Economist Santosh Mehrotra on the Jobs Crisis That Could Keep India Poor

Just as Brazil and South Africa have remained caught in the middle-income trap, India is moving towards a similar fate, never attaining the status of a rich country despite the current government's promise of a Viksit Bharat, argues development economist Santosh Mehrotra. Such an outcome would deny Indians the kind of prosperity that has come to define the advanced economies of the West and East Asia.

In their recent book, India Out of Work: Rethinking India’s Growth Story, Mehrotra and his co-author Jajati Parida unpack the layers of structural weaknesses that lie beneath the government's narrative of high gross domestic product (GDP) growth.

Their central argument is that India has failed to generate sufficient employment outside agriculture to absorb the millions entering the labour force. According to their estimates, India is currently falling well short of the 10 to 12 million new non-farm jobs it needs to create every year until 2047, the consequences of which extend far beyond the labour market.

Weak employment growth, they argue, has constrained household incomes, depressed aggregate demand and eroded household savings, leaving businesses with little incentive to undertake fresh investment. The result is a self-reinforcing cycle in which subdued demand discourages investment, while inadequate investment further limits the creation of productive and well-paying jobs.

“There is no systematic dynamic of rising consumption, especially among the bottom 70 to 80 per cent of the population, who are barely managing to sustain their consumption by running down their savings,” says Mehrotra in an interview with Outlook Business.

This structural crisis, he argues, is clearly visible in India's economic growth over the past decade. After adjusting for inflation using 2011-12 prices, the economy grew at an average annual rate of 6.2 per cent in the 10 years up to 2023-24, down from 6.8 per cent during 2004-05 to 2013-14. The difference may seem small, but it comes at a crucial moment in India's development. These were the years when the country had a rapidly expanding working-age population—a once-in-a-generation opportunity known as the demographic dividend, when a larger workforce is expected to drive faster economic growth.

Comparison with China should give an even clearer picture. China, now the world's second most populous country, made the most of its roughly 30-year demographic dividend through careful long-term planning. In fact, China was at the same level of per capita income as India in 1995 but now has a per capita income 5.3 times that of India, though only 2.5 times as large in purchasing power parity terms. Throughout that period, it maintained annual GDP growth of around 9-10 per cent, creating jobs and lifting incomes before its dividend came to an end around 2015.

In India's case, the authors believe this window of opportunity will begin to close by 2040. If the country fails to replicate China’s success in the next 15 years, it risks entering a future with hundreds of millions of people still trapped in poverty and illiteracy, problems that could persist for decades.

If India maintains an average annual GDP growth of 6.5 per cent till 2044, its per capita income will reach only $9,220, well below the current threshold of around $14,000 for a high-income economy. And even that target will keep moving higher, as the World Bank periodically revises the threshold upward to account for inflation and changes in exchange rates.

Inefficient Industrial Policy

Much of Mehrotra and Parida's argument centres on the failure of India's industrial policy to create enough manufacturing jobs. Instead of drawing workers out of farms into more productive factory employment, the economy has left millions stranded in low-productivity agricultural work.

The authors argue that the problem became even more acute in the aftermath of the Covid-19 pandemic. Between 2020 and 2023, large-scale reverse migration pushed an estimated 80 million workers back into agriculture. To put that in perspective, the number of people working in agriculture rose from about 200 million in 2019 to 280 million in 2023-24, before falling to 265 million in 2025.

At the same time, India has adopted what Mehrotra calls a "vertical" industrial policy through production-linked incentive (PLI) schemes, which offer financial incentives to selected firms mainly in capital- and import-intensive sectors in return for expanding domestic production and sales.

"By definition, the PLI scheme cannot create many (manufacturing) jobs because you are essentially paying firms that you have selected in return for merely increasing sales and production," says Mehrotra. He points out that 12 of the 14 sectors covered under the PLI programme are capital-intensive, meaning they rely far more on machines and technology than on employing large numbers of workers.

Even before the PLI scheme came into the picture, economists had long argued that government support for India's labour-intensive sectors—including textiles, wood products, food processing, leather and footwear—as well as its micro, small and medium enterprises, had been woefully inadequate compared with the support extended to large corporates. Policies such as demonetisation and the implementation of the goods and services tax, in particular, have been widely criticised for hurting these sectors.

"This has contributed to a rise in income and wealth inequality in the country, reinforcing the loop of constrained consumption, weak investment and slower growth," says Mehrotra.

Rising income and wealth inequality can be particularly damaging for a country like India, which already struggles with deep gender inequality. Social norms, Mehrotra believes, continue to keep millions of women out of the workforce, further limiting the country's productive potential. The combination of these inequalities, he adds, will not allow India to reap its demographic dividend and escape the middle-income trap in time.

Devil in Definition

Just as important as creating enough non-farm jobs, Mehrotra and Parida argue, is having an honest picture of the employment situation. In their book, they also challenge the government's narrative of high employment growth, arguing that it relies on "favourable" and "misleading" data. Without an accurate diagnosis of the problem, they contend, India cannot have an informed debate about the true scale of its unemployment crisis, let alone address it effectively.

The debate boils down to a striking difference between the government's Periodic Labour Force Survey (PLFS) and the privately compiled data of the Centre for Monitoring the Indian Economy (CMIE). Since 2020, the PLFS has shown a rise in both the labour force participation rate and the worker-population ratio despite the pandemic. The CMIE data, by contrast, suggests that both indicators declined over the same period. The difference, Mehrotra points, lies in how "employment" is defined.

Unlike the PLFS, the CMIE follows employment definitions laid down by the International Labour Organization (ILO), which do not count unpaid family labour or unpaid work on family farms as employment. The PLFS, however, continues to classify such work as employment, resulting, Mehrotra says, in more favourable employment numbers. The CMIE dataset also covers both the organised and unorganised sectors, as well as rural and urban India, giving a broader picture of the labour market.

"One can simply understand this from the fact that when labour markets across the world were being disrupted by the pandemic, India was miraculously creating so many jobs," says Mehrotra. "More than 100 countries use the ILO definition today. The saddest part is that India, despite chairing the ICLS (International Conference of Labour Statisticians) in 2013, did not adopt it."

How much attention Indian policymakers give to measuring the country's unemployment problem should matter when there is so much to fix and so little time to get it right.

The coming decades are perhaps the most crucial in India's history. They will shape the country's identity, its story and the lives of its people. Mere slogans of Viksit Bharat, without long-term planning and policy confidence, will achieve little, adds Mehrotra.