India Illustration: Liu Rui/GT

While India's large population has long been viewed as a potential advantage for its promising economic outlook, how to transform the demographic opportunity into a demographic dividend is a challenge it will have to address to become a global manufacturing hub.

Indian Prime Minister Narendra Modi plans a raft of measures if he wins a third term this week, including pushing through regulations making it easier to hire and fire workers, Reuters reported on Monday, citing two government officials familiar with the matter.

While it remains unclear what reforms India will introduce to the labor laws, it is certainly a positive development toward enhancing the economy and fostering a more favorable business environment. If India can resolve key issues in its labor market through reform, it has the potential to bring about significant economic and social changes.

Stringent labor laws have long been seen as a major obstacle to India's manufacturing ambitions and a key area that requires change to adapt to manufacturing development.

Currently, labor law in India is governed by dozens of federal laws and regulations along with a number of local and state laws depending on where the employee is located. In much of India, companies with more than 100 employees need authorization from state governments to hire and fire, according to Reuters.   

This complexity requires companies to adhere to strict and intricate regulations when it comes to hiring and terminating employees, leading them to exercise caution in recruitment and expansion to mitigate legal and operational risks.

In recent years, the Indian government has made some efforts in an aim to improve relevant regulations. For instance, the parliament has passed legislation to raise the threshold for companies to get official approval to those with at least 300 employees, but state authorities that must consent to the changes have stalled the move, according to Reuters. Also, the government has consolidated 29 central labor laws into four labor codes.

But labor law reform alone won't be enough to fully unleash India's demographic dividend. This is because labor laws are not the only problem facing India's employment market.

According to a report released by Oxford Economics in September 2023, India's labor force participation is only 51 percent, trailing China by 25 percentage points. This means that nearly half of the working-age population is out of the job market for various reasons.

One obvious manifestation of the low labor force participation rate is that despite India's rapid economic growth, young people still struggle to find jobs. According to the Centre for Monitoring Indian Economy, an economic think tank, the unemployment rate was 7.6 percent in March. The jobless rate for Indian graduates was 29.1 percent, almost nine times higher than 3.4 percent for those who are illiterate, according to the International Labour Organization.

Yet according to a survey by ManpowerGroup, over 80 percent of employers in India faced difficulties finding the skilled talent they wanted in 2023.

Behind this contradiction is a mismatch in the labor market and the generally low level of education of the Indian labor force. A large number of young people grew up poor, with inadequate education, so they cannot become the skilled workers manufacturers require. 

Also, only one in five Indian women has a job. India has one of the lowest female labor force participation rates in the world. In 2021-22, only 29.4 percent of women were part of India's workforce, according to media reports.  

A demographic advantage does not inherently translate into a demographic dividend. A multifaceted approach is essential to facilitate this transformation, encompassing heavy investments in health, education, cultural development, social governance and economic growth. 

India needs to address a key bottleneck to its manufacturing sector by improving the quality of its workforce, and this requires long-term and comprehensive efforts.