Skill gaps and job shortages threaten to undermine India’s population advantage

Nearly half of India’s graduates are unemployable while people with formal vocational training make up just 4 per cent of population. What is the fix?

Sector-wise job placements for skills courses show the most uptake in electronics and hardware. In pic, technicians ready photovoltaic panels at Fab City, Maheshwaram in Telangana. | Photo Credit: SIVAKUMAR PV

With 1.4 billion people, India has surpassed China to become the world’s most populous country, according to UN estimates. As its population will continue to grow over the coming decade, India stands to gain numerous advantages, especially as developed countries grapple with declining birth rates and tight labour markets. The abundant availability of labour also makes India well placed to achieve its growth goals. However, this also opens up the challenge of augmenting and channelising productive resources to activities that absorb labour in order to reap the benefits. While numerous policies have been announced to accomplish the goal of enhanced labour absorption and job creation, data on employment released from time to time by multiple agencies point to contradictory trends. This raises a vital question on the ability of the economy to generate adequate jobs, failing which the potential advantage could turn out to be a catastrophe.

A country enters the demographic dividend phase when, along with sustained population growth, the share of its working-age population exceeds that of the very young and old. India has already entered this zone, according to an International Labour Organization report, and will remain in this phase for another decade. The Economic Survey 2018-19 states that the demographic dividend will peak around 2041, when the working-age population will be 59 per cent of the total population.

However, the World Bank’s “Jobs for Resilience” report on South Asia states that the region recorded the highest outflow of migrants during 2010-23, accounting for 2 per cent of the working-age population. The report also highlights that for the demographic dividend to be realised, the region needs to create more jobs, which means that India has to create jobs at a higher rate than its youth population growth rate. Current data on employment growth do not indicate this, and going by the timeline of the next decade as the peak of the demographic dividend phase, employment generation is a tough challenge.

As an economy grows, it is expected to experience structural transformation with sectoral share in output and employment too changing over time. Agrarian economies have a higher share of workers and output in the agricultural sector, and as industrial activities grow over time, the size of the agriculture sector in the economy reduces. As industrialisation proceeds, it absorbs workers released from the agriculture sector. This process culminates in a third phase, when the services sector grows faster and absorbs more workers and contributes a larger share to the overall output. The linear progression outlined above assumes that output and employment growth move together.

Sluggish growth of the industrial sector

In India’s case, such a linear trajectory was cut short by the sluggish growth of the industrial sector and the rapid growth of the services sector. Output transition is not accompanied by employment transition as agriculture, which contributes more to employment growth, has a lower share in output, and the services sector, which contributes more to output, has not generated more jobs. This scenario is complicated by the existence of the informal sector, which is a sizeable component of the services sector. Employment transition in India typically sees workers in the informal agricultural sector shift to informal roles in the services sector, effectively moving from one low-paid job to another, resulting in the persistence of the “working poor” in the economy.

Given this peculiar path of structural transformation, data on employment growth in India reveal divergent trends. Data from the Reserve Bank of India show a 6 per cent increase in job growth for the financial year 2023-24, while the Centre for Monitoring Indian Economy shows that the unemployment rate rose to 9.2 per cent in June 2024 from 7 per cent in May. According to the Periodic Labour Force Survey (PLFS), the unemployment rate in urban areas decreased from 6.8 per cent to 6.7 per cent from January–March 2023 to January–March 2024 for people aged 15 and above. According to Citigroup Research, India needs to create about 1.2 crore jobs every year to absorb new entrants into the labour market. However, with a 7 per cent growth rate, the country is able to generate only around 80–90 lakh jobs a year, resulting in a deficit of around 30–40 lakh jobs a year.

Unemployment in India has both demographic and structural dimensions. Among men, the highest unemployment rate is seen in the 15-19 age group, followed by those aged 20-24. Among women, the highest unemployment rate is found in the 20-24 age group.

The self-employed made up 57.3 per cent of those employed in rural and urban areas in 2022-23, and the share of salaried employees fell to 20.9 per cent during 2022-23 from 21.5 per cent in the previous year.In terms of broad industry division, nearly 49.1 per cent of all rural males and 76.2 per cent of all rural females were employed in agriculture.

An important factor that hampers labour market operations is skill mismatch, which results in excess workers in some sectors and shortages in other sectors. Skills are the building blocks of efficient labour market outcomes as they represent an individual’s ability to perform tasks and add value to a work environment.

Skill development is considered key for productive employment as it is an important means for increased productivity, inclusive economic growth, and poverty reduction. Given the demographic pressures and structural changes in the services sector, a better skilled and more adaptable labour force that can spur domestic and foreign investment is required for sustained economic and employment growth.

Skill gap is the divergence between the skills required by the workforce and their current attributes and capabilities. According to the 12th Plan document, merely 2 per cent of the workforce has any vocational training. Further highlighting this, the India Skills Report 2015 stated that only one-third of all students applying for jobs had the appropriate skills to match employers’ requirements.

There exists an enormous skill gap between the demand from industries and the kind of skill sets young people acquire through various education and training programmes. According to PLFS data, the percentage of formally vocationally trained individuals decreased from 2.2 per cent in 2011-12 to 2 per cent in 2017-18 and increased to 3.7 per cent in 2022-23, compared with 52 per cent in the US, 80 per cent in Japan, and 96 per cent in South Korea.

