If India is to live up the expectations of its own people and become a successful middle-income country in a few decades, the country has multiple problems to solve—its sclerotic politics, its clogged infrastructure, its choked judicial system, its lack of investable capital, its interfering and inefficient state. But perhaps the greatest hurdle is its poor stock of human capital. Without better education, health and skills, India won’t be able to build a middle class and its efforts to become the next China can’t succeed.

India is already failing its young people. Tens of millions of them are unemployed and under-employed, and the situation isn’t improving. Quite the opposite: According to one well-regarded employment survey, from the Delhi-based Centre for Monitoring the Indian Economy, almost 1.5 million people lost their jobs during the first four months of 2017, while another 420,000 jobs vanished in the next four months. India’s relatively small manufacturing sector has suffered especially badly; one industry body, the All India Manufacturers’ Association, has claimed that the rate of job losses is much higher. (The government itself publishes no reliable data on the subject but has promised to do so—though I suspect we won’t see any until the next general elections, scheduled for 2019, are done.)

Things are particularly bad in the informal sector and for lower-skilled workers. The government’s decision a year ago to withdraw 86% of currency in circulation hit the informal sector hard, while the red tape imposed by a confusing new goods and services tax (GST) made the problem worse. One senior government minister highlighted the issue, if a little callously, when he argued that “only those not skilled enough have lost jobs." Unfortunately, far too many Indians aren’t skilled enough.

India and its government are caught between two development models. On the one hand, when Prime Minister Narendra Modi swept to power in 2014, he promised to revive India’s struggling manufacturing sector and even launched a high-profile “Make in India" campaign. Some of these efforts have now borne fruit, with India moving up 30 places in the World Bank’s ease of doing business rankings, for example. But conditions haven’t improved enough to encourage serious investment in manufacturing. And without that money, Modi’s vision of creating belts of export-oriented factories along India’s coastline is still just a vision.

The government is now promoting another optimistic scenario: one in which India’s digital backbone enables new businesses and provides employment to millions of small-scale entrepreneurs. This has the advantage of not requiring any large-scale administrative or regulatory reforms. Others, who question the future of manufacturing as automation erodes the traditional advantages of lower-wage countries, have also embraced this possibility.

Yet there remains one giant problem: Indians’ skills don’t match up. Consider the “Make in India" program. With its growing population, India has plenty of workers. Yet investors commonly complain that they can’t find employees with suitable skills and abilities. Various efforts by the government to create skilling programs have fallen far short of targets—so far short, in fact, that it’s recently abandoned targets altogether.

Nor is the alternative vision, whereby technology transforms India’s landscape of small enterprises and the country leapfrogs into middle-income status, likely given the country’s current human-capital profile. One big reason India’s transition to the new GST has been so traumatic is that it requires too many taxpayers to be familiar with online payments, with accounting software and so on. This may have sounded like a reasonable assumption to officials sitting in New Delhi and pondering India’s digital future. It’s clearly far from the reality.

Today, the folly of this expectation has been painfully revealed. Entrepreneurs and small companies aren’t confident enough to file their taxes themselves and are having to hire people with those skills. In many cases, the additional cost has pushed low-margin companies out of business. Building a small-scale, dynamic, digital economy shifts much of the burden of adaptation, compliance and planning onto ordinary Indians. Many simply aren’t prepared to take on those tasks.

India has long understood that it needs to reform its state and build its infrastructure if it is to grow. To those imperatives must be added a third: It needs to invest in Indians. Less than 4% of GDP is spent on education. Appallingly, Indian students spend more in the US than their government spends on higher education in total. Growth economists have long understood that human capital is what drives economies. India’s policymakers need to accept that fact, too. Bloomberg View

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