Each year, India welcomes a significant number of young people to its labor market. Some of these young people enter formal employment, while others join the informal sector, underemployment, or inactivity. This imbalance raises the central question of Indian development: can a world-class industry consolidate itself without a parallel formation of the middle class that would support it?
The Essentials
- India records net additions to social protection schemes each year, but these cannot be uncritically equated with the number of formal jobs created or directly compared to labor market entrants.
- Wage data suggest gaps between skilled and unskilled workers.
- Indian manufacturing growth is accelerating, but it combines labor-intensive sectors with more technology-driven sectors; available data do not demonstrate a general concentration in capital-intensive sectors alone.
- China and several Asian economies experienced industrialization trajectories marked by absorption into light industry; India has taken a distinct path, with absorption challenges to monitor through 2030.
- Levers exist: labor law reform, large-scale vocational training, sectoral negotiation on minimum wages in automotive and electronics.
Growth Without Absorption: How the Gap Widened
India has experienced several years of high growth, but not consistently above 7 percent annually over the recent period. Its software services exports are advancing. Its iPhone assembly factories make economic headlines. Yet available data reveal a complex Indian labor market; ASI data show recovery and employment growth in the organized manufacturing sector, while PLFS alone does not measure formal manufacturing job creation.
Measuring formalization requires directly tracking the share of workers or jobs covered by homogeneous criteria of formality. Several Asian economies absorbed a growing workforce in light export industries—textiles, toys, electronics assembly—during their industrialization phase. This difference reflects distinct industrial model choices.
Indian industry has grown along a particular trajectory. It has developed high-value-added activities in software services, as well as manufacturing sectors such as pharmaceuticals and automobiles. Light industry exists and employs a significant share of India’s manufacturing workforce, even if its weight or trajectory differs from other Asian economies. Indian industry combines organized job creation with a large share of unorganized employment; this configuration raises the question of relative absorption of annual entrants.
Wage data reflect this fracture. Salary gaps exist between skilled and unskilled jobs. The economy is splitting: demand for highly trained workers rises, while bargaining power for others stagnates.
The 9 Million Invisible
A substantial portion of young people who do not enter formal employment distribute themselves across several segments. Some join agriculture, still accounting for 40 percent of total employment in India despite very low productivity. Another fraction settles into the urban informal economy: small-scale food service, delivery, day-labor construction, street vending. A final group moves toward the gig economy of digital platforms, which offers income but neither contract nor social protection.
These trajectories share a common feature: they offer limited human capital accumulation compared to formal employment. Later mobility toward the formal sector depends on factors not uniformly documented. The trap gradually closes.
The ILO publishes Employment and Social Trends 2026, a global report. India presents high informality and protection gaps, but the assertion about stagnation and weak mobility requires specific longitudinal data. This configuration characterizes several Latin American economies since the 1980s, where growth coexisted for decades with massive informality and structural inequality.
Comparison with Bangladesh illuminates the limits of automatism. Bangladesh has developed a massive export textile industry since the 1980s. It today employs more than 4 million people in garment production, predominantly low-skilled women. But real wages in this sector have risen slowly, industrial diversification remains limited, and productivity gains have been captured more by the margins of international buyers than by local workers. Absorption occurred; distribution much less so.
Jaffrelot’s Analysis on the Political Level
Christophe Jaffrelot, in his work on the political economy of India and the sustainability of its democracy, identifies the middle class as the pivot of support for the BJP and its nationalist project. This middle class, defined by stable employment, regular income, and property access, faces pressure from wage slowdown, though this source does not prove it alone prevents the formation of a manufacturing middle class.
If a significant fraction of young people remains in the informal sector, the social base of the regime could fragment. Beneficiaries of Indian growth notably include skilled workers and large export firms. Some labor market entrants see their material conditions improve at a different pace than other population segments.
This tension is not purely theoretical. The 2024 results confirm that the BJP won fewer seats than in 2019. The causal link remains to be rigorously established, but the political signal is readable.
A competing reading, advanced by economists interested in Schumpeterian development trajectories, whose theoretical foundations Philippe Aghion established, suggests that industrial upgrading can be compatible with worker absorption if productivity gains are redistributed through taxation and training. According to this view, India could pass through a phase where the formal sector consolidates before expanding. Available PLFS data before the January 2025 redesign cover less than a decade and do not permit the attribution made.
China as Mirror, Bangladesh as Warning
The Asian comparison constitutes the most useful test. China in the 1990s created jobs en masse in sectors that raised productivity for low-skilled workers. The textile industry, electronics assembly, and footwear enabled significant absorption of rural workers during industrialization phases. This entry point fed the subsequent upgrade.
India has not followed this classical industrialization sequence. Its labor regulations long limited the expansion of certain large firms. Indian manufacturing is dominated by very small structures whose capacities vary. Labor law reforms carried out under the Modi government between 2020 and 2022 sought to remove these barriers. PLFS data alone do not permit attribution of a limited effect of labor law reforms on formal employment.
Bangladesh offers the other lesson. Absorption occurred, in volume, in textiles. But low diversification and dependence on a single sector exposed to international competition kept wages low. Today, Bangladesh is beginning to lose orders to Vietnam and Cambodia, while its industrial upgrade lags. Absorption without training is employment without trajectory.
Two Trajectories for 2035
Available data allow sketching two scenarios, without attributing them to a single source; they are working hypotheses based on current trends.
In the first scenario, India reorients its industrial policy toward human-machine complementarities. The automotive and electronics sectors, developing rapidly under production-linked incentive schemes (PLI schemes), adopt robotization that amplifies the productivity of existing workers rather than replacing them. Sectoral minimum wage, negotiated by sector in automotive and electronics, gradually rises. Vocational training, where India invests a limited share of GDP, scales up. In this scenario, wage gaps stabilize and the absorption ratio improves.
The manufacturing middle class that Jaffrelot seeks to identify in electoral data begins to exist.
In the second scenario, formal employment grows at a pace comparable to previous years. The informal economy persists in its dynamics. Income gaps between skilled and unskilled remain, marking a distinction between population segments according to their insertion in the formal economy. In this case, political pressure mounts. Studies on developing democracies, and the French situation merits examination here, where exclusion of part of the active population produces lasting political costs, show that sustained exclusion of a significant youth fraction ultimately translates into institutional mistrust.
This scenario would signal itself from 2028-2030 through formal employment rate stagnation among 25-34-year-olds and rising indicators of discontent in states with high density of unskilled youth.
Signals to monitor include: the ratio of formal employment to total annual entrants and its evolution through 2028, the wage gap between skilled and unskilled workers, and vocational training coverage rates among 18-24-year-olds entering the market without university degrees.
The Levers That Exist
The picture is not fixed. Three types of intervention have shown effectiveness in comparable contexts.
Labor law reform, first. India codified its dozens of labor laws into four codes between 2019 and 2020. The four labor codes were implemented effective November 21, 2025. Full implementation could facilitate formalization of small manufacturing firms without imposing excessive costs on small structures.
The Skill India system, launched in 2015, has trained millions of young people, but independent evaluations report disappointing formal employment placement rates. The volume of training is not the issue: it is its alignment with real needs of growth sectors—automotive, electronics, and industrial logistics—that poses problems. A reorientation toward these sectors, with company apprenticeships rather than classroom training, would change the equation.
Sectoral wage negotiation, finally. Indian automotive industry—Tata, Mahindra, Maruti Suzuki, to which foreign assemblers now add themselves—has margins to absorb a sectoral minimum wage increase without losing competitiveness. The same logic applies to electronics assembly, where international buyers face growing pressure to improve working conditions in their supply chains. The question of productivity gain distribution is raised in all economies undergoing rapid industrial transformation; India is no exception.
The sequencing question will remain open through 2030. Waiting for manufacturing growth to accelerate before redistribution carries risk: insufficient wage growth can dampen domestic demand. Available data do not permit choosing between these two trajectories with certainty. Insufficient absorption pace could keep a substantial portion of people outside the formal sector.
Sources
- Indian Journal of Labour Economics (2025), Data on high-skill versus low-skill wage premium, 2015-2025. https://link.springer.com/article/10.1007/s41027-025-00582-0
- Periodic Labour Force Survey (PLFS), Indian government, data 2020-2025. Available on the Ministry of Statistics and Programme Implementation (MoSPI) website, without stable URL.
- ILO World Employment Outlook 2026, Labor market duality and emerging economies. Available on the International Labour Organization (ILO) website, without stable URL.
- World Bank India Economic Update 2025, Vocational training, formal employment and productivity. Available on the World Bank website, without stable URL.
- Christophe Jaffrelot, work on Indian political economy and democracy sustainability. https://www.ifri.org/en/publications
