India: Domestic Demand

Background:

Over 65% of India's population lives in rural areas where employment is largely in the less productive agricultural sector and increasingly in allied activities and small-scale industries. While the manufacturing sector employs over 20% of the workforce, around 90% of these workers are employed in the informal sector with little or no safety net. Tight labor laws hinder hiring in the formal sector and promote capital-intensive production—one of the reasons India has failed to promote manufacturing employment like China has. In recent years, rural-urban migration and an information technology (IT) sector boom have accelerated job creation in the services sector, where incomes and human capital development are superior. The growing role of private and foreign investors in industry and education are also pluses. However, the services sector, despite accounting for 65% of GDP, employs only 15% of India's workforce. Skilled workers are still a small share of the total workforce, and India ranks low in global rankings for the provision of primary education, human capital development and education and health-care spending. The number of Indians in the working age group (15-64 years) is forecast to rise from 63% in 2006 to 68% in 2026, with the total working age population increasing to 765 million. Creating manufacturing jobs, accelerating labor training programs and increasing non-agricultural-based employment in rural areas will be key challenges for the government in the coming decade.