By Milounee Purohit

BENGALURU (Reuters) - The biggest economic challenge for the government after the ongoing election is unemployment, according to economists polled by Reuters who expected the world's most populous country to grow a healthy 6.5% this fiscal year.

Despite growing at the fastest pace among major peers, the economy has failed to generate enough jobs for its large and expanding young population, a key issue among citizens in the midst of electing the next government.

A majority of economists, 15 of 26, in the April 16-23 Reuters poll who answered an additional question said the biggest challenge for the government after the national election would be unemployment.

Eight said rural consumption, two picked inflation and one said poverty.

"Following a decade of near jobless growth, the rising number of discouraged workers had pushed India's LFPR (labour force participation rate) down well below levels exhibited by the four Asian tigers at comparable stages in their demography," said Kunal Kundu, India economist at Societe Generale (OTC:SCGLY).

"Bharatiya Janata Party's focus on existing employment drivers (infrastructure, manufacturing, and government jobs) that have not moved the needle much to date is all the more worrying. Without a more concrete plan, India runs the risk of missing out on potential demographic dividends."

Prime Minister Narendra Modi's BJP, widely expected to return to power for a third straight term, had promised to create more jobs when elected in 2014.

Despite that promise, the unemployment rate over recent years indicates not enough jobs have been added to make a significant difference. Periodic Labour Force Survey data showed the unemployment rate which stood at 3.4% in 2013-14 was only marginally lower at 3.2% in 2022-23.

According to the Centre for Monitoring Indian Economy, an economic think tank, the unemployment rate was 7.6% in March.

Although job creation has stayed lacklustre, the government ramping up of capital expenditure helped the economy grow a faster-than-expected 8.4% in the October-December quarter.

The economy likely grew 6.5% last quarter and 7.6% in the previous fiscal year that ended on March 31, the survey showed.

It was forecast to expand 6.5% and 6.7% this fiscal year and next, broadly unchanged from last month.

"Repeating the exceptional strength of 2023 shouldn't be taken for granted. Last year's growth was strongly supported by the government's capex push, but the need for fiscal prudence will limit the boost this year and over the coming years," said Alexandra Hermann at Oxford Economics.

"We currently see risks to the upside with increasing signs the economy's resilience of last year was maintained into the beginning of 2024."

With various institutes like the International Monetary Fund upgrading India's growth forecast the risk to the outlook was to the upside.

A strong majority of economists, 20 of 28, who answered an additional question said economic growth this fiscal year was more likely to be higher than they expected rather than lower.

Consumer price inflation, at 4.85% in March, was forecast to average 4.5% this fiscal year and next. However, a majority of economists, 19 of 28 said it was more likely inflation would be higher than they currently predict.

(For other stories from the Reuters global economic poll:)