India’s Labour Productivity Challenge

The productivity gap in India

India’s Labour Productivity Challenge: India has announced the creation of 17 crore jobs in the last decade, but the country’s vision of becoming a $36 trillion economy by 2047 hinges on narrowing the gap between formal and informal workers. Formal workers generate an average ₹12 lakh Gross Value Added (GVA) per year, while informal workers contribute only ₹1.5 lakh annually. This wide difference weakens national income growth.

Static GK fact: The term Gross Value Added (GVA) is used to measure the value of goods and services produced in an economy minus input costs.

Formal versus informal workforce

Nearly 91% of India’s workforce is informal, leaving only 9% in secure formal employment. The informal sector’s low productivity weighs heavily on India’s average income levels. Agriculture, which employs 42% of the workforce but contributes just 18% of GDP, illustrates the issue of disguised unemployment and low marginal productivity.

Wages and market imbalance

Economic theory suggests wages should follow productivity, but this balance breaks in India due to underemployment and excess labour supply. Formal sector wages rise modestly, while informal sector wages remain stagnant. This mismatch prevents income growth from keeping pace with national output.

Static GK Tip: The International Labour Organization (ILO) defines informal employment as work lacking social protection and legal recognition.

The path to formalisation

Formalisation remains central to bridging the productivity divide. Schemes like e-Shram, ESIC, and EPFO are critical to expanding coverage across industries. Incentives such as simplified compliance rules and tax benefits could encourage MSMEs and gig platforms to adopt formal contracts. A Formalisation Index can help measure regional progress and identify policy gaps.

Tackling the skills deficit

India faces a serious skills gap with only 4.7% of the workforce formally skilled, compared to over 50% in developed nations. Institutions like the National Skill Development Corporation and Industrial Training Institutes (ITIs) must scale up training capacity. Emerging fields like AI, green technology, and digital skills should become part of core curricula to prepare workers for high-productivity jobs.

Innovation and wage alignment

Linking wages directly to productivity can reduce inequality. Performance-based wage models can be implemented in organised industries such as electronics and textiles. Even public schemes like MGNREGS could adopt performance bonuses to reward efficiency without harming worker rights. AI, IoT, and platforms like ASEEM can help maintain skill records and measure productivity.

Demographic dividend at risk

India’s young population gives it a natural advantage. However, without structural reforms, the demographic dividend may turn into a demographic burden. Wage stagnation and inequality could undermine social stability. Policy focus on formalisation, skills development, and fair wage distribution is essential to ensure inclusive growth.

Static GK fact: India’s median age is around 28 years, making it one of the youngest populations in the world.

Static Usthadian Current Affairs Table

India’s Labour Productivity Challenge: