Why human capital needs to be the anchor of growth

Human capital for long-run growth

The idea that people, not only machines or markets, drive long-run growth is not new. Gary Becker, who won the Nobel prize in Economics in 1992, explains that long-run growth is driven by productivity, not by population size or capital accumulation alone. The productivity increases when workers are educated, skilled, healthy, and able to move across sectors as technologies and markets evolve.

India’s policy is driven by this insight. The NITI Aayog’s Working Paper, India’s Path to Global Leadership: Strategic Imperatives for Viksit Bharat @2047, recognises human capital – knowledge, skills, health, and adaptability – as the principal drivers of long-term growth. This matters because India’s goals are ambitious.

The vision of Viksit Bharat @2047 aims at transforming India into a USD 30 trillion economy, with average incomes rising nearly seven times from today’s levels. That kind of transformation is not incremental; it is structural. To reach upper-middle-income status, India would need productivity to rise much faster than it has in the past, and to keep rising for decades.

The infrastructure and digital networks can help people work better. But they cannot, by themselves, make people more productive. That comes only when workers are educated, skilled, and healthy. Without investing in people, growth will remain a number on paper. With it, growth can become something people actually experience in their daily lives.

Need to harness demography to amplify growth 

It is this link between people and productivity that makes India’s demographic moment so important. India today stands at a decisive demographic juncture. About 62.5 per cent of its 1.44 billion people are of working age (15-59 years), and this share is projected to peak around 2041 before beginning to decline. This age structure forms the basis of India’s much discussed demographic dividend.

But demographic arithmetic is changing faster than it appears. The Economic Survey shows that India’s total fertility rate (TFR) has fallen sharply, from around 4.5 in the mid-1980s to about 1.9 in 2025 – below the replacement level of 2.1. The population of children has already peaked. In other words, most of India’s future workforce is already born.

This has a stark implication. The demographic dividend is not a permanent advantage. It is a time bound opportunity. As the working-age share peaks in the late 2030s and early 2040s, the burden of supporting an ageing population will gradually rise. If India uses this period to raise productivity, expand quality employment, and deepen human capital, demography will amplify growth. If it does not, the same forces will translate into unemployment, informality, and fiscal pressure.

Why focus shifts to school-to-work transitions

But a young population, by itself, does not create growth. It only creates pressure and possibility. Whether India’s demographic advantage becomes an economic strength depends on what happens between childhood and work –  in classrooms, training centres, and early years in the labour market.

India has made impressive gains in expanding access to education. But despite near-universal enrolment, expected years of schooling remain at about 13.4 years, lower than the 15-16 years seen in many middle-income economies. Learning outcomes, especially in foundational literacy and numeracy, remain uneven. Evidence suggests that each additional effective year of schooling raises GDP by 0.3-0.4 per cent, but only when learning quality improves. Weak foundations sharply reduce the returns to later education and training. 

Further, the skill formation remains the most binding constraint. Only about 5 per cent of Indians aged 15-29 have received formal vocational training, even as over 60 per cent of firms report difficulty in finding suitably skilled workers. This gap explains why employment has grown without a corresponding rise in productivity. Population growth without skills does not deliver a dividend; it simply increases competition for low-quality jobs. 

The National Education Policy (NEP) recognises this problem and shifts focus from enrolment to capability, prioritising foundational learning, vocational education, apprenticeships, and school-to-work transitions. The direction is right. But implementation remains slow and uneven. Vocational pathways are small, socially undervalued, and weakly linked to industry, while apprenticeship coverage is negligible relative to labour market needs. 

India’s education challenge, therefore, is no longer about getting children into classrooms. It is about what they learn, what they can do, and how quickly learning turns into productive work. Without rapid improvement here, the demographic dividend will remain an unfulfilled promise rather than a lasting transformation.

India’s employment status 

India’s recent employment numbers look encouraging. Data from the Periodic Labour Force Survey (PLFS) show that between 2017-18 and 2023-24, total employment increased from 47.5 crore to 64.33 crore, while the unemployment rate fell from 6.0 per cent to 3.2 per cent. Youth unemployment also declined. Rising female labour force participation, from 23.3 per cent to 41.7 per cent, is often cited as evidence that growth is becoming more inclusive.

Around 7.7 crore net additions to the Employees’ Provident Fund Organisation (EPFO) since 2017 are highlighted as a key indicator of formalisation in India’s job market. These trends matter. For many households, work of any kind means stability and survival. But taken on their own, these numbers do not confirm that India is successfully converting its demographic advantage into durable development.

A closer look shows that much of the new employment has come from self-employment and casual work, particularly in rural areas. But these are the jobs that people often accept because there are few alternatives. In sectors such as agriculture, construction, and petty trade, employment can rise even when incomes remain low and uncertain. In such cases, falling unemployment may reflect the need to work at any cost, rather than the availability of better opportunities.

Demographic dividend is realised when people work with skills

Moreover, public employment schemes (VB-G RAM G) protect livelihoods in distress, but they do not build productivity and cannot substitute for skilled, better-paid non-farm work. 

Further, the rise in women’s participation also needs careful reading. Many women have entered the workforce, but largely in informal or unpaid family roles. Without access to safe, regular, and reasonably paid jobs, higher participation does not automatically translate into empowerment or economic security.

This distinction matters because India’s demographic window is not open forever. The working age population is expected to peak before 2040. What India does in the next decade will shape the kind of economy it carries into an ageing future. 

A demographic dividend is realised not when more people are working, but when people are able to work with skills, dignity, and stability. Further, labour code reforms can support human capital formation only when they reduce insecurity and improve mobility; otherwise, flexibility risks becoming a substitute for skill development rather than a pathway to it.

Why timing matters

History offers a simple lesson. In the early 1960s, South Korea’s income level was not very different from India’s. It did not grow by chance. Before its demographic window closed, South Korea invested heavily in secondary education, vocational training, public health, and closely linked education with industrial policy.

By the 1980s, over 90 per cent of its workforce had completed secondary education. When ageing began, productivity was already high enough to support stable wages and living standards. The lesson is not replication, but sequencing. Human capital investment came first, followed by high income. South Korea did not wait to become rich before investing in people. It invested in human capital in order to become rich.

To sum up, realising demographic dividend in Human Capital requires better jobs, stronger links between education and work, and sustained investment in skills and productivity. India’s demographic arithmetic is favourable. If India invests decisively in people now, in learning, skills, health, and job quality, the demographic window can translate into rising incomes and shared growth. In the end, development cannot be defined by GDP alone. It must be lived by people, through work that offers dignity, security, and hope for the future.

Post read questions

India’s next phase of development will not be determined by macroeconomic momentum alone, but by the quality of its people: how early they learn, how well they are educated, how productively they work, and how healthy they remain over their lifetimes. Illustrate.

The demographic dividend is not a permanent advantage. How can India use this dividend to raise productivity, expand quality employment, and deepen human capital to amplify growth?

Discuss how human capital formation influences long-run economic growth. Evaluate India’s preparedness for leveraging its demographic transition.

Does skill deficit constitute the most binding constraint on India’s productivity growth? Is a demographic dividend realised when people are able to work with skills, dignity, and stability?

Discuss the challenges in aligning India’s education system with labour market needs. Suggest institutional and governance reforms.

(Pushpendra Singh is an Assistant Professor of Economics at Somaiya Vidyavihar University, Mumbai, and Archana Singh is an Assistant Professor of Gender and Economics at the International Institute for Population Sciences, Mumbai.)

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