Does India need 12% growth rate to avoid unemployment crisis? Here's what Morgan Stanley warns

India’s economy must grow at an exceptional rate of 12.2% annually to address its underemployment crisis, Morgan Stanley economists warned, highlighting the risk that millions of young Indians might remain excluded from productive work, reported Bloomberg.

The labour market of India faces a dual challenge of unemployment and underemployment, Morgan Stanley economists led by Chetan Ahya stated in a note on Monday. The youth unemployment rate stands at 17.6%, the highest in the region, while an influx of workers into agriculture has pushed farm employment to a 17-year peak, it added.

Morgan Stanley cautioned that India faces the risk of falling into a jobs trap unless it boosts industrial and export growth, accelerates infrastructure development, and implements comprehensive reforms to upgrade skills and improve business environment. This would not only hinder its goal of becoming the world’s next growth engine but also increase external migration pressures, despite H-1B visas becoming more expensive.

What is underemployment?

Underemployment occurs when jobs that do not fully utilise an individual's skills, education, or available work hours. Unlike unemployment, it is hard to quantify, particularly when employment definitions are broad. In India, anyone who has worked at least one hour in the past week is considered employed, including unpaid family work, which results in widespread underemployment mainly within informal sectors.

The government’s estimated growth rate of 6.3%-6.8% remains well below the level required to effectively tackle the country's unemployment problem. The situation has been worsened by a 50% US tariff on Indian goods and a significant rise in H-1B-visa fees during Donald Trump's administration, the report said.

India’s economy grew 7.8% in the June quarter, exceeding expectations. However, this growth remains insufficient to absorb the 84 million people expected to join the workforce over the next decade, according to the note. The report also highlighted that poverty continues to hinder household consumption.

Approximately 603 million Indians still live on less than $3.65 a day, according to the World Bank’s 2022 standard. Since the bank has recently increased that threshold to $4.20, the number of Indians considered vulnerable is likely to increase.

Additionally, advancement in artificial intelligence and automation threatens traditional service-sector jobs, which have long provided opportunities for India’s educated youth. Morgan Stanley cautioned that without increased investment in advanced manufacturing, technology, and skills development, India’s labour market might lag even more behind the demands of its young workforce.

(With inputs from Bloomberg.)