India’s Labour Productivity Gap
India’s government recently announced the creation of 17 crore jobs over the past decade. However, the nation’s ambition to reach a $36 trillion economy by 2047 depends heavily on closing the vast productivity gap between formal and informal workers. This divide limits income growth and economic inclusion, necessitating a major structural transformation of the labour market.
The Productivity Divide Between Formal and Informal Sectors
Formal industrial workers generate an annual Gross Value Added (GVA) of around ₹12 lakh per worker. Informal sector workers produce only about ₹1.5 lakh annually. This eightfold difference marks the productivity chasm. Nearly 91 per cent of the workforce remains informal, while only 9 per cent are formally employed. The informal sector’s low productivity drags down average incomes and masks the true economic potential of India’s labour force.
Wage Disparity and Labour Market Dynamics
Economic theory suggests wages should match productivity. Yet, India’s large informal workforce and underemployment distort this link. Excess labour supply suppresses wages despite rising productivity in formal jobs. Agriculture employs 42 per cent of workers but contributes just 18 per cent to GDP, indicating disguised unemployment and near-zero marginal productivity. This imbalance prevents wage growth from keeping pace with economic output.
Formalisation as a Policy Priority
Formalising employment is crucial to raising productivity and aligning wages with output. Formal jobs offer social security, stable contracts, and opportunities for skill development. Policies like e-Shram, ESIC, and EPFO need universal coverage. Small businesses and gig economy platforms require incentives such as simplified regulations and tax benefits to encourage formal contracts. A Formalisation Index could track progress and show reform needs at various levels.
Addressing the Skills Deficit
Only 4.7 per cent of India’s workforce is formally skilled, compared to over 50 per cent in developed countries. This skills gap restricts workers’ movement into higher productivity roles. Scaling up institutions like the National Skill Development Corporation and Industrial Training Institutes is essential. Curricula must evolve to include digital, AI, and green technology skills. Strong industry-academia collaboration will ensure training relevance and job readiness.
Linking Wages to Productivity Through Innovation
Performance-based wage models can better connect pay with output quality and efficiency. Organised sectors such as electronics and textiles can adopt such systems. Public programmes like MGNREGS could introduce performance-linked bonuses without compromising worker rights. Digital tools like AI and IoT can help measure productivity objectively. Platforms such as ASEEM and DigiLocker can maintain integrated worker profiles to track wages, skills, and career growth.
Harnessing the Demographic Dividend
India’s young workforce is a key advantage. However, without formalisation and productivity gains, this demographic dividend risks becoming a liability. Economic growth must translate into wage growth to prevent inequality and social unrest. Structural reforms that raise productivity and ensure fair wage distribution are vital to inclusive growth. Failure to act could trap India in a low-income equilibrium dominated by a small formal sector.
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