To address this acute shortage of skills, a number of policy measures have been envisaged. The National Skill Development Mission (NSDM) and the National Policy on Skill Development and Entrepreneurship have been the government’s major response.The NSDM was implemented through schemes such as the Pradhan Mantri Kaushal Vikas Yojana (PMKVY), the Deen Dayal Upadhyaya Grameen Kaushalya Yojana, and the National Apprenticeship Promotion Scheme.

A major problem with skilling programmes has been their short duration. Since 2017-18, of the total vocationally trained individuals, the share of those who undertook courses with a duration of less than six months increased from 22 per cent to 37 per cent.

Highlights

• India has become the world’s most populous country with 1.4 billion people, surpassing China. The country’s demographic dividend is expected to peak around 2041, when the working-age population will reach 59 per cent of the total population.
• India needs to create about 12 million jobs annually to absorb new labour market entrants. But with a 7 per cent growth rate, the country is only generating 8-9 million jobs per year, resulting in a deficit of 3-4 million jobs annually.
• Only 3.7 per cent of India’s workforce is formally vocationally trained, compared to 52 per cent in the US and 96 per cent in South Korea. The Pradhan Mantri Kaushal Vikas Yojana has a low placement rate, with only 22.2 per cent of trainees actually placed in jobs after training.

Worrying trend

A more worrying trend is that while in 2017, 29 per cent of individuals took two-year or longer courses, it has now declined to 14.29 per cent. This clearly indicates that there has been a rapid decrease in the duration of skill development courses, leading to a situation of more people getting some kind of formal certification through short-duration courses, some of which are as short as 10 days.

Short duration skill training programmes offer a range of courses across retail, hospitality, agriculture, wellness, construction, IT, and other sectors. These courses are intended to equip young people with the skills required to work as electricians, warehouse packagers, tailors, hairdressers, beauticians, farm machine repairers, solar technicians, videographers, and so on. But in reality, across regions, there have been some serious lacunae in the functioning of these initiatives. They range from an absence of training centres to poor training, lack of certification, inadequate or forced placement, shortage of trainers, and no assurance of a decent wage for those trained.

The shortcomings of the skill development courses are reflected in the post-training placement statistics. According to the PMKVY’s official website, 54 per cent of the trainees are placed; however, an analysis of data shows that only 22.2 per cent were actually placed. The placement rate of the PMKVY shows not much improvement over time; for PMKVY 1.0, it is 18.4 per cent, for PMKVY 2.0, it is 23.4 per cent, and for PMKVY 3.0, it is 10.1 per cent. The sector-wise placement rate shows 54 per cent for electronics and hardware; 20 per cent for apparel; and for the rest of the eight sectors, BFSI (banking, financial services, and insurance), beauty and wellness, etc., it is lower than 10 per cent.

Young engineers writing a test at a campus placement programme held at IIT Madras, a 2016 picture. | Photo Credit: MOORTHY M

This indicates that the rise of short-term skilling courses results only in an increase in the number of individuals who may now possess a certification labelling them as skilled but in reality lack the full training required to carry out tasks efficiently.

Imparting skill development programmes is also ridden with a number of problems, as finding a good instructor at a minimum wage and managing the centre within a budget is a tough task. Most centres thus run courses that require less funding, which means these centres cannot afford to buy big machines or hire well-skilled trainers.

Initially, skill development centres used to get money from the government before a batch completed a course; however, according to the new guidelines, funding is given only after the course is over and only for those who have successfully completed the certification. Further, in the initial phase, the Ministry allocated Rs.1,100 a student, with which the skilling centres had to provide equipment and products for training, pay teachers, and pay electricity bills.

Currently, the per-student budget at PMKVY centres is nearly Rs.6,000, with which these centres offer courses such as automotive service technician, healthcare, and food processing. Given this milieu of skill training programmes, there is a need for quality checks of the short-term courses. The available resources and infrastructure limit these courses to producing half-trained workers, and the certificates of these trained jobseekers do not carry much value in the labour market as they essentially do not learn the required skills. This, in turn, hampers their chances of securing a job after the completion of these training programmes. In essence, the skilling system produces half-educated and quasi-trained personnel.

The India Skills Report

The India Skills Report 2021 argues that nearly half of India’s graduates are unemployable. Further, the youth unemployment rate reflects worrying trends: for those with middle school (class VIII) education, it increased from 4.5 per cent to 13.7 per cent; for secondary education (class X), it rose from 5.9 per cent to 14.4 per cent; and for higher secondary (class XII) education, it climbed from 10.8 per cent to 23.8 per cent. Among graduates, the unemployment rate went up from 19.2 per cent to 35.8 per cent, while for postgraduates, it rose from 21.3 per cent to 36.2 per cent in 2022-23.

Studies show that effective, sustainable approaches to workforce development and employment must improve a combination of skills for employability of individuals and at the same time build a sustainable system for improved private sector competitiveness. Youth unemployment resulting from a mismatch between the supply of the education system and labour market needs can in particular be partly addressed through adequate skills development within a future-oriented, flexible, and holistic education system.

The current situation of educated unemployment, low demand for skill programmes, low-quality training, and poor placement rate calls for an urgent need to comprehensively review the skill development landscape. This assumes more importance as the country seems to be losing the demographic advantage.

The current youth unemployment rate is unacceptably high, with young people account for nearly 83 per cent of the country’s total unemployed population. As of now, one in every three young Indians is neither pursuing education, nor is employed, nor enrolled in any skill-based training. This underscores the need to accelerate labour upskilling and strengthen women’s participation in the workforce if India is to achieve its full economic potential.

M. Suresh Babu is Director, Madras Institute of Development Studies. The views expressed are personal.