative potential of such demography—East Asian economies, South Korea and China, for example, harvested their demographic dividends through investments in education, health, and employment generation. Studies estimate that a young population, backed by good policies and institutions, can drive savings, enhance productivity, and power long-term economic growth (Ladusingh and Narayana 2012; Mason 2001).

However, despite the immense potential of its Indian youth, they continue to face challenges such as access to quality education and health, unemployment and social inequalities. Failure to surmount these challenges could result in India’s demographic dividend becoming a demographic disaster.

According to Bloom, Canning, and Sevilla (2003), the age structure of a country’s population plays a critical role in its economic growth. A population with a larger proportion of dependents might have a lower rate of economic growth compared to one with a larger share of working-age people; however, this is also dependent on the policies that are being implemented in terms of health, education, family planning and macroeconomics. Accordingly, the demographic dividend can be examined from four perspectives, i.e., labour supply, savings, human capital, and institutional quality(Bloom, Canning, and Sevilla 2003).

Demographic Landscape of India

The percentage of working-age individuals has risen to 64% in 2021 from 61% in 2011, and its share is projected to increase until 2036 before stabilising, despite a decrease in the overall population growth rates and fertility rates (Ministry of Statistics and Program Implementation, n.d.). This implies the addition of more than one crore people to the labour force each year (ILO DWT for South Asia and Country Office for India and Institute for Human Development 2024).

The demographic landscape in India varies across regions, with southern states ageing faster and northern states experiencing significant population growth. According to the projections, almost 50% of the projected population growth between 2011 and 2036 is expected to occur in Bihar, Uttar Pradesh, Maharashtra, West Bengal and Madhya Pradesh (National Commission on Population 2019).

This would create an imbalance in political representation, with states in Northern India having greater representation in parliament, giving them greater control over economic and political decisions taken at the federal level. This potential imbalance has caused significant concern among southern states which already perceive a bias in the tax devolution policies of the central government. Further, southern states also face the challenge of taking care of their rapidly ageing population, while northern states face the challenges of harnessing the potential of their ever-growing youth population.

Role of Savings in Economic Growth

Household savings play an important role in driving investments, and the level of household saving is greatly influenced by the demography of the population. A larger working-age population, along with falling fertility rates, usually leads to more saving for social security, which enables domestic investments.

Domestic savings in the Indian economy, which accounted for 40% of gross fixed capital formation during 2012-2020 (World Bank 2025), have been declining for 3 straight years despite a growing workforce (Kundu 2025). This has also been accompanied by an increase in household liabilities for consumption. This reduces the amount of capital for investments and increases financial risk for households (Jhamb 2024).

Labor Supply – Employment of Youth

As per the latest PLFS report, the labour force participation rate for people aged 15-29 years was 46.5%, and the worker population ratio was 41.7%. The unemployment rate for the same age group stood at 10.2%, with young women in urban areas having the highest unemployment rate of 20.1% and urban men with 12.8%. Unemployment rates for those with a secondary education and above, while decreasing, continue to be higher than those with lower educational levels.

Despite impressive economic growth in terms of GDP, multiple reports have indicated the lack of quality employment for youth, especially those who have graduated with a college degree (Murali Krishnan 2024). This phenomenon, often termed jobless growth, occurs when an increase in economic output does not result in an increase in the number of jobs. Its effects are also visible in the intense competition for government jobs (Sharma 2024) and a rising wave of youth migration in search of better prospects abroad.

This shows a critical need for generating quality employment, especially from the private sector for college graduates, and increasing investments in higher and vocational education. This would ensure that economic growth is not increasing the size of the pie but also ensure a more equitable distribution of the pie for all.

Table 1 – Unemployment rates (in percent) according to usual status (ps+ss) for the persons of age 15-29 years estimated from PLFS (2023-24) all-India (Source – PLFS (2023-24))

Sector	Male (%)	Female (%)	Person (%)
Rural	8.7	8.2	8.5
Urban	12.8	20.1	14.7
Rural+Urban	9.8	11	10.2

Table 2 – Unemployment rates (in percent) according to usual status (ps+ss) for the persons of age 15 years and above with different educational attainments estimated from PLFS (2023-24) all-India (Source – PLFS (2023-24))

General Educational Level	Overall Unemployment
Not literate	0.2
Literate & up to primary	0.6
Middle	1.6
Secondary & above	7.1
All	3.2

