India’s Demographic Dividend: Asset or Liability?

Half a century ago, there was only one answer to the question of India’s growing population. In a 1967 book titled Famine 1975!: America’s Decision: Who Will Survive?, U.S. economists William and Paul Paddock even advocated that the population of India should be allowed to starve as the country was a hopeless case. America should allocate its aid dollars to other countries with greater chances of being able to feed their hungry, the authors argued.

Ten years ago, the India’s growing masses — the population officially crossed one billion in 2000 with the birth of Aastha Arora on May 10 of that year — were still considered a liability by many. Providing basic needs for all seemed to be a near-impossible task.

Somewhere along the line, however, economists discovered a silver lining: The world was aging, but India was growing younger. There was a “demographic dividend” that the country could hope for, and ultimately exploit. Ann April 2012 International Monetary Fund (IMF) paper titled, “Asia and the Pacific: Managing Spillovers and Advancing Economic Rebalancing,” noted that “in many Asian countries, aging populations are now causing, or are about to cause, a decline in the working-age ratio. The Japanese workforce has been shrinking since 1995, and the Korean workforce will start to decline beginning 2015. China’s working-age ratio will peak in 2013 and then decline by a substantial amount in the next few decades…. The second most populous country in the region (and the world) affords grounds for cautious optimism. India’s demographic transition is presently well underway, and the age structure of the population there is likely to evolve favorably over the next two to three decades.” The democratic dividend could add 2 percentage points to per capita GDP growth per annum, according to the IMF.

There are some challenges related to those seemingly favorable demographics, however. The first is in finding jobs for all these people. Second, and more importantly, India’s young people will need to develop the right skills for the modern job market.

Different Views on Job Growth

Opinions on future job growth diverged at the recent 20th Anniversary Symposium of the University of Pennsylvania’s Center for the Advanced Study of India. During a panel discussion titled, “Building an Inclusive India,” one speaker envisioned the country exporting armies of skilled labor to the world. Another worried about a generation of unskilled Indian workers left behind. “Only 5% of India’s labor force is estimated to have had any formal training,” said panelist S. Ramadorai, vice-chairman of Tata Consultancy Services and an advisor to the Prime Minister for the National Council of Skill Development.

Developing India’s human capital is essential in the coming decade, Ramadorai noted. To make manufacturing a genuine engine of growth, the government has announced new policies as part of the 12th five-year plan (2012-2017) that aim to create 100 million work opportunities by 2022 — many in labor-intensive manufacturing sectors such as textiles, gems and footwear.

The government is also working to expand access to education and vocational training for workers in the countryside, including new rural broadband networks that will connect remote areas with educational opportunities. “Technology is going to play a very critical role in connecting the haves and the have-nots,” Ramadorai said.

With the right skills and training, Ramadorai sees workers from India prospering not only at home but also abroad. According to the United Nations, the working-age population will increase by about 600 million globally in the next decade. While there will be a decline in the developing countries by almost 17 million, the global economy as a whole is expected to experience a skilled manpower shortage of 56 million by 2020, he added.

India will be one of the few countries in the world with a working age population that exceeds its number of retirees. “By 2020, the average Indian will be only 29 years of age, compared with 37 in China and the U.S., 45 in Western Europe, and 48 in Japan,” Ramadorai pointed out. That means India will experience an age advantage for at least three decades, through 2040. “So this is where I see an unprecedented opportunity,” he added. The future is bright “if Indians skill themselves to suit the future demand for jobs both domestic and abroad.”

If India can make employment and skill level a priority, it might be able to fill the gaps in the world’s manpower shortage and “become the resource pool of the world,” Ramadorai said. “We need to see this as an opportunity,” he added. Getting India’s labor pool ready for export will be “the largest and most complex human resources exercise in the world.”

Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics and senior fellow and director of the India Initiative at the Center for Global Development, was more skeptical about India’s ability to train its unskilled workforce. “I hope Mr. Ramadorai will succeed in his mission, because India needs that, but I’m a little more pessimistic,” he said. India suffers from a “precocious model of development,” Subramanian noted. “We have developed based on skilled services rather than using our abundant pool of unskilled labor. All of East Asia, even China, in the early phases developed using low-skilled, abundant labor. We have completely neglected that.”

Anomalous FDI Flows

India’s “precocious” development is seen most clearly in “the uphill flow of foreign direct investment (FDI),” Subramanian said. In theory, economists believe that rich countries should produce the technology, know-how and capital and then shift those resources to poorer countries in the form of FDI. But today, emerging countries like Brazil, China and especially India are showing comparative advantages in certain skilled areas such as management and finance — and are exporting FDI as a result.

