India’s jobs crisis is structural

India’s latest GDP growth estimates for FY26 reinforce a familiar but increasingly uncomfortable pattern. Output remains robust by global standards, public investment continues to support demand, and macroeconomic stability has largely been preserved. Yet employment outcomes refuse to move in tandem. Job creation, particularly in formal and higher-quality segments, continues to lag well behind the pace of economic expansion. This disconnect is no longer episodic or cyclical. It is structural.

For years, weak job growth was explained as the result of temporary shocks. Demonetisation, the initial disruption from GST, the pandemic, and a global slowdown were all cited as reasons employment would recover once growth normalised. That recovery has not materialised. Instead, successive phases of strong GDP growth have delivered diminishing returns in employment. The constraint lies not in short-term demand but in the underlying nature of India’s growth.

At the core of the issue is declining employment elasticity, the number of jobs created for each percentage point of GDP growth. India’s growth model has become progressively more capital intensive. Large manufacturing investments, infrastructure projects, and technologically upgraded firms generate output efficiently but absorb relatively little labour. While such investments are essential for long-term productivity, they cannot, on their own, meet the employment needs of a labour force that continues to add millions of new entrants every year.

Manufacturing illustrates this challenge clearly. Policy over the past decade has prioritised scale, efficiency, and global competitiveness. These objectives are defensible, but they have also encouraged automation and capital deepening. As a result, manufacturing output has risen faster than manufacturing employment. Labour-intensive segments such as textiles, footwear, and light engineering have struggled to expand at scale, constrained by compliance burdens, fragmented supply chains, and weak integration into global markets. The outcome is a sector that appears strong in headline output but remains thin in job creation.

Services, often seen as India’s employment safety valve, present a different but equally troubling picture. High-productivity services such as information technology, finance, and professional services contribute disproportionately to GDP but employ a relatively small, highly skilled segment of the workforce. At the other end of the spectrum, low-end services absorb large numbers of workers but remain informal, low-paid, and insecure. The middle layer, where stable, moderately skilled jobs should emerge, remains underdeveloped. As services expand, they are increasingly informalising rather than formalising employment.

This structural imbalance is compounded by the weakness of small and medium enterprises. MSMEs are widely recognised as India’s largest potential source of jobs, yet policy support remains uneven. Credit access has improved in aggregate, but issues of timeliness, cost, and risk-sharing persist. Compliance requirements, even when simplified on paper, continue to impose disproportionate burdens on smaller firms. Delayed payments by larger buyers and government agencies further erode their ability to expand payrolls. Without a stronger and more resilient MSME sector, employment-intensive growth will remain difficult to achieve.

Another constraint lies in the geography of job creation. Economic growth has become increasingly concentrated in a limited number of urban clusters and capital-intensive corridors, while smaller cities and semi-urban regions struggle to attract investment that generates stable employment. This spatial imbalance matters because labour mobility in India remains constrained by housing costs, social ties, and uneven access to urban services. As a result, growth does not translate into employment opportunities where the majority of workers actually live. Industrial corridors and logistics hubs have improved connectivity, but without parallel investment in affordable housing, urban governance, and basic services, they risk becoming enclaves rather than engines of broad-based employment.

Labour market institutions also shape outcomes. Reforms have sought to improve flexibility and reduce complexity, but implementation remains uneven across states. More importantly, reform efforts have focused largely on the formal sector, which employs only a small share of the workforce. The vast informal economy, where most workers are located, remains largely untouched by productivity- enhancing interventions. Skilling programmes, while extensive, often operate in isolation from actual labour demand, leading to credential accumulation rather than employability.

Education quality adds another layer to the problem. Rising enrolment has not translated into commensurate learning outcomes, leaving many workers ill-prepared for even mid-skilled jobs. Employers frequently report shortages of job-ready candidates despite high levels of educated unemployment. This mismatch reinforces firms’ preference for automation or limited hiring, further weakening employment elasticity. Without sustained improvement in foundational skills and vocational pathways, labour supply constraints will continue to undermine job creation.

The implications of this structural job deficit extend well beyond employment statistics. Weak job creation risks constraining consumption growth, which remains a critical driver of India’s economy. It also exacerbates inequality, as gains from growth accrue to capital and skilled labour while large sections of the workforce experience stagnant or uncertain incomes. Over time, this imbalance could erode the social and political foundations that sustain reform, investment, and macroeconomic stability.

The demographic dimension adds urgency. India’s working-age population continues to expand, but the window to convert this demographic advantage into productive employment is narrowing. Younger cohorts are entering the labour market with rising aspirations shaped by education and exposure, yet opportunities remain limited. Persistent underemployment among the young is not only an economic concern but also a governance challenge that will shape public expectations in the years ahead.

What needs to change is not the pursuit of growth, but the way it is pursued. Policy must explicitly prioritise employment elasticity alongside output expansion. Infrastructure and capital expenditure remain important, but they must be complemented by targeted support for labour-intensive sectors. MSME policy should focus on viability and expansion rather than survival alone, with faster dispute resolution, stricter enforcement of payment timelines, and operationally simpler compliance. Skilling and education policy must align more closely with labour demand, while female workforce participation deserves far greater policy attention as a source of both equity and growth.

The FY26 GDP estimates offer reassurance about India’s macroeconomic resilience. They also underline a harder truth. Growth alone is no longer sufficient. Unless the structure of growth changes to generate more and better jobs, India risks a future in which strong headline numbers coexist with deepening labour market stress. Recognising the problem as structural is the first step. Acting on it will determine whether growth remains inclusive and sustainable in the years ahead.

The writer is a policy analyst focusing on employment, demographics, and economic development. He writes on the intersections of workforce trends, technology, and industrial policy