Self-employment continues to be the largest source of employment, with an increase in the percentage of workers classified as “unpaid helpers in household enterprises” from 17.5% in 2021-22 to 19.4% in 2023-24 (National Sample Survey Office 2024). Sector-wise data on the distribution of workers shows that the percentage of workers engaged in agriculture has increased. This indicates a lack of quality jobs for young people, with many of them engaged in the informal sector without any social security benefits and reflects the trend of underemployment in agriculture (Sinha 2025). Further PLFS does not capture specific data related to gig workers, which could have  

Table 3 – Percentage distribution of workers in usual status (ps+ss) by broad industry division (Source – PLFS (2023-24))

Broad Industry Division (NIC 2008)	PLFS (2021-22)	PLFS (2022-23)	PLFS (2023-24)
Agriculture	45.5	45.8	46.1
Mining & Quarrying	0.3	0.3	0.2
Manufacturing	11.6	11.4	11.4
Electricity, Water, etc.	0.6	0.5	0.5
Construction	12.4	13	12
Trade, Hotel & Restaurant	12.1	12.1	12.2
Transport, Storage & Communications	–	5.4	5.6
Other Services	–	11.4	11.9

Data on activity status shows a decrease in the percentage of youth (15-29 years) in employment and a corresponding increase in those pursuing education, increasing from 18% in 2000 to 35% in 2022. Gender-wise activity data shows that despite an increase in young women pursuing education (32.4%), a majority continue to be primarily involved in domestic duties (45.1%) with a worrying decrease of those engaged in employment among both young women (aged 15–29) and adult women (aged 30–59) (ILO DWT for South Asia and Country Office for India and Institute for Human Development 2024).

Source: Employment and Unemployment Survey data, and Periodic Labour Force Survey data, ILO

This paradox reflects the effects of systemic social barriers such as the burden of households, childcare, lack of workplace safety (Maurizio Bussolo, Jonah Matthew Rexer, and Margaret Triyana 2024) and increasing household incomes (Chatterjee, Desai, and Vanneman 2018). The increase in Female Labour Force Participation Rate can also be attributed to better data collection of unpaid work of women.

Human Capital – Education

India has nearly 15 lakh schools with more than 26 crore students enrolled and employing nearly 1 crore teachers (Ministry of Education 2024); however, while the quantity, i.e., access to education, has improved, quality in the Indian education system continues to present a formidable challenge. In early decades, successive governments prioritised higher education rather than expanding primary education, which later negatively impacted India’s efforts to transition to an industrial economy (Kotwal, Ramaswami, and Wadhwa 2011).

The Annual Status of Education Report highlighted the fact that only 23.4% of rural students in Class 3 studying in government schools can read text from a Class 2 textbook, and only a third can perform a basic arithmetic operation (ASER 2025). While these figures have improved over the last few years, the COVID pandemic reversed many of the gains achieved over the past few years. However, this report only evaluates basic reading and arithmetic skills, leaving out higher-order cognitive or subject-specific learning outcomes.

The persistently poor levels of foundational literacy and numeracy inhibit the ability of students to progress to higher levels of learning as well as the acquisition of technical skills. This learning deficit carries forward to tertiary education, with direct implications on the employability of graduates. Consequently, the transition from education to the workplace is interrupted, leading to a pool of highly educated but low-skilled individuals (UNICEF, n.d.). According to UNESCO, every dollar invested in education would generate up to $15 in terms of economic growth, and if all students in low-income countries had basic reading skills, it could result in more than 170 million people being lifted out of poverty (UNESCO 2015).

Gender and age are important determinants of education attainment, with the likelihood of older children not enrolling higher than younger children. The report also mentions that while female students performed better at reading regional languages, they were lagging in arithmetic and English reading (ASER 2024).

This challenge is equally evident in the higher education sector, which includes more than 1,000 universities and 45,473 colleges serving over 4.3 crore students (Department of Higher Education 2022), and yet with less than half of graduates in India being employable (Bera 2025), they face hurdles in obtaining gainful employment. This was further exacerbated by the pandemic, which caused a global economic slowdown and resulted in a decrease in hiring.

Higher education suffers from outdated curriculum, faculty shortages, poor infrastructure and limited industry participation in higher education in terms of pedagogical development and research collaborations.

The lack of opportunities in the private sector has fuelled intense competition for public sector jobs where highly qualified graduates apply for jobs with modest educational requirements. This has also resulted in many graduates migrating abroad for jobs and higher education, a massive waste of graduates who otherwise could have contributed to the economy.