China’s FDI goes mostly to emerging African countries, which is consistent with the traditional economic models, Subramanian noted. “But India is completely anomalous, completely precocious. We export FDI to the richest countries in the world. That shouldn’t be happening at all.”

It will be difficult at this point for India to build a manufacturing sector for unskilled labor, Subramanian suggested. “That is not going to happen.” Much of manufacturing today is already shifting toward robots and machines. “Within manufacturing, it’s become much more skill intensive. Within our exports, it’s become more skill intensive. It is not becoming unskilled-labor intensive,” Subramanian said.

India’s only other option is to upgrade workers’ skills so that as the economy demands more skilled labor, there will be a supply of people to fill those positions. Subramanian expressed doubt that India could train workers fast enough. “While there will be very good private sector initiatives to respond to this, I think the public sector will just not be able to supply the kind of skills in the quantities that we need going forward,” Subramanian noted. “What that means is that one or two cohorts of unskilled labor will get left behind.”

Subramanian called the scenario “an unavoidable and inevitable consequence” of India’s precocious model of development. “I think we have a problem on our hands,” he added.

The Debate in India

The employability issue is the focus of a heated debate in India, with strong arguments from both sides. The National Association of Software and Services Companies (Nasscom) has published a study saying that only 25% of information technology (IT) graduates are employable. This has drawn a strong reaction from the All-India Council for Technical Education (AICTE), the government’s accreditation agency. According to the AICTE, every year, one million engineering graduates and diploma holders are added to the workforce. If the number of unemployed engineers was anywhere near what Nasscom claims, “there would be civil war,” AICTE chairman S.S. Mantha told the media recently.

The IT sector has been the biggest recruiter in recent years and has attracted many studies. A report by Aspiring Minds, a Gurgaon-based employability assessment firm, highlighted the skills gap, particularly in the product space. According the report, titled “The National Employability Report, Engineering Graduates, Annual Report-2012,” although India produces more than 500,000 engineers annually, only 2.68% meet the skill requirements of the IT products sector. The report estimated that nearly 92% of engineering graduates in India lack computer programming and algorithms skills and around 56% lack soft skills and cognitive skills.

The report further noted that only a very small percentage of engineers have the competence to apply engineering mathematics to solve problems. “There is a clear and measurable distinction between the talent required to develop IT products vis-à-vis typical IT services talent. While we observe employable talent is spread across all kinds of colleges, building India’s prowess in IT products would require significant focus and investment in training and evaluating students in core technology,” Himanshu Aggarwal, CEO of Aspiring Minds said in the report.

Sanjay Modi, managing director of online recruitment firm Monster.com for India, the Middle East and Southeast Asia, suggests that there is a lack of adequate communication and collaboration between the government, academia and industry in India. “For instance, while business has changed drastically in the past 10 years, the curriculum in educational institutions is the same as it was a couple of decades ago. And the sheer process of bringing in any change in the curriculum is so tedious that it simply gets bogged down,” says Modi. “What is needed is a strategy of three Es — education, employability and employment. What we have to focus on first is education. This will lead to higher employability.”

In an earlier India Knowledge@Wharton article, Manish Sabharwal, chairman of TeamLease Services, a leading human resource services provider, pointed out that skill development is only one part of the solution. Sabharwal noted: “There are three problems in the current Indian system: matching supply and demand, repairing supply for demand and preparing supply for demand. What we are all focusing on right now in terms of employability … is only the repair part. This is a low-hanging fruit. But this repair pipeline will run dry if the prepare pipeline, by way of education reforms, is not fixed. And that is something that the government and academia need to work on.”

A Global Problem

This is, of course, not a problem for India alone; it is more important in the country, however, because of the numbers involved. According to a recent McKinsey report titled, Education to Employment: Designing a System that Works,” there is a huge gap in almost all countries between what the educational system feels it provides and what employers think they get. In the U.S., 87% of the education providers answered the question, “Are graduates adequately prepared?”  in the affirmative, while only 49% of the employers agreed. India actually scored better, with figures of 83% and 51%. The gap was the widest in Germany followed by the U.S. “Seventy-five million young people — 12.6% of global youth — are unemployed yet only 43% of employers report there are enough qualified entry-level candidates,” according the McKinsey study.

S. Krishnaswamy, senior professor and head of the department of genetic engineering at Madurai Kamaraj University, says that all of these reports are doing a good job of raising awareness. “There is certainly a problem, but it’s not insurmountable,” he notes. “Indians are extremely adaptable. They learn very fast, too.”

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