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India and the 'demographic' dividend

Gabriel DomínguezSeptember 4, 2015

The UN projects that India will become the world's most populated nation by 2022. And with a fifth of the global working-age population soon living in the country, DW examines the challenges and opportunities involved.

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Image: Getty Images/AFP/P. Paranjpe

A recently released UN study of global population trends sees India overtaking China to become the world's most populous country as soon as 2022 - six years earlier than previously predicted. Although Indian fertility rates have moderated significantly over the past three decades, they are still above the population replacement rate. This means that the South Asian nation's population is projected to rise from 1.31 billion in 2015 to 1.52 billion by 2030.

"This is a prospect that might have seemed unfathomable some time ago, but is now all but inevitable. We are not far from the day when a fifth of the planet's people will be in India," Michael Kugelman, a South Asia expert at the Woodrow Wilson Center for Scholars, told DW.

The UN forecast has refocused attention on the country's remarkable demographic potential and the impact this could have on its economic development. But it has also turned the spotlight on the many daunting challenges the nation will have to overcome, including the creation of infrastructure and urbanization models needed for such a large increase in the population.

Can the service industry do it?

Analysts agree that one the biggest requirements to capitalize on this development will be to create job opportunities for the additional 150 million or so Indians who will be entering the labor force by 2030. But how is this possile?

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So far, productivity gains in India have been mostly linked to a few economic sectors such as ITImage: STR/AFP/Getty Images

Milan Vaishnav, an expert on India's political economy at the Carnegie Endowment for International Peace, explains that India's economic development has so far been rather unique in that it has leapfrogged from an agrarian economy directly into a services-based economy, largely skipping over manufacturing.

However, he points out that while this development model has its benefits, they have largely accrued to a relatively small number of skilled workers. Indeed, it is sometimes even argued that India could continue on the path of developing its world-class services sector to generate highly productive employment. But as Shilan Shah, an India economist at UK-based Capital Economics, indicates, this is something of a "misnomer" given that productivity gains in India are mostly linked to few sectors such as IT.

Manufacturing is key

The problem is that, according to a study by Mckinsey, India's IT industry employs only around three million people - or 0.4 percent of the workforce - with the vast majority of Indians doing low-productivity jobs in areas such as transportation or construction. Shah therefore argues that the development of a labor-intensive manufacturing sector is crucial for the country to capitalize on its rapidly growing population.

Historically, manufacturing has been the only sector capable of creating enough jobs to absorb a country's rising workforce while also generating high productivity gains. "Every economy in Asia that has successfully moved beyond low or lower-middle income status has done so by first establishing a thriving manufacturing sector," Shah told DW.

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Manufacturing is seen as the only sector capable of creating enough jobs to absorb a country's rising workforceImage: Reuters

But it's not just about avoiding rising unemployment rates. "While demographic factors can support growth, they do not determine outcomes. Productivity growth is crucial," the analyst added, arguing that the key challenge for policymakers lies in fostering the creation of "globally competitive high-productivity sectors" that can absorb what is soon to become the world's largest labor force.

The education factor

Economists believe that India has the potential to reap a major "demographic dividend" by having a large and growing workforce at a time when many other large economies are dealing with aging populations. However, there is nothing guaranteed about reaping the benefits of this demographic dividend, as analyst Vaishnav points out.

"If India does not make the right investments by diversifying its economy, creating a more favorable investment climate, and improving the quality of education, this supposed demographic dividend could end up being a demographic disaster," the expert told DW.

Analyst Kugelman agrees: "India has a window of opportunity to reap great benefits from a young population. However, if this strategic age cohort isn't properly educated, or does not receive proper vocational training, then all the opportunities could be for naught, and the demographic dividend could pass India by."

India has made major progress in recent years in terms of educating its children, and not coincidentally, many Indians have been lifted out of poverty. But this pattern will need to continue on a much deeper level, as a recently published survey shows.

According to the Pearson Voice of Teacher Survey, Indian teachers say that while 57 percent of students in the country are educated, they are not adequately prepared for employment. The survey also found that 75 percent of teachers have called for a restructuring of course curriculum in collaboration with the industry.

Urban and environmental challenges

Alongside these challenges, policymakers face the daunting task of providing basic services to an ever-increasing number of people. Even today, India is struggling to provide health care, water, electricity, and shelter to its masses. "Some years down the road, when the population has grown even larger, this challenge will prove even more immense," Kugelman said.

Moreover, there are huge urbanization challenges. Indian cities have grown tremendously over the past two decades - both in population and geographic size - leading not only to housing shortages, but also contributing to traffic congestion, air pollution, rising greenhouse gas emissions, and poor public health. In fact, a study published this February by economists at the universities of Chicago, Harvard and Yale, reveals that India's high air pollution, ranked by the World Health Organization (WHO) as among the worst in the world, is having an adverse impact on lifespans.

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The WHO estimated last year that 13 of the 20 most polluted cities in the world are in IndiaImage: Prakash Singh/AFP/Getty Images

The report found that over half of India's population - around 660 million people - lives in areas where fine particulate matter pollution is above the country's standards for what is considered safe. The figures came after WHO estimates last year showed that 13 of the 20 most polluted cities in the world were in India, including the worst-ranked city, Delhi. Moreover, the South Asian nation has the highest rate of death caused by chronic respiratory diseases anywhere in the world.

'Make in India'

Given the enormity of these challenges, tackling them will require an enormous amount of political will and determination. A first step in this direction was made by PM Narendra Modi whose economic agenda of improving growth, boosting commerce and promoting Indian manufacturing could play a key role. After receiving a strong electoral mandate to transform India's troubled economy, many hope that Modi can replicate his record of economic success as Chief Minister of Gujarat state on the national stage.

But this is easier said than done as the PM's agenda faces formidable political resistance. Fifteen months into Modi's tenure, he has faced strong headwinds in making the kinds of alterations to the economy necessary to reap the benefits of the changing demographics. And this is precisely why analysts are skeptical that the country will be able to capitalize fully on its demographic dividend.

Political headwinds

For instance, despite Modi's strong mandate, the prospects for wide-ranging economic reform to amend land acquisition laws and ease labor market rigidities - two major constraints on the development of a thriving manufacturing sector - look slim for now.

While some states have amended their labor laws to give employers greater flexibility to hire and fire workers