Why India's Unemployment and Underemployment Rise

Our Chief Asia Economist Chetan Ahya discusses how youth unemployment will impact future growth and stability across China, India, and Indonesia.

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Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. 

Today – Asia’s young workforce is facing a significant challenge. How a soft labor market will shape everything from consumer demand to social stability and long-term growth. 

It’s Tuesday, October 14th, at 2pm in Hong Kong. 

Across Asia, a concerning trend is emerging. The region’s younger generations face mounting challenges in the job market. 

Asia’s youth unemployment averages 16 percent, which is much higher than the U.S. rate of 10.5 percent. Youth unemployment rates are running two to three times higher than headline unemployment rates. The underlying situation is even weaker than what is represented by [the] unemployment rate. 

And within Asia, the challenge is most acute in China, India, and Indonesia, the three most populous economies. Youth unemployment rates for these three economies are running close to double, as compared to other economies in Asia. 

Now let’s take a closer look at China. The urban youth unemployment rate, i.e. for 16–24-year-olds, has steadily increased since 2019. 

What’s driving this rise in unemployment? A mismatch in labor demand and supply. The number of university graduates surged 40 percent over the last five years to close to 12 million. But economy-wide employment has declined by 20 million over the same period. Entry-level wages are sluggish, and automation plus subdued services growth mean fewer opportunities for newer entrants.  

Turning to India, their unemployment rate is the highest in the region at 17.6 percent. Employment creation has been subdued. And on top of it, India also faces another issue: underemployment. Post-COVID, primary sector – i.e. farming and mining – employment rose by 50 million, reaching a 17-year high. Note that these jobs are relatively low productivity jobs. And this is explained by the fact that [the] primary sector now accounts for less than 20 percent of GDP but it employs about 40 percent of the workforce. That’s a sign of COVID-induced underemployment. 

How fast must growth be to tackle the unemployment challenge? In our base case, India's GDP will grow at an average of 6.5 percent over the coming decade – and this will mean that India will be one of the fastest-growing economies globally. But this pace of growth will not be sufficient to generate enough jobs. To keep [the] unemployment rate stable, India needs an average GDP growth of close to 7.5 percent; and to address underemployment, the required run rate in GDP growth must be even higher at 12 percent. 

Shifting to Indonesia, its youth unemployment rate is the second highest in the region. Moreover, close to 60 percent of jobs are in the informal sector. And many of these jobs pay below minimum wage. Similar to India, both these trends signal underemployment. The key reason behind this challenge is weak investment growth. Indonesia's investment-to-GDP ratio has dropped meaningfully over the last five years. 

So, what’s the way forward? For China, shifting towards consumption and services could reduce labor market mismatches. And for India and Indonesia, boosting investment is key. India in particular needs much stronger growth in its industrial and exports sectors. If reforms fall short, policy makers may need to fall back on increasing social welfare spending to manage social stability risks. 

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