Due to robust economic growth, India’s contribution to global GDP has increased by 1.8 times over the past twenty years, reaching 8.2% in 2025. However, this achievement conceals a significant issue: India is failing to develop a substantial, consumer-driven middle class. The underlying cause is the predominance of employment in low-value-added and largely informal sectors. The few high-value-added manufacturing sectors with strong job potential such as electrical equipment, electronics, automotive, chemicals and pharmaceuticals, are hindered by an unfavourable business environment, while a skills shortage is obstructing their advancement up the value chain. Furthermore, the highest-paying service jobs, particularly in IT, are threatened by artificial intelligence.
India struggles to develop a middle class
India has one of the highest growth rates among the world’s major economies (+7.3% annually over the past decade, excluding the pandemic), yet its consumer middle class remains surprisingly small. In current dollars, total consumption in India appears very high (USD 2,241 billion in 2025), but this figure is largely a reflection of the country’s vast population. By way of comparison, it is 3.5 times lower than that of China, and per capita consumption at purchasing power parity (PPP) is 1.3 times lower than that of Indonesia, the Philippines and Vietnam.
According to our estimates[1], the middle class accounts for only 1.6% of India’s population, equating to just 24 million people. This figure is lower than that of Thailand and Vietnam, each with over 30 million, and significantly less than China’s middle class, which is estimated at 490 million people, or 35% of the population, using the same methodology. Furthermore, the disparity between urban and rural areas remains particularly pronounced, as urban households consume, on average, 1.6 times more than their rural counterparts. More than 60% of the Indian population consumes less than the national average. Only the top urban deciles, which represent only 5% of the total population, have genuine discretionary spending power. Although consumption patterns have evolved over the last decade, evidenced by a decline in the share of food spending (-4.3 percentage points, now at 34.8% of total spending) in favour of transportation and communications (+3.8 percentage points, now at 12.4%), purchases of durable goods, which account for only 7% of urban household spending, remain marginal. Furthermore, these purchases are increasingly financed by consumer credit rather than by rising incomes.
The labour market suffers from structural weaknesses
This weakness in the middle class and in household consumption can be explained, in particular, by the structural weaknesses of the labour market. The employment rate, which stood at 52.7% in 2025 according to the International Labor Organization (ILO), is significantly lower than that of its Asian neighbours: 65.6% in Indonesia and 71.3% in Vietnam.
Over the past ten years, employment has experienced only modest growth (an average of +2.4% per year), while GDP growth has averaged nearly 6% per year (including the pandemic). The services sector, which accounts for 33.2% of employment, has been the primary driver of job creation (+3.2% per year), significantly outpacing the manufacturing sector (+1.4%) and agriculture (+0.1%), despite agriculture being the country’s largest employer, accounting for 41.5% of the labour force. This trend is insufficient to absorb the 10 to 12 million new entrants to the labour market each year. Furthermore, the traditional pathway for labour transition from agriculture to industry has become severely restricted. Over the past decade, employment in manufacturing has barely kept pace with growth: the employment elasticity with respect to growth reached only 0.1 for this sector. However, the contrast between the formal and informal sectors is striking: the employment elasticity of the formal manufacturing sector reached 0.7 over the same period. Consequently, the decline in informal employment, which accounts for 73.4% of total manufacturing employment (but only 38% of the sector’s value added), has offset this positive trend. Furthermore, in labour-intensive sectors such as textiles, apparel and wood, the increase in value added stems primarily from productivity gains rather than job creation, which significantly limits the availability of low-skilled jobs in the country.
Several structural challenges hinder job creation in the manufacturing sector: an unfavourable business environment (particularly regarding access to land), the high cost of capital for SMEs, a lack of export competitiveness in labour-intensive sectors, which are penalised by less advantageous tariff conditions compared to the rest of Asia, and, above all, labour market rigidity, which obstructs the size of companies and, consequently, job creation (65% of companies have fewer than 50 employees).
Insufficient jobs in both quantity and quality
Not only is the number of jobs created insufficient, but their quality is also subpar, which adversely affects income growth and the development of a substantial middle class. According to the ILO, 87% of total employment is informal and concentrated in low-value-added, low-skilled roles. Approximately 20% of the population earns 79% of labour income. This concentration reflects the low skill level of existing jobs: 88.2% of Indian workers have jobs that require minimal or no skills. The issue is not a shortage of graduates but rather a mismatch between their education and the actual needs of businesses. This results in a gradual decline mobility among workers and a higher unemployment rate among graduates compared to those without a degree (13.5% versus 1.3% in 2025, according to the ILO).
The lack of skills that align with the demands of the labour market obstructs employment opportunities in the few high-potential manufacturing sectors. According to our econometric estimates, electronics and IT, electrical engineering, automotive, chemicals, and, to a lesser extent, pharmaceuticals exhibit strong growth, high employment elasticity, and high productivity (see chart). They therefore represent potential sources of high-quality jobs. However, these sectors remain largely underdeveloped: in 2025, they accounted for only 1.4% of jobs and 5.9% of India’s GDP.
Elasticities of formal employment to real GDP growth in industry in India: the chemical, pharmaceutical, electrical, electronics, and automotive sectors are the key growth
Artificial intelligence could limit the creation of the highest-paying jobs in the service sector
AI may also impede the creation of the highest-paying jobs, which are essential for expanding the middle-class consumer base.
Agriculture, construction, trade and transportation remain largely immune to direct job displacement due to AI. Therefore, the macroeconomic impact of the immediate shock is expected to be minimal. However, these sectors are characterised by the lowest wage levels. Conversely, IT, finance and insurance account for less than 3% of total employment but employ the most highly skilled workers. Ironically, these are the very segments most threatened by automation.
While sector-specific data does not currently indicate a widespread decline, there is a notable deceleration in job creation for routine tasks, as confirmed by a study conducted by the ICRIER (Indian Council for Research on International Economic Relations). Although new job roles are emerging, their number is expected to remain limited, particularly as the skills required surpass the capabilities of the existing graduate pool.
Reforms are heading in the right direction but are insufficient
Since 2019, the Modi government has rolled out a series of measures aimed at developing industry, attracting foreign direct investment, and integrating into global trade after decades of protectionist policies.
Corporate subsidy programs, such as Production-Linked Incentives, have bolstered the growth of the most promising sectors identified earlier. Similarly, the implementation of the labour reform, which came into force in late 2025, could facilitate business expansion and the creation of formal jobs. However, its actual impact will depend on its adoption by the states, which possess significant autonomy over labour law, and on its effective implementation at local level. The free trade agreement signed between India and the European Union in late January 2026 and anticipated to take effect in 2027 at the earliest, aims to mitigate the tariff disadvantages faced by labour-intensive industries. The EU has pledged to abolish tariffs on Indian textiles and apparel, which currently range from 4% to 12%.
However, these measures alone will not suffice to create high-quality jobs unless the education system aligns with the needs of Indian businesses. It is therefore imperative that India continue to improve its business environment and reform its education system to promote job creation in high-paying, high-value-added sectors. Without concrete measures, the “demographic window”, which is expected to remain favourable for another 15 to 25 years, could close before India succeeds in establishing a solid industrial foundation and a substantial middle class.
