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India is expected to hit 1.37 billion by 2020 and 1.48 billion in 2030. At that point, India’s population will overtake China’s.
By Lakshman Krishnamurthi And Sugandha Khandelwal
India ended 2010 with a population of 1.21 billion. The population is expected to hit 1.37 billion by 2020 and 1.48 billion in 2030. At that point, India’s population will overtake China’s.
Now consider this: The number of people in the working-age population aged 15 to 64 is expected to increase from 781 million in 2010 to 916 million in 2020 to a staggering 1.02 billion in 2030.
And this: Half the population of India was younger than 25 in 2010. That will only change to half the population being under 28 in 2030.
So, India will remain a very young country for the next 20 years. These favorable demographic statistics in India point to the potential of a large “demographic dividend” where the enormous size of the young, working population could turbo-charge the prosperity of the country.
China in just 15 years, between 1995 and 2010, leveraged its “demographic dividend” to build the world’s second-largest economy after the U.S. and will overtake the U.S. within the next 20 years. Chinese nominal per capita gross domestic product in dollars increased seven-fold between 1995 and 2010!
Can India ride the same winds? We don’t mean overtaking China or the U.S. That simply will not happen. But can India leverage its demographic dividend into a substantial economic payoff which will significantly change the lives of hundreds of millions of the poor?
There will be a payoff but it will not be as large as China’s. The best India can hope for is that nominal per capita GDP in dollars will increase by a factor of 3.5 to 4 between 2010 and 2025, about half what China achieved between 1995 and 2010. Even though India is a young country, the age dependency ratio still favors China over India till 2025. (The ratio is the proportion of people too young or too old to work to the number of working-age adults.)
Both countries have momentum but China’s structural factors are far superior to India’s so India will not get the same leverage.
India’s sector GDP is split 17%, 28%, and 55% in agriculture, services, and industry, respectively. The employed workforce split 52%, 14%, 34%, respectively. The disproportionate services GDP contribution is an anomaly in a poorer country like India. The vast majority of service employment in India is in low-level and low-paying industries. The contribution of higher-level industries to the services GDP is driven by the information technology and software sectors which do not employ large numbers of people.
Equally worrisome is the low percentage of employment in industry, which should be the GDP driver of a poorer country like India. Industrial employment in factories is more directly connected to real productivity growth than agricultural or low-level service employment.
There is some talk that India should focus on the “knowledge economy” instead of the “manufacturing economy” given that the country is badly trailing China in manufacturing. We believe this is wishful thinking.
India needs hundreds of millions of productive, decent-wage jobs which can only be provided by industrial employment. Even if production of such goods is not of exportable quality, it will still provide gainful employment. The “knowledge economy,” which will employ far fewer people, can serve as the export engine.
The agricultural sector, which employs over 50% of the workforce, is extremely inefficient. Agricultural inefficiency is a combination of small farms, poor land management, dependence on the vagaries of water supply whether it be rains or ground water, a poor supply chain that wastes food and provides low remuneration to farmers, and in some cases low prices paid by the government, which reduces the incentive to produce crops.
Overall, only around 60% of the population available to work is working, which compares poorly to China’s number of 85%.
The vast majority of employment is in enterprises with fewer than 10 employees, and in the informal sector, which is a major cause for the low productivity. The data reflect that India’s workforce is only half as productive as China’s in all three sectors (agriculture, industry, and services).
The combination of fewer people working and not working efficiently is a double whammy.
Even with favorable job creation of 13 to 14 million new jobs annually over the next 15 years, there will not be enough productive jobs available to absorb the increasing work force with the proportion employed rising to only 70% in 2025.
Indian education is in a dismal state with only about one out of eight children who start first grade graduating from 12th grade. According to World Bank data, India’s literacy rate for ages 15 and above places it in the last quartile of 114 countries. Even though the country produces 2.5 million to 3 million college graduates a year, a national survey notes that among persons aged 15 to 29, only 2% have received formal vocational training and just 8% non-formal vocational training.
Industry estimates also note that only 25% of the engineering graduates are qualified to work for a multinational company, leading many companies to invest in retraining graduates.
Energy is the prime driver of economic growth. To deliver the GDP growth forecast over the next 20 years would require a quadrupling of energy capacity, according to the Indian government. The energy required to fuel infrastructure growth is daunting and is unlikely to be met and would require massive importation of coal and oil. That will raise input costs, leading to significant balance of trade deficits, and crimp GDP growth.
Already, the Indian government runs a budget deficit and has to borrow from the capital markets to meet its obligations. The government has announced infrastructure investments of $500 billion in the 11th five-year plan that runs to 2012 and $1 trillion in the next. These enormous investments are unlikely to be realized because a significant amount has to come from the private sector. Uncertain returns, corruption and bureaucratic meddling will negatively impact private-sector participation.
What does India need to do? A sustained and massive investment in education, an increase from the current 3.8% of GDP to 5%, is necessary to improve both basic literacy and skills though given the budget deficits at the national and state levels, it is not clear how this can be done. Vocational education is imperative to move unproductive farm workers to productive industrial workers. The country needs tens of thousands of qualified trades-people like electricians, carpenters, plumbers, bricklayers, masonry workers, HVAC contractors, IT and security contractors, and so on for all the infrastructure that is expected to be built.
India has the second-largest amount of arable land after the U.S. Land reforms are urgently needed, farm sizes must get bigger allowing mechanization to improve productivity, and prices must be rationalized to incentivize production. Food inflation in India is high which hurts the poor the most. The burgeoning population will exacerbate food shortages, with the potential for massive social unrest derailing growth.
Democratic India has more rigid labor policies and a weaker investment climate than communist China, a big reason for productivity across the board being less than half of China’s. Flexible labor laws are needed to improve the investment climate and increase worker productivity.
China made the right bet in improving its agricultural base first before sustained improvement in infrastructure which attracted large amounts of foreign direct investment leading to a virtuous cycle of growth and investment over a 25 year period. India did not pay enough attention to its agricultural sector which means it has not significantly improved the lives of half its working population.
So, India in 2025 will be the sixth- or seventh-largest economy in the world, but not rich enough to make a material difference to some 300 million people who will still be living on less than $3 to $4 a day by then.
- Lakshman Krishnamurthi is professor of marketing at the Kellogg School at Northwestern University; Sugandha Khandelwal is a former research associate at the Kellogg School.
Fuente: India Real Time