India must grow twice as fast to avoid jobs trap, Morgan Stanley warns

India’s economy needs to expand at an extraordinary 12.2% pace each year to solve its underemployment crisis, Morgan Stanley economists warned, underscoring the risk that millions of young Indians may remain locked out of productive work, fueling social strains at home.

The South Asian nation’s labor market is facing a dual challenge of unemployment and underemployment, Morgan Stanley economists led by Chetan Ahya wrote in a note on Monday. The youth jobless rate stands at 17.6%, the highest in the region, while a surge of workers into agriculture had pushed farm employment to a 17-year high, according to their note.

Without stronger industrial and export growth, accelerated infrastructure roll out, and sweeping reforms to upgrade skills and improve the business climate, India risks falling into a jobs trap, the Wall Street firm warned. That would not only slow its ambition of becoming the world’s next growth engine, but also intensify outward migration pressures even as H-1B visas are becoming costlier.


Underemployment refers to those jobs that don’t fully utilize the skills, education, or available work hours of a person. Unlike joblessness, underemployment is difficult to measure, especially when the definition of employment is loose. India counts anyone working at least one hour in the past week as employed, including unpaid family labor, leading to significant underemployment where most of the jobs are informal.

The government’s own estimate of a 6.3%-6.8% growth rate is still far lower than what is needed to address the unemployment issue in the country. The outlook has been complicated by a 50% US tariff on Indian goods and a sharp increase in US work-visa fees under Donald Trump.

India’s economy grew 7.8% in the June quarter, out pacing expectations, but that pace still falls far short of what’s needed to absorb the 84 million people set to join the workforce over the next decade, according to the note. The report also pointed to poverty levels as a lingering drag on household consumption in the country.

About 603 million Indians still live below the lower middle-income threshold of $3.65 a day, based on the World Bank’s 2022 benchmark. With the global lender recently raising that bar to $4.20, the number of Indians counted as vulnerable is set to climb further.

Adding to the challenge, rapid advances in artificial intelligence and automation risk reducing the scope for traditional service-sector employment, long a source of opportunity for India’s educated youth. Unless the country ramps up investment in advanced manufacturing, technology, and skill-building, Morgan Stanley warned, the labor market could fall even further behind the needs of its youthful workforce.