By Saumitra Bhaduri & Shubham Anand
India’s labour market is a paradox. While India recorded GDP growth of 7.8% in the first quarter of FY26, a closer look reveals that two fundamental challenges persist: a pervasive skills mismatch, and a troubling disconnect between growth and job creation. This narrative is less about a quiet revolution and more about the risk of an unfulfilled demographic dividend, demanding attention.
Perhaps the most debated aspect of India’s labour market is the trajectory of women’s participation. India’s female labour force participation rate (FLFPR) has shown a classic “U-shaped” curve, falling from 34.1% in 1999-2000 to a low of 23.3% in FY18. While a recent rebound has brought the figure up, the FLFPR in July stood at 36.9% for persons aged 15 years and above, significantly below the G20 average of around 50%.
Who drove the rebound in participation rates?
A significant portion of the rebound is driven by an increase in rural areas and in own-account and unpaid work in agriculture and unorganised sectors. The share of women workers in regular salaried jobs, the organised sector, and industry and services has fallen over the last few years. Over half of the regular salaried women workers in 2023 didn’t have written job contracts or social security benefits, said a study in July by Shamim Ara and Puneet Kumar Shrivastav in Economic & Political Weekly
The International Monetary Fund estimates bringing more women into the formal economy could add up to 2% points to India’s annual GDP growth. A significant barrier that has persisted for years is the disproportionate burden of unpaid care work, which women in India shoulder 90.5% of, compared to the G20 average of about 70.8%. This not only limits women’s economic mobility but also keeps many from the formal workforce. An International Labour Organization survey found one-third of women who reported their occupation as “domestic duties” were willing to work if jobs were available at their premises.
India’s low unemployment rate of 5.2% might appear promising, but it often masks a deeper problem of underemployment. Data reveal significant disconnect between the skills taught in academic institutions and those required, leaving a large portion of educated youth in roles that don’t utilise their qualifications.
How big is India’s skill mismatch issue?
Only 8.25% graduates are employed in roles that align with their qualifications, a study by the Institute for Competitiveness found. The problem is compounded by a stark regional disparity. States with strong industrial and services bases, such as Gujarat, Tamil Nadu, and Karnataka, continue to outperform in job creation. In contrast, Bihar, Jharkhand, and Uttar Pradesh—home to 30% of India’s youth—remain trapped in low-productivity agriculture and public employment schemes. The reliance on migrant remittances is a direct consequence of this disparity, serving as a primary income source for millions of families.
This skill gap has a direct impact on employment outcomes. A Mercer-Mettl survey noted that only 42.6% of Indian graduates were found to be employable in 2024. This is largely attributed to a lack of non-technical skills, even as employability in technical roles has shown a slight improvement. This suggests that despite a booming number of graduates, a large portion of the talent pool lacks the practical and technical skills that industries require, leading to a vicious cycle of academic inflation and professional frustration.
This leads to the most pressing question: what about the government’s flagship “Make in India” initiative? While it has boosted manufacturing output and attracted foreign investment, its impact on job creation has been limited. The reasons are many. Modern manufacturing is increasingly capital-intensive and automated, requiring fewer people to produce more goods. So even a manufacturing boom might not generate the millions of jobs a labour-surplus economy like India needs.
The Employees’ Provident Fund Organisation payroll data for June showed a net addition of 21.89 lakh members, an all-time high. This is often cited as a sign of robust formal employment growth. But this data must be viewed with caution. It includes not just new jobs but also the formalisation of existing ones and re-registrations of former members. The majority of new subscribers in June were aged 18-25; a big portion of the total net addition was in “expert services” and “manpower suppliers”, indicating a rise in contract-based work rather than permanent, secure jobs.
India is at a critical juncture, facing a demographic deadline that demands action. With a youth bulge of 650 million under 25, this opportunity won’t last forever. By 2046, the elderly will outnumber those aged 0-15, turning a potential dividend into a burden. To be workforce-ready by 2047, India needs a coordinated policy approach that tackles both the skill mismatch and persistent issues with FLFP.
To address the deep-seated challenges in FLFP, a fundamental policy imperative is continued investment in social infrastructure. Providing affordable childcare and elder care facilities is essential to alleviate the care burden on women, freeing them to pursue formal employment.
Along with these social reforms, education and training systems must be overhauled to bridge the skill gaps. The education system needs to be recalibrated for the demands of the job market, while technical and vocational education and training must be reformed to address under-qualification. Policies must also be tailored to address regional imbalances. Empowering states with targeted funding and autonomy to develop localised skill development programmes can help address disparities and create a more equitable distribution of job opportunities.
Data-driven interventions are also necessary. For instance, the intelligent use of gender-disaggregated data can help fine-tune policies to identify and address specific, localised constraints that hold back women from the workforce, such as safety issues or lack of access to transportation. Similarly, granular skill data collection and regular skill gap analysis led by Sector Skill Councils and State Skill Missions are essential for more responsive policies.
While this unified strategy is the clear path forward, its successful implementation will ultimately determine if India’s demographic dividend becomes a story of triumph or a tale of lost opportunity.
Saumitra Bhaduri is a professor and Shubham Anand is a PhD scholar at the Madras School of Economics in Chennai.
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