The Education For All–Global Monitoring Report finds that out of the total 759 million illiterate adults in the world, India still has the highest number.
"Over half of the illiterate adults live in just four countries: Bangladesh, China, India and Pakistan," the report said, adding the progress has been "painfully slow" and threatens to obstruct the Millennium Development Goals.
It said about 72 million primary school age children and another 71 million adolescents are not at school, and on current trends, 56 million primary school age children will still be out of school in 2015, it said.
UNESCO's top official Irina Bokova said the world body was apprehensive that the financial crisis would cause governments to scale back funding on education.
"With the world's largest illiterate population, India has been making progress," the report said.
While in 1985–1994 just about half of the adults in the country were literate, now the number has gone up to two-thirds. "Since the adult population increased by 45 per cent, this marks a real advance," it said.
Gender disparities remain deeply engrained, with 28 nations across the developing world having nine or fewer girls in school for every 10 boys.
The report said said two-thirds of the total illiterate people are women.
On a positive note, it says that out-of-school numbers have fallen "driven by rapid advances in India". In the three years to 2007, out-of-school population fell by 8 million.
"Much of the decline took place in India, which reported a fall of almost 15 million in out-of-school numbers in the two years after the 2001 launch of the Sarva Shiksha Abhiyan (universal primary education) programme," the report said.
It finds that with the exception of China, progress towards halving illiteracy has been "painfully slow," which will make meeting MDG targets difficult.
"On current trends, the world will be less than halfway towards this goal by 2015. India alone will have a shortfall of some 81 million literate people," it said.
Bokova, Executive Director of the UN body for education, warned that the present financial crisis would cause parents and governments to scale back on educating their children.
The Education For All Monitoring Global Report comes out in the backdrop of a financial crisis that is driving millions into extreme poverty. "In short it would create a lost generation... a tremendous cost to society," she added.
"It could force governments to cut their spending on education and parents to pull their children out of school or simply not to send them," Bokova said, at the launch of the report here at the UN headquarters.
The report also finds that low-income countries provide poor quality education and caste system obstructs education in South Asia.
"In rural India, just 28 per cent of grade 3 students could subtract two-digit numbers and only a third could tell the time," the report said.
The study also points out at India as an example of how caste systems obstruct education in South Asia.
"It shows that children from low-caste households score at far lower levels when their caste is publicly announced than when it is unannounced – an outcome that underlines the debilitating effects of stigma on self-confidence," it said.
Underlining that poverty is a critical factor that blocks access to education, it quotes a 2005 survey that in India the poorest 20 per cent were over three times more likely to be out of school than children from the richest 20 per cent.
"Many of the 8.3 million Indian children born with low birth weight will carry a burden of disadvantage with them into primary school," it said.
The report finds that vocational programmes in India reach only about 3 per cent of rural youth and there are few signs that these are benefitting people in getting jobs.
"The image of technical and vocational provision as a form of second-class education that provides limited benefits for employment remains largely intact," it stated.
Governance problems have hampered India's efforts to strengthen vocational education and responsibilities are spread among several ministers and authorities leading to a great deal of duplication and fragmentation of the work.
"For countries including Bangladesh, India, Indonesia and Nepal, the big challenge is keeping children in school once they enrol," it added.