A beacon of economic hope
The changing conditions in China have cast a hopeful new light on India in the emerging global marketplace.
While many Asian countries are aging (Japan most notably), approximately half of India’s 1.2 billion people are under the age of 26, and by 2020, it is forecast to be the youngest country in the world, with a median age of 29. That means a growing pool of buyers for goods and services, and a growing middle class.
China, which came into economic prominence on the heels of a similarly youth-heavy population, is forecast to have a median age of 37 by then.
“India is the most logical candidate to replicate China’s success in becoming a manufacturing powerhouse.” Taneli Ruda Thomson Reuters
Demographic trends in India
A growing workforce helps the entire Indian economy, giving businesses access to people that are young, educated and physically fit; it also drives down labor costs.
Already, Chinese manufacturing labor costs nearly four times as much, at an average of US$3.52 an hour, as it does in India, at 92 cents an hour, according to an analysis by Boston Consulting Group.
The demographics feeding consumption
The potential for businesses to more fully incorporate India into their global manufacturing strategies is also driven by the boom in Indian consumer spending.
Between 2006 and 2011, consumer spending in the country almost doubled, from US$549 billion to US$1.06 trillion. In a recent CNBC article, Sunil Devmurari, country manager for India at Euromonitor, said this is just the beginning.
“250 million people are set to join India’s workforce by 2030. As a big chunk of the population shifts into the working age group, the offshoot of that is an increase in disposable incomes and conspicuous consumption. This is the most exciting aspect of India’s demographic dividend,” Devmurari said.
Stubborn challenges remain
India’s rank of 142 is near the bottom of the World Bank’s Ease of Doing Business list, and the country continues to lag behind other Asian economies in the share of GDP attributable to manufacturing. India also has well-documented issues with infrastructure as well as bureaucracy and intractable regulatory requirements.
‘Made in India’
Prime Minister Narendra Modi was elected with the mandate of confronting these challenges and stimulating economic development. His goal: to increase India’s share of the world’s exports from 2 % to 3.5 % by 2020.
In fact, the India of the near future is expected to be manufacturing-centric.
General Motors Co (GM), for example, recently announced a new US$1 billion investment to ramp up production capacity in the Talegaon region of India.
More broadly, companies in the Biotechnology, Pharmaceutical, Electronic Systems, Renewable Energy, Oil and Gas, and Textiles sectors are also poised to become more dependent on India from both manufacturing and retail perspectives.
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One again India's hidden gift of demographic dividend surfaces as its saving grace, in a situation that bodes ill for the general sustainability of development. The International Monetary Fund's ‘Asia Pacific regional Economic Outlook for 2012' cited in media reports suggests that the dividend can add about 2 per cent to the annual rate of economic growth with the right policy mix. That seething mass of youthful energy has to be harnessed and if done well, India's GDP could witness a sizable leap. Given the slipping numbers, with GDP forecast at around 6 per cent, the demographic dividend could be the knight in shining armour.
But here's the catch. While the number of working age youth, the first input for the creation of the dividend is definitely on the rise, it is concentrated in regions that are also the poorest, both in terms of savings and job potential. So this huge chunk of high-voltage productivity needs to find gainful employment and that's what does not seem to be happening.
With growth rates now pegged down at lower levels, that possibility of opportunities for expanding employment seem to have shrunk a bit. So India's advantage over say, Japan that has a shrinking working population since 1995 and an increasing ageing one dependent on pensions or even China, could fritter away into the hot dusty plains of North India and other poor regions blessed with the DD potential.
But what is the strategic advantage India enjoys in terms of its demographic potential? Simply put, India has a relatively higher proportion of a youthful population than the developed economies such as Korea, Japan and Europe. Experts estimate the size of India's workforce population will swell from 77.5 crore in 2008 to 95 crore in 2026. Additionally, by 2020, the average Indian will be only 29 years old, compared to 37 years in China and US; 45 years in West Europe; and 48 years in Japan. In effect, in eight years, workers elsewhere would have crossed the prime of their working lives, inching towards retirement with claims on a working and youthful shrinking population — a demographic handicap.
In India on the other hand, their counterparts would be at the peak of their productivity and earning potential supporting a smaller non-working population, and thereby saving enough to provide investments for further growth.
It is now a popular perception, bordering on myth that India's youthful population contributed significantly to the acceleration in economic growth since the 1980s. Since the late 1990s, India's growth potential has turned its fertility trends from a millstone to catalyst.
So what causes a handicap (rising population) to become dividend? Growth, of course.
Till the late 1980s policymakers never tired of casting the blame for poor growth on India's growing population. When economic expansion became a palpable possibility with reforms and the unleashing of industrial capacity, the demand for robust working-age numbers grew. Suddenly, there was a need for those burgeoning numbers of the young and India's demography turned into a strategic advantage.
Yet it was not long into the growth story that captains of industry, policymakers and educationists began to talk of a shortage of skilled labour. How could that be the case in a country like India with its favourable working age ratios, or its expanding educational base?
A report published by the Confederation of Indian Industry (CII) and the Boston Consulting Group (BCG) in 2010 offered clues to India's demographic dividend complexities. In manufacturing the report estimates that even with technological change, automation, improvements in overall productivity of 5-7 per cent (in real terms) to 2025, India will still lack a trained workforce of around 50-60 million.
So India's growth to 2009 was accompanied by two factors: a rising level of productivity of 4 per cent a year to 2007, and an employment total that fell far short of requirement. This despite the fact that the working age ratio was in India's favour
The ‘talent gap' explained the anamoly of rising growth and falling employment. But there was something more than rising productivity slowing the rate of employment — the emergence of contract labour in factory employment. The use of temporary labour was taking its toll on regular fixed employment.
This was disturbing because it represented the spread of the existing form of employment in the informal sector that accounts for more than a third of total employment.
Looking back, growth itself was regionally uneven. The fact that it centred in southern and western States as various studies have attested meant that the demographic dividend was also working for these States blessed with growth and rising employment especially in the urban and IT sectors.
The working population
According to economists the “working population” in India is set to rise considerably over the next decade or more. India's “dependency ratio,” that is the number of dependents to working people is low at 0.6, compared with the developed countries.
That DR is going to decline with fertility rates continuing to fall. Interestingly, the annual average rate of decline in fertility rates has been higher in the twenty years after 1990 than it was in the two decades since 1970.
India has a large population in the 0-15 years that would continue to enter the work force just when fertility rates are falling. By the same token the dependency ratio will fall further with lesser children being born in the current period of falling fertility rates.
This suggests India's demographic graph has a “bulge” in the centre, a concentration of people in the age group that constitutes a nation's potential work force, its storehouse of talent, energy and scalable achievement. That is India's “Demographic Dividend.”
Given the skewed pattern of growth and the fact noted by the IMF that the working ratio is high in poorest States; that most employment is located in the informal sector and that factory employment is increasingly contract-driven, India's demographic dream may turn into its nightmare.