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Saturday, November 22, 2003

Demographic dividend or disaster?

A recent op-ed in the Economic Times, titled "Demographic dividend or disaster" analyses the implications for India of projections from a recent Goldman Sachs report titled "Dreaming with BRICs: The Path to 2050" (pdf - 580kb).

China, US and India will be by far the three largest economies in the world by 2050. Each of them will be more than four times as large as the next largest economies - those of Japan, Brazil, Russia, the UK, and Germany. The report estimates that the US' GDP will be $45 trillion, China's $35 trillion and India's about $28 trillion, whereas Japan's will be about $7 trillion.

The principal factor contributing to the huge sizes of the Chinese and Indian economies if they continue on their development paths is demographics. Both countries have huge populations. And since demographics are such an important factor in these projections, let us consider the implications. I will highlight four.

The first is that demographics can be predicted with much greater certainty than almost any other variable that goes into econometric models ...and its contribution to Goldman's projections makes the results worthy of serious attention.

In 2050, even though India's GDP will be more than four times that of Japan, the UK, and Germany, India's per capita GDP will be less than a third of the others. This has two implications.

One is that, on average, Indians will not be able to pay the same high prices for products and services as people in the smaller but richer (on per capita basis) economies. Therefore, for the size of the Indian economy and especially the extent of its growth to provide an attractive market for companies, they have to develop product-price propositions that suit the large Indian market.

The other implication of the demographic boost to the size of India's economy is that India can have a competitive advantage in labour costs that can be sustained through 2050 even as the country becomes one of the three richest economies in the world in terms of gross GDP.

It is estimated that by 2020 the US will be short of 17 million working age people, China 10 million, Japan 9 million, and Russia 6 million, whereas India will have a surplus of 47 million. The emerging youthfulness of India leads to the fourth implication of demography as a principal factor contributing to India's economic growth. The country can benefit from a demographic dividend or suffer a demographic disaster. Unlike other resources such as capital and natural resources that count in econometric models, people have a unique quality - they are, well, people! They have emotions, hopes and disappointments. Moreover, they are "appreciating assets" that, unlike machines and money can improve their own abilities when motivated and provided with the requisite learning environment. Young people can learn. Young people have energy. But young people are easily frustrated and they can be headstrong.

A huge demographic wave is arising, unprecedented in history. To ride it, and not be swamped by it, India urgently needs a dynamic education system as a surfboard.Therefore, it behoves our policy makers to give the highest priority to strengthen the education system. Along with more primary education at the grass roots level, we need more effective vocational and professional education. People want jobs. Therefore education must be continuously tuned to emerging opportunities for gainful employment.

Atanu pointed out in an earlier post that "every damn problem that India faces is exacerbated by the population problem". True both in the short and long term, only differently. Though solutions need to be found in the short term (which can only alleviate the problem to an extent), the real challenge is going to be in the long term - that of educating our workforce of tomorrow who will need jobs to sustain the country's growth.

This means that the demand for both primary and higher education (backed by the readiness to pay for it, even out of future earnings if necessary) will be be huge, along with demand for other basic needs like food, clothing, shelter, healthcare and communication. The state education system neither has the funds nor the efficiency to meet this demand. The unorganised private sector which currently comprises the major chunk of the education sector is ridden with quality and scalability problems. Organised private sector players will have to rise to the challenge sooner or later. The organised private sector is active with multiple large players and multiple models in all other basic sectors (food, clothing, shelter, communication etc.) but not education yet. The Reliance group's foray into education is a very small step (don't know if they have a larger game plan in the education sector).

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