3 Feb 2026·Source: The Hindu

5 min

EconomySocial IssuesEDITORIAL

India's Growth Model: Balancing Capital Expansion and Labor Absorption

India's growth focuses on capital, potentially excluding its labor force.

Photo by Jakub Żerdzicki

Editorial Analysis

The authors argue that India's current growth model, which prioritizes capital expenditure, is not effectively generating employment and is leaving a significant portion of the labor force behind. They suggest a need to re-evaluate the strategy to ensure more inclusive growth.

Main Arguments:

The budget signals a shift towards borrowing-heavy financing for growth and capital expenditure, aiming for a fiscal deficit of 4.3% of GDP and increased public capital expenditure.
Despite capital formation driving GDP, labor absorption is stalled, indicating a disconnect between capital expansion and employment outcomes.
Construction's employment elasticity has declined, meaning each additional unit of capex is associated with fewer construction jobs than before.
Agriculture is reabsorbing labor, reflecting distress-driven fallback into low-productivity activity, rather than releasing labor as productivity rises.
Public investment favors capital intensity, leading to a widening gap between productivity and wages, with efficiency gains captured largely as profits rather than labor income.

Counter Arguments:

The government aims to project a broader infra-capex enabled vision of a ‘Viksit Bharat’ while giving a necessary push to MSMEs in manufacturing.
Public infrastructure spending is expected to crowd in private investment, raise productivity, and generate employment.
Formal skills, urban location, and compatibility with automation determine inclusion, with those outside this profile adjusting downward into informal work, own-account activity, or agriculture.

Conclusion

The authors conclude that India's economy is advancing without requiring broad-based labor absorption, leading to a structural U-turn where the workforce is being pulled back towards subsistence.

Policy Implications

The authors imply a need for policy adjustments to ensure that economic growth translates into meaningful employment opportunities for the vast labor force, potentially through promoting labor-intensive industries and addressing the skills gap.

Budget 2026-27 indicates a shift towards borrowing-heavy financing for growth and capital expenditure (capex). The government aims to guide the fiscal deficit to 4.3% of GDP and scale public capital expenditure to ₹12.2 lakh crore. This is to project a broader infra-capex enabled vision of a ‘Viksit Bharat’ while giving a necessary push to MSMEs in manufacturing. However, the mechanism connecting this massive capital expansion to actual employment outcomes has become increasingly tenuous. While capital formation successfully drives headline GDP, absorption of labor is stalled. This suggests that India is perfecting a growth model designed to function with clinical efficiency, while quietly leaving its vast labor force behind. For much of India’s fiscal history, capex played a secondary role. From 2020-21 onwards, capex expenditure became the organizing principle of fiscal policy. Capex expenditure as a share of total expenditure rose from roughly 12% in 2020-21 to over 22% in recent estimates. Yet, the youth NEET rate (share of people who are not in education, employment, or training) for ages 15-29 remains in the 23%-25% range, materially higher than several peer economies. Construction's employment elasticity declined from 0.59 in the pre-COVID period of 2011-12 to 2019-20 to 0.42 in the post-COVID years of 2021-22 to 2023-24. Agriculture's employment elasticity rose sharply from 0.04 during 2011-12 to 2019-20 to 1.51 during 2021-22 to 2023-24. India is modernizing its physical asset base while its workforce is being pulled back towards subsistence. Public investment, as currently configured, systematically favors capital intensity.

Key Facts

Fiscal deficit target: 4.3% of GDP

Public capex: ₹12.2 lakh crore

Youth NEET rate: 23%-25%

UPSC Exam Angles

GS Paper III: Indian Economy - Growth, Development and Employment

Connects to syllabus topics like Fiscal Policy, Infrastructure Development, and Human Resource Development

Potential question types: Statement-based, analytical questions on the effectiveness of current growth model

Visual Insights

Key Economic Indicators

Dashboard of key economic indicators mentioned in the news article.

Fiscal Deficit Target: 4.3%
Public Capital Expenditure: ₹12.2 lakh crore
Youth NEET Rate (15-29): 23-25%

More Information

Background

The focus on capital expenditure (capex) as a driver of economic growth in India has evolved significantly over time. Historically, India's economic planning prioritized social welfare and poverty reduction, with capex playing a supporting role. The Nehru-Mahalanobis model, adopted in the Second Five-Year Plan, emphasized heavy industries and public sector investment, laying the foundation for future capex-driven growth. However, the economic liberalization of 1991 marked a shift towards a more market-oriented approach. While the public sector continued to play a role, private investment gained prominence. The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 aimed to promote fiscal discipline and reduce the fiscal deficit, influencing the allocation of resources towards capex. Over the years, various governments have implemented policies to encourage infrastructure development and attract both domestic and foreign investment in capital projects. The current emphasis on capex is also influenced by global economic trends and the need to enhance India's competitiveness. The government's focus on infrastructure development, such as roads, railways, and ports, is aimed at improving connectivity, reducing logistics costs, and attracting investment. This strategy aligns with the broader goal of achieving sustainable and inclusive economic growth, while also addressing the challenges of unemployment and inequality. The effectiveness of this approach depends on how well it integrates with labor absorption strategies and addresses the skills gap in the workforce. The Skill India Mission aims to address this gap.

