Mriganka Tiwary

Abstract

This paper argues that India’s labour market challenge is systemic

underemployment, which restricts productivity and undermines

the human potential of the workforce, rather than a mere lack of

jobs. The analysis, supported by secondary data, shows that the

country’s rapid economic expansion fails to translate into quality

work. Nearly half of the workforce remains concentrated in low-

productivity agriculture, while widespread informality and stark

skill–job mismatches undermine returns even for the educated.

These structural patterns reveal that India’s “jobless growth” has

left much of its demographic dividend underutilised. Current

policy responses, such as loan waivers or other short-term rural

relief, provide only temporary reprieve without addressing the

roots of the crisis. The paper contends that a strategic shift toward

labour-intensive manufacturing, skills development, and

formalisation of employment is essential if India is to convert its

young workforce from a liability into a driver of long-term,

inclusive growth.

Introduction

In India, millions are “working” but not truly employed. Despite

the country’s real GDP growth at an exceptional 8.2% in FY

2023–24 (PRS Legislative Research), labour productivity has

remained inconsistent, even turning negative in December 2022

(CEIC). By contrast, in the U.S., real GDP growth of 3.3% in Q2

2025 was matched by an identical 3.3% rise in labour productivity

(BEA) (U.S. Bureau of Labor Statistics), suggesting a more efficient

growth model. This paper argues that India’s labour market

challenge is not a lack of jobs per se, but the systemicunderemployment that limits productivity, constrains economic

growth, and undermines the social and human potential of its

workforce.

Literature Review

The problem of underemployment in developing economies has

been analysed through multiple lenses (see Lewis; Sen; Rodrik).

The Lewis dual-sector model displays productivity gains from

shifting labour out of agriculture, yet India has not followed this

trajectory. Rodrik’s thesis on premature deindustrialisation

explains the country’s limited manufacturing absorption compared

with East Asian peers, while Sen’s capability approach reframes

employment as a core dimension of human freedom. Panagariya

and other Indian policy economists identify underemployment,

rather than unemployment, as the central structural challenge.

Reports by the World Bank, ILO, and Indian institute document

persistent informality, skills mismatches, and the devaluation of

higher education in the labour market.

Methodology

This paper adopts a qualitative approach grounded in secondary

research. It makes use of evidence from government publications,

international organisations, independent institutes, and media

reports to identify patterns of underemployment. Rather than

relying on a single dataset, it combines statistical indicators, case

studies, and sectoral analysis to build a holistic picture of India’s

labour market. The findings are interpreted through established

development frameworks, particularly the Lewis dual-sector

model, Rodrik’s deindustrialisation thesis, and Sen’s capability

approach, to evaluate structural constraints and assess the

adequacy of current policy responses.

Analysis

Defining Underemployment

Employment is often measured by the total number of people with

jobs. However, this method is limited. Many people may be

employed, but their work might add little value. This is

underemployment. Underemployment is hidden, in contrast to

unemployment, which is visible and easily countable. It occurs

when individuals put in less hours than they would like to, do tasks

that are below their skill level, or receive pay that is not enough to

lift them out of poverty.

A significant portion of India’s underemployment is disguised.

Although millions of people are technically “working” in

agriculture, more workers could be let go without lowering output.

In a similar vein, a large number of people work in low-wage,

unstable, or irregular jobs in the informal sector. The economy’s

actual productive potential is misrepresented when these workers

are counted as fully employed. They could do more.

This mismatch between counted workers and their real

productivity has been described in development theory, most

prominently through the Lewis dual-sector model.

Jobless Growth and the Limits of Structural Transformation

The Lewis dual-sector model explains how economies grow by

moving workers from low-productivity sectors, such as agriculture,

into high-productivity sectors like industry and services (Lewis).

This would cause overall output and living standards to rise. In

India, however, this expected correlation is not fully seen, and the

transition has been much slower than expected. Even as the

economy’s GDP grows, a large part of the labour force continues

to work in low-paying agricultural or informal jobs. This situationis often described as “jobless growth,” where the economy expands

but does not create enough quality jobs. In other words, the link

between economic growth and employment generation, known as

labour elasticity, is weak.

One reason for this weak elasticity is that, since the early 2000s,

India’s economic growth has been driven by urban, capital

intensive and skill intensive sectors, like IT and finance. The

service sector accounts for over 55% of India’s Gross Value Added

yet it employs about 30% of the total workforce (Press Information

Bureau). It is highly productive but is limited in its ability to absorb

the vast number of low skilled workers. Historically,

manufacturing has been particularly useful for absorbing labour in

developing economies. However, in India, manufacturing share of

GDP has about stagnated at around 13% (World Bank Group) and

its share of employment is also relatively low. Conversely,

according to Dani Rodrik’s work on premature deindustrialisation,

countries like China and South Korea have shifted rural workers

to the manufacturing sector successfully during their growth phase

(Rodrik), creating a more inclusive employment structure. India’s

service sector dominated before this could happen.

