The conventional narrative holds that India’s large cohort of youth is an “asset” — a demographic dividend that will power growth. But beneath the optimism lies a more troubling reality: millions of young Indians are ill-matched to the labour market; public and private debt is mounting to mask this gap; and the dividend is in danger of becoming a liability. Unless policy is redirected, India may find itself trapped in a cycle of debt and underemployment, unable to harness the potential of its human capital.
The demographic window is narrowing, even as structural bottlenecks widen. The “asset” risks turning into a “liability,” if the state continues to borrow to subsidise unemployment, subsidised education, and handouts rather than investing in productive job creation. The case that India’s demographic dividend is becoming a debt trap is not hyperbole — it is grounded in recent data, thought-piece critiques, and credible economic analysis.
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Youth unemployment and skills mismatch
A demographic dividend yields returns only if youth are gainfully employed. But recent evidence suggests the reverse. An ILO-IHD report notes that youth constitute 83 per cent of India’s unemployed — a stark indicator that the unemployed are overwhelmingly young. Furthermore, the share of educated youth among the unemployed has risen to 65.7 per cent in 2022 from 54.2 per cent in 2000.
This reflects a sharp skills mismatch. India is producing millions of graduates annually, but many lack marketable skills. “Many of these graduates remain underemployed and are increasingly becoming unemployable,” notes one critical report (Report 1). The education system remains outdated, preparing students for jobs that are disappearing or evolving. The pace of technological change, especially with artificial intelligence, means that up to 44 per cent of today’s skills may become obsolete by 2030. McKinsey estimates that effective skilling could add US$500 billion to GDP—but failure to act will stall growth.
Former RBI Governor Raghuram Rajan has been forthright in lamenting India’s inability to convert its youth bulge into employment growth. He warns that while China and South Korea generated sustained job creation during their demographic windows, India is faltering in that endeavour. Thus, the dividend is not being realised — youth remain idle or underemployed, while the state feels compelled to spend and borrow to maintain social peace and expectations.
Public debt and fiscal stress
As job creation fails to keep pace, the state increasingly borrows to sustain subsidies, social transfers, education, and schemes aimed at youth. India’s sovereign debt, already elevated during the COVID-19 era, remains a pressing concern. Analysts warn that rising public debt can drag growth through crowding out and higher interest burdens. One empirical study posits an “inverted U” threshold beyond which higher public debt leads to reduced growth.
Moreover, the debt burden constrains the state’s fiscal flexibility to invest in growth-oriented infrastructure or human capital. In effect, borrowing is used not to build capacity but to plug holes caused by weak job creation. This is a dangerous pattern: when debt is accumulated to fund unproductive expenditures or compensate for structural failures, the economy risks being trapped in a low-growth, high-debt equilibrium.
At the same time, household leverage is rising. A recent commentary highlights how household debt, credit card defaults, and consumer borrowing are growing rapidly, raising fears of a broader “debt trap” among middle- and lower-income people. In sum, both public and private debt are mounting in parallel with rising labour market distress.
Underemployment, informality, and low wages
Even among those employed, many are engaged in low-productivity, informal work with limited security, benefits or wage growth. A recent study on informality and education-occupation mismatch finds that informality remains a dominant determinant of low wages—stronger even than mismatch for many workers. In effect, the youth may not be unemployed, but they are often underemployed or stuck in jobs that do not match their aspirations or capabilities.
This structural underemployment acts like an implicit debt: human capital is underutilised, productivity stagnates, and potential tax revenue is foregone. The state is forced to subsidise the gap between aspiration and reality through welfare schemes, education subsidies, and preferential jobs, thereby increasing fiscal strain.
The situation is magnified for women, who face low labour force participation, concentrated informal roles, and gendered barriers to entry. Without deeper reforms, a large segment of the youth remains excluded from productive employment.
Demographic dividend or demographic liability
When the driver of growth turns into a drag, the dividend becomes a liability. The window of favourable age-structure is finite: predictions suggest that India’s working-age share will peak around 2041 and then gradually decline. Meanwhile, the pressures — fiscal, social, economic — intensify.
A World Bank warning is telling: even as India racks up fastest growth, it is failing to create enough jobs for its youth — and may squander its demographic dividend. In that scenario, the “asset” becomes a burden: youth unemployment becomes political risk, debt accumulation becomes a drag, and capital formation gets crowded out by consumption and transfers.
In effect, India is witnessing a debt-fueled substitute for real growth. The demographic burden, instead of contributing to growth, is being masked by debt. That is the definition of a debt trap.
Escape routes from the debt trap
Rapid scaling of employment incentives linked to productivity: The government has recently approved a ₹1 trillion Employment-Linked Incentive (ELI) scheme to create 35 million jobs over two years. This is welcome, but must be rigorously structured: incentives should be tied to productivity gains, retention beyond a year, and sectors with high forward linkages, not merely headcount subsidies.
Radical overhaul of skill-education alignment: The gap between degrees and employability must be closed. Curricula must be dynamic, modular, and industry-driven, with strong apprenticeship pathways, micro-credentials, and continuous re-skilling. Collaboration with high-growth sectors (semiconductors, AI, renewables, defence) must be intensified. Report 3 warns that without closing the skilling gap, India’s trillion-dollar sector dreams will remain unrealised.
Incentivise formalisation and raise wage floors: Tax, regulatory and labour reforms should encourage firms to formalise jobs. The burden on firms that formalise should be reduced (through phased reliefs, regulatory simplification) so that formal jobs become the default, not an exception. Social safety nets must accompany transitions to prevent job loss.
Fiscal reconfiguration- shift borrowing to investment: Instead of borrowing to subsidise transfers, the state must prioritise capital and human capital investment. Fiscal constraints demand that subsidised schemes should be tapered unless they show measurable returns in productivity or employment. A stricter cost-benefit approach is essential.
Strengthen public institutions and data systems: Better labour market data, continuous tracking of placement outcomes, real-time feedback between industry and academia, and regional differentiation are essential. Active labour market policies should be evidence-based and regionally tailored — one size will not fit diverse Indian states.
Encourage inclusive growth and women’s workforce participation: A significant portion of the youth dividend lies in bringing more women into the workforce in skilled roles. Incentives, safe transport, childcare support, and gender-sensitive recruitment are vital. The dividend will slip away if half the population remains sidelined.
The demographic dividend is not self-executing. The failure to create quality employment forces the state and households to borrow, substituting debt for growth. What was once an “asset” is slipping into a “liability.” The risk of a demographic trap looms real. The way forward demands bold alignment — of skills, jobs, fiscal priorities and institutions. If not, India may discover, too late, that it has mortgaged its future to a demographic debt that cannot be repaid.