Human Capital – Skilling

Skilled labour plays an important role in driving economic growth, especially in the industrial and service sectors, such as manufacturing and hospitality. According to the NSSO 2011-12 (68th round) report, less than 3% of the working population have received formal vocational training (Ministry of Skill Development & Entrepreneurship 2024).

The vocational education sector continues to face numerous challenges, such as a lack of coordination among ministries and governments, numerous certification systems, a lack of trainers, an outdated curriculum and a lack of support for entrepreneurship. Moreover, public perception of vocational training is often seen as a last resort for those who are not academically successful (Ministry of Skill Development & Entrepreneurship 2024).

Germany’s dual system of vocational training (Ausbildung) has been recognised worldwide as a highly successful model of education which combines both theory and practice, with both industry and the government playing an active role, encouraging a large percentage of German students to opt to undergo vocational training. This resulted in Germany having a competitive edge over other European economies due to a highly skilled workforce (Funk 2004).

Skilling in India is coordinated by the Ministry of Skill Development and Entrepreneurship (MSDE) guided by the National Policy for Skill Development & Entrepreneurship, 2015. The government has been revamping the vocational education sector through the Skill India Mission, Jan Shikshan Sansthan and Pradhan Mantri Kaushal Vikas Yojana, which focus on increasing the capacity of training institutions such as ITIs and skill universities and upgrading and standardising the curriculum of such institutions. The ministry is also collaborating with the armed forces to provide formal certification to Agniveer cadets, thus improving their career prospects after their service period ends (Ministry of Skill Development & Entrepreneurship 2024).

The 21st century saw the rise of computers and artificial intelligence playing an important role in the global economy. While such technologies have increased productivity and wages, this has also widened income and employment inequality, also known as skill-biased technological change. Effective vocational education and skilling programmes could help in reducing such inequalities and improving productivity (Ghose 2024).

Institutional quality with comparative insights

India’s policies regarding employment, education and skilling are developed and implemented in silos; for example, education and skilling are managed by separate ministries (The Economic Times 2024), and labour, economy and education are concurrent subjects under the Constitution. Thus, institutional fragmentation is coupled with a lack of coordination among central, state and local governments, leading to overlapping of schemes and wastage of resources. This siloed approach to policy making could and has negatively impacted the potential of the demographic divide which India is experiencing.

East Asian economies had successfully leveraged their demographic dividends to achieve rapid economic growth and better standards of living. South Korea, a country poor in natural resources and ravaged by war in the mid-20th century, experienced rapid economic growth in the 1980s, known as the “miracle on the Han River’.

South Korea in its early decades invested heavily in primary education with a focus on eradicating illiteracy. The implementation of policies was so successful that adult literacy jumped from 22% to 93% in 1975. Expansion of secondary and tertiary education resulted in a highly skilled labour force vital for tech-intensive manufacturing. Further land and agriculture reforms carried out by the newly independent government enable an increase in output and productivity in the agricultural sector, freeing up labour and creating demand for the industry.

An important factor behind its economic success was the government’s ability to implement policies. President Park Chung Hee established the Economic Planning Board (EPB) in 1961, which directed economic policies and budget planning and established a common framework for all ministries (Kim 1992). Proposals from individual ministries were reviewed by other relevant ministries. Economic research was encouraged with the establishment of the Korea Development Institute (“Republic of Korea: Four Decades of Equitable Growth”, 2004).

Another country which successfully leveraged its demographic potential is China. After coming to power, the Chinese Communist Party promoted the expansion of primary education and healthcare and implemented land reforms. These social reforms played an important role in ensuring the success of the economic reforms which were implemented in the 1980s.

Conclusion

India is at a crossroads in its national journey with a youthful population capable of achieving the dreams of its founding fathers; however, it is also beset with the challenges of unemployment, poor-quality education and skilling, and fragmented policy interventions.

East Asian economies such as China and South Korea have shown the way to leverage a demographic advantage requires unified policies that prioritise foundational education, targeted skilling, and quality employment generation. Equally important is private sector participation in not just job creation but also in education and skilling.

The window of opportunity is short; if the current challenges remain unresolved, India’s demographic dividend can become a demographic liability. But with visionary leadership, congenial policy-making, and sustained investments in the people, India can translate this promise into progress—becoming not only the world’s most populous country but also one of the most prosperous.

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