Agriculture and Manufacturing Stagnation

This imbalance is particularly visible in agriculture, where about

46% of India’s workforce is employed, yet the sector contributes

only 18–20% to the country’s GDP (Doshi et al.). The large-scale

movement of workers from primary into more productive sectors

is limited, and many workers remain underemployed or stuck in

low-paying roles, despite apparent improvements in national

output statistics.

The data suggests a clear underutilisation of labour. Primarily, this

is due to a lack of capital investment and economic opportunities

in the agricultural sector. Another factor that plays a role in theirlow output contribution is seasonality. Most crops grow at a certain

time of year, and farmers may be left without work during certain

periods. The low GDP share reflects this; since the work is not

year-round and earnings are often meagre, many may be forced to

seek casual, low-wage jobs in the informal sector when not

farming.

The Informal Economy

Work in the informal economy is precarious, yet 90% of India’s

labour force is a part of this sector (Ministry of Labour &

Employment). The rise of gig platforms like food delivery and

ride-hailing has expanded informal work, but it hasn’t necessarily

improved wages or security.

Jobs in the informal sector can be often categorised as

underemployment due to two main reasons: skill and time. Firstly,

the informal sector provides few opportunities for a worker to

apply or develop skills. A person with basic education or a knack

for a certain type of trade might end up in a job like street vending

or other casual labour that does not utilise their full potential.

Since workers are temporary, an employer is also unlikely to train

them. This is an example of skills-based underemployment.

Second, hours are unpredictable. A casual worker may only find

work on certain days. This is time-based underemployment;

workers are willing to work more hours but cannot find them.

In a 2024 report, the World Bank expressed that the persistence of

informal labour in developing economies will harm development

and sustainable growth (Ohnsorge and Yu).

Educated Yet Underemployed

Some especially compelling cases of underemployment can be

seen among those with university-level education. Many Indians,culturally, are encouraged to pursue higher education. However, if

they are forced to take unskilled, low-paying jobs after this, their

education is effectively devalued. And this is not simply a

theoretical situation. A study by the Institute for Competitiveness,

an affiliate of Harvard Business School, found that as of 2024,

only 8.25% of Indian graduates are working in jobs that align with

their educational qualifications. The same report notes that over

50% of graduates are employed in lower-skilled jobs (amitkapoor).

Similar is a striking case in 2024, when nearly 40,000 graduates

and over 6,000 postgraduates applied for “sweeper” positions in

the state of Haryana (The Wire Staff).

Rural Distress

It is not unreasonable to aim to decrease unemployment in a

nation. Unemployment is easier to express as a number, and is

more widely understood by the public as compared to

underemployment. However, the effects of underemployment,

including low incomes, are starting to be felt greatly by Indian

farmers. Farmer suicide rates are high, with numbers remaining

fairly steady between 2013-2022, making the topic one of debate

and controversy. The widely accepted reasons for this are

economic distress and large debts (Fleck). Before proceeding, it is

important to assert that these are not just statistics; each case

represents another worker trapped in structural

underemployment, where even relentless labour cannot guarantee

survival.

Policy Responses: Loan Waivers and MGNREGA

One way the government has tried to combat this is using loan

waivers. After the 2014 general election, several state governments

announced their own loan waivers to address persistent farm

distress. States like Uttar Pradesh, Maharashtra, Punjab, andRajasthan implemented large-scale farm loan waivers. For

instance, the Uttar Pradesh government announced a waiver of

loans up to ₹1 lakh in 2017, amounting to over ₹36,000 crore

(Balkrishna). Although these do provide ephemeral relief, they do

not address the structural problem of underemployment in the

agricultural sector, thus a long-term change is not made. Further,

such loan waivers may create an expectation that future loans will

also be forgiven, possibly discouraging repayment and formal

lending. This could harm India’s credit system.

A tried alternative is rural employment schemes. The Mahatma

Gandhi National Rural Employment Guarantee Act, or

MGNREGA, guarantees 100 days of unskilled manual labour to

rural households on demand (Ministry of Rural Development,

Government of India). This could provide a safety net for workers,

particularly during off-season when agricultural work is scarce.

And it has; MGNREGA has undeniably cushioned rural

households against seasonal shocks and provided support through

some guaranteed work. However, it is still a temporary solution , it

does not help in creating sustainable, high-productivity jobs that

would help workers move out of underemployment permanently.

Further, there has been discussion about possible inefficiencies and

corruption in the system, with Nirmala Sitharaman, India’s

finance minister, mentioning documented issues of “ghost

workers” in MGNREGA. (IANS).

Unmistakably, the real value of such populist policies in the long

term, is low. There is much room for improvement in how India

battles its underemployment, and deciding on a solution will

certainly be complicated.

Employment as Freedom: A Human Perspective

Underemployment, when viewed as a human issue, remains

disadvantageous. Employment is not just a means to earn a wage

that can support survival. Employment helps individuals find their

purpose, to contribute to their community, and to hone their skills.

Jobs that provide no such opportunities reduce people to

instruments of production. Amartya Sen’s capabilities approach

(Sen) depicts development as the substantive freedoms people have

rather than just material wealth like GDP. Sen argues that poverty

is not just a lack of income, rather the lack of opportunities

presented to a person that would have allowed them to be what

they desire, and what they value.

