The World Bank’s report serves as a stark warning that India’s demographic dividend is not a given. Without immediate and comprehensive labour reforms, the nation risks squandering this opportunity, jeopardizing its aspirations for high-income status.

India’s pursuit of high-income status by 2047 is facing a critical juncture, with a new World Bank report highlighting the urgent need for comprehensive labour reforms to fully capitalize on its demographic dividend.

The report, “Becoming a High-Income Economy in a Generation,” released last week, reveals that while India’s growth potential is significant, time is running out to address the nation’s lagging labour force participation.

To achieve its ambitious goal, India must sustain an average growth rate of 7.8 percent over the next 22 years, a target deemed feasible given its recent growth trajectory. However, the World Bank emphasizes that this requires “reforms and their implementation to be as ambitious as the target itself.”

“Lessons from countries like Chile, Korea and Poland show how they have successfully made the transition from middle- to high-income countries by deepening their integration into the global economy,” said Auguste Tano Kouamé, World Bank Country Director. “India can chart its own path by stepping up the pace of reforms and building on its past achievements.”

A central concern of the report is India’s underutilized demographic dividend. Despite having a large working-age population, the country’s labor force participation rate stands at a mere 56.4 percent, significantly lower than its peers. This deficiency is a major obstacle to achieving sustained economic growth.

“India can take advantage of its demographic dividend by investing in human capital, creating enabling conditions for more and better jobs and raising female labour force participation rates from 35.6 percent to 50 percent by 2047,” said Emilia Skrok and Rangeet Ghosh, co-authors of the report.

“Vulnerable Employment”

The report warns that the window to leverage this demographic advantage is rapidly closing. Over the next three decades, the growth of India’s working-age population is projected to decelerate, and the dependency ratio is expected to increase. This shrinking window underscores the urgency of implementing reforms to boost labour force participation and job creation.

A major challenge is the quality of jobs being created. Many new jobs are informal and low-productivity, concentrated in sectors like construction and traditional market services. Agriculture remains the primary employer, accounting for over 45 percent of total employment. Moreover, a significant portion of manufacturing employment is in micro and small firms, further contributing to informality.

The report highlights the prevalence of “vulnerable employment” in India. A staggering 73.2 percent of employment is in the informal sector, compared to the 32.7 percent average in emerging market economies. Even in the formal sector, many jobs lack basic protections, with over half of regular wage and salaried workers lacking social security benefits, paid leaves, or formal contracts.

Persistent Gender Gap

Despite improvements, women’s participation in paid employment remains limited. While female labour force participation has increased to 35.6 percent, it is still far below the 50-60 percent seen in other emerging markets. A significant proportion of working women are engaged in unpaid work or agricultural activities, with urban participation remaining particularly low. Regulatory restrictions, limited access to finance and digital technologies, and social norms are significant barriers to women’s full participation in the workforce.

The report emphasizes the need for structural transformation, shifting labour from low-productivity sectors like agriculture to higher-productivity sectors like manufacturing and modern services. India’s progress in this area has been slow compared to successful East Asian and East European economies.

Productivity gains have largely been concentrated in large firms, particularly in the services sector, while small and medium enterprises have seen stagnant productivity. The report recommends streamlining labour market regulations, fostering innovation, and promoting technology adoption to boost productivity across all firms.

To address these challenges, the World Bank recommends four critical areas for policy action:

• Increasing Investment: Boosting both private and public investment from 33.5 percent of GDP to 40 percent by 2035 is crucial.
• Fostering Job Creation: Incentivizing private sector investment in job-rich sectors and improving skills development are essential.
• Promoting Structural Transformation: Shifting labour to higher-productivity sectors and enhancing trade participation are vital.
• Enabling State-Level Growth: Adopting a differentiated policy approach for states and providing incentives for lagging regions are necessary.