Skill gaps cost trillions: Why India must urgently upgrade human capital
India's tertiary education enrollment has risen, but quality matters more than quantity for economic benefits.
Human capital remains the primary driver of economic growth and enhanced competitiveness. Research by the World Bank shows that effective skill development reduces unemployment, increases labour productivity, and improves living standards, making it a fundamental element of competitive, inclusive economies. The World Bank also estimates that bridging skill gaps could boost global prosperity, with an anticipated gain of US$6.5 trillion over the next seven years, accounting for 5-6 per cent of their GDP. It further notes that most countries invest less than 0.5 per cent of the global domestic product in adult lifelong learning. High skill development is also crucial for enabling structural transformation, moving the workforce to shift from low-productivity sectors into higher productivity industries, thereby fueling GDP growth, sectoral transformation, and mobility.
Over the past few decades, India has made progress in expanding access to tertiary education through investments in education and skilling. The tertiary school enrollment percentage has increased from 24.39% in 2013 to 33.11% in 2023. However, it is the quality of higher education, not the Gross enrolment rates, that matter. Empirical research has identified diminishing marginal returns if the expansion of the economy outpaces the economy’s ability to absorb the potential workforce. A recent research paper, “How popularising higher education affects economic growth and poverty alleviation: empirical evidence from 38 countries,” found that population segments with higher education levels within the population significantly boost GDP growth in 38 OECD countries. The paper demonstrates that an increase in the working-age population completing higher education has a positive contribution to economic growth and development. However, an oversupply of graduates without a skill mismatch in jobs can lead to underemployment, yielding marginal benefits beyond a certain point. The quality improvements and labour market alignment to bridge skill mismatch are imperative to realising the full economic benefits of a highly skilled workforce.
Global studies also show that private returns to education are substantial. The World Bank Review report shows that there is an average 9 per cent increase in hourly earnings for each additional year of schooling, with returns often highest at the tertiary level (i.e., college graduates see higher wage boosts than primary or secondary graduates). From society’s welfare, highly educated individuals tend to contribute more in tax revenue and innovation, as shown through an OECD analysis, which estimated the net public return from a man obtaining a tertiary education averages about $127,000 over his lifetime in OECD countries (for women it’s around $60,600), reflecting different labour force participation. These figures suggest that public investment in expanding higher education levels can yield significant long-term benefits through increased economic output.
The recent report, “Skills for the future: Transforming India’s workforce landscape”, also presents a data-driven and detailed examination of India's skills landscape, with a focus on educational attainment, occupational distribution, and technical and vocational education and training (TVET). It analyses macro-level trends and sector-specific dynamics to understand current patterns and to identify the skill sets required for the future of work. The report indicates that, in the long run, GER at the higher education level has a significant positive impact on the economy. Specifically, a 1% increase in GER at the higher education level leads to a 0.511% rise in GDP over time. Since GER for higher education accounts for only a small portion of the broader human capital variables, this effect is notable.
The link between a highly skilled workforce and economic performance is clearer than in the contrast between Indian states. States such as Assam, Rajasthan, Odisha, Jharkhand, Tripura, Madhya Pradesh, Uttar Pradesh, Chhattisgarh, and Bihar, where the share of the highly skilled workforce is below 10 per cent in the region and the GSDP per capita ranges between ₹113219 and ₹36,399. Only 11 states/UTs have a highly skilled workforce above 15%, with the highest being recorded in Chandigarh at 39.48%, accompanied by an average wage of ₹5,90,466.
Moreover, the top 5 states, Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Uttar Pradesh, account for around 48 per cent of India’s GSDP, but their workforce engaged in the highly skilled segment is not more than 20 per cent. Consider Kerala vs Bihar; Kerala’s GSDP per capita is ₹1,76,010, which is almost four times the GSDP per capita of Bihar, i.e., ₹36,399. The difference in the share of the skilled workforce is also significant, as Kerala has 24.78 per cent of the workforce with an average wage of ₹3,45,897, whereas Bihar has share of the highly skilled workforce is 5.57 per cent with an average wage of ₹2,87,244. These notable differences tell us that achieving high-quality growth necessitates the development of human capital, which involves addressing skill mismatches and implementing education reforms that emphasise problem-solving, critical thinking, digital literacy, and communication skills. A proficient workforce is not merely a consequence of economic growth but also actively contributes to it, thus establishing a virtuous cycle.
Overall, Indian states are at a crossroads; the path to economic growth requires job creation, developing a skilled workforce, and retaining human capital. States need to focus on human capital and must approach from an integrated, three-dimensional perspective, meaning a thorough understanding of general and technical educational attainment, the occupational landscape, and the level of vocational training across all levels and regions is necessary to unlock the potential of the demographic dividend.
(Author Atul Kumar Tiwari is Former Secretary to Ministry of Skill Development and Entrepreneurship, Government of India. Views are personal.)