In this view, employment is a fundamental capability. A person’s

freedom is expanded when they have the option to pursue a

meaningful career. Conversely, underemployment is a direct

deprivation of this capability. It traps a person in a job that does

not utilise their skills or potential. It denies a person the freedom to

be a productive and respected member of society, even if they are

technically “working”.

Underemployment is a political failure too. As noted earlier, the

high growth of the service sector in India, covered briefly before,

did not occur without significant government support. While these

industries have contributed heavily to economic growth, they have

created a relatively small number of high-skilled jobs. India’s

policies of prioritising a high technology growth model over a

labour intensive one has created a massive skills gap, and millions

of low skilled workers are left behind. This is political neglect.

Current policies have failed to create an inclusive job market for

the large, young, unskilled population of India.

India’s large underemployed population will act as a drag on

innovation, and will reduce economic dynamism. Arvind Panagariya, former chairman of the NITI Aayog and the current chairman of the 16th Finance Commission, asserts that India’s primary labour issue lies not in unemployment but in underemployment, highlighting the urgent need for high-quality, productive jobs (Press Trust of India).

Solutions

Some organisations like the International Labour Organisation,

World Bank, and NITI Aayog have already started researching on

policies that could help solve India’s problem of

underemployment. Research is absolutely necessary, and should be

focused on skills development, promoting entrepreneurship, and

detailed analyses of the gig economy to find ways it can be

formalised, to provide workers with better wages, benefits, and

security.

1. Skills Development & Labour-Market Alignment

Goal: Align education and training with employer demand.

i. Employer-led apprenticeships: Companies help design training

and hire apprentices. Workers gain skills actually needed, thus

faster absorption into real jobs.

ii. Regional Skills Hubs: Linking local colleges, clusters, and

anchor firms

iii. Micro-credentials: Short, modular courses, like “basic coding”,

made widely acceptable by the government. Lets workers stack

skills, move up, and stay employable as jobs change.

iv. MSME apprenticeship credits: MSMEs are large employers in

India, employing over 60% of its workforce (Administrative

Staff College of India (ASCI)). Government subsidises small

firms to take trainees. Helps MSMEs build a trained workforce

at low cost.

2. Promoting Entrepreneurship

Goal: Build labour-absorbing, higher-productivity enterprises

beyond survivalist self-employment.

i. Agro-processing clusters: Farmers move from just growing

crops to also processing. This adds value and creates non-farm

jobs.

ii. Labour inclusive growth: Policies that generate jobs in labour-

absorbing sectors like manufacturing. Again, the argument of

capital-intensive sectors like IT and Finance generating a

higher GDP than labour-intensive industries may come up.

However, focusing on GDP growth alone is a flawed approach

for developing nations. In a country like India, a two-tiered

economy is created, where a small minority benefits, while the

majority is stuck in low quality employment, or even without

jobs. This inequality and social instability will harm India in

the long run. Further, manufacturing jobs still help teach

workers teamwork and basic technical skills. This creates a

more productive workforce ready to transition into higher-

skilled, more capital-intensive jobs later.

3. Formalising the Informal Sector

Goal: Make micro-units visible to markets and the government

without job loss.

i. Ease of registration with benefits: Cut bureaucracy, make it

easy to formalise, by for example, using a mobile app or just

requiring one ID. Further, tie formalisation to tax rebates.

Firms come forward.

ii. Gradual formalisation ladder: Small firms start with basic

registration, then gradually add compliance as they grow.Avoids scaring them away.

These are not radical ideas, but they matter because India has not

yet scaled such reforms effectively.

This paper focuses on under employment, not to downplay the

significance of unemployment, but because addressing

underemployment inherently strengthens labour-market

alignment. By making worker skills better suited to employer

demand, these measures also reduce unemployment by increasing

the number of workers firms actively want to hire

Synthesis

India stands at a critical juncture. To achieve a prosperous and

equitable future, creating jobs is not enough; meaningful work

must be created. Thus, reaching a resolution for the

underemployment crisis is an economic necessity and a moral

imperative.

The real test for policymakers is whether they can transform

employment from a statistical goal into a lived reality of secure

and dignified work. Growth will not solve this crisis; choices must

prioritise opportunity over pretence. With the world’s largest youth

population (United Nations Children’s Fund, India), India cannot

afford a workforce that is educated but underutilised, or ambitious

but underemployed.

At the same time, rapid advances in artificial intelligence add

urgency to this task. While AI may create new roles in fields like

data science and advanced analytics, it also threatens to displace

routine service and clerical jobs, the very areas that currently

absorb large numbers of graduates.

The quality of work available to the people will decide the nation’s

economic trajectory and its social stability. Ultimately, the fight against

underemployment is nothing less than the fight to ensure

that India’s demographic dividend becomes a dividend for its

people, not a debt to its future.

The success of a society is to be evaluated primarily by the

freedoms that members of the society enjoy.

— Amartya Sen, Development as Freedom

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