Latest Developments

Recent government initiatives have focused on boosting infrastructure development through increased capital expenditure. The National Infrastructure Pipeline (NIP) and the PM Gati Shakti National Master Plan are key initiatives aimed at streamlining infrastructure projects and enhancing connectivity. These initiatives seek to address bottlenecks in project implementation and improve coordination among various government agencies. However, concerns remain regarding the employment elasticity of growth. While capital expenditure has increased, the creation of jobs has not kept pace, leading to a situation of jobless growth. This has sparked debates among economists and policymakers about the need for a more balanced approach that prioritizes both capital formation and labor absorption. Institutions like NITI Aayog are actively involved in formulating strategies to promote employment generation and skill development. The future outlook involves a greater emphasis on promoting labor-intensive industries and creating an ecosystem that supports entrepreneurship and innovation. The government is also exploring ways to leverage technology and digital platforms to create new employment opportunities. Achieving a balance between capital expansion and labor absorption will be crucial for ensuring inclusive and sustainable economic growth in the years to come.

Frequently Asked Questions

1. What are the key facts about India's growth model and budget 2026-27 that are important for UPSC Prelims?

Key facts include the fiscal deficit target of 4.3% of GDP, public capital expenditure scaled to ₹12.2 lakh crore, and the youth NEET rate of 23%-25%. Remember these figures as they can be directly asked in the exam.

Exam Tip

Focus on memorizing the numerical targets and their significance for the Indian economy.

2. What is the main issue with India's current growth model as highlighted in the article?

The main issue is that while capital expansion drives GDP growth, it's not effectively absorbing the labor force, potentially leaving a large segment of the population behind.

3. How does the current focus on capital expenditure differ from the Nehru-Mahalanobis model?

The Nehru-Mahalanobis model emphasized heavy industries and public sector investment, laying the foundation for industrial development. The current focus emphasizes infrastructure development through initiatives like the National Infrastructure Pipeline (NIP) and PM Gati Shakti National Master Plan.

4. What are the potential pros and cons of India's borrowing-heavy financing for growth and capital expenditure?

Pros include boosting infrastructure and MSMEs, potentially leading to faster economic growth. Cons include increasing the fiscal deficit and the risk of unsustainable debt levels if growth doesn't materialize as expected.

5. What reforms are needed to ensure that capital expansion leads to better labor absorption in India?

Reforms could include focusing on labor-intensive industries, skill development programs aligned with industry needs, and policies that incentivize job creation alongside capital investment. The government needs to ensure the benefits of growth reach the common man.

6. Why is India's growth model, balancing capital expansion and labor absorption, in the news recently?

It is in the news due to concerns that the current approach, focusing on capital expenditure, may not be effectively translating into job creation and inclusive growth, as highlighted in the context of Budget 2026-27.

7. What are the recent government initiatives mentioned in the article that aim to boost infrastructure development?

The National Infrastructure Pipeline (NIP) and the PM Gati Shakti National Master Plan are key initiatives aimed at streamlining infrastructure projects and enhancing connectivity.

8. What is the fiscal deficit target for 2026-27, and how does it relate to India's growth model?

The fiscal deficit target is 4.3% of GDP. This target is part of the government's strategy to manage its finances while investing in capital expenditure to stimulate economic growth.

9. How does the high youth NEET (Neither in Employment nor in Education or Training) rate impact India's growth narrative?

A high NEET rate indicates a significant portion of the youth is not contributing to the economy, which can hinder long-term growth and create social challenges. The NEET rate is between 23%-25%.

10. What is the significance of MSMEs in the context of India's capital expansion and labor absorption?

MSMEs are crucial as they are often labor-intensive and can absorb a significant portion of the workforce. Supporting MSMEs through capital expenditure can lead to better employment outcomes.

Practice Questions (MCQs)

1. Consider the following statements regarding India's recent economic growth model: 1. It prioritizes capital expenditure (capex) as the primary driver of GDP growth. 2. Construction's employment elasticity has increased in the post-COVID period (2021-22 to 2023-24) compared to the pre-COVID period (2011-12 to 2019-20). 3. The youth NEET rate (Not in Education, Employment, or Training) remains significantly higher than several peer economies. Which of the statements given above is/are correct?

A.1 and 2 only
B.1 and 3 only
C.2 and 3 only
D.1, 2 and 3

Show Answer

Answer: B

Statement 1 is CORRECT: The article explicitly states that capex expenditure has become the organizing principle of fiscal policy. Statement 2 is INCORRECT: Construction's employment elasticity declined from 0.59 to 0.42 in the post-COVID period. Statement 3 is CORRECT: The youth NEET rate remains in the 23%-25% range, higher than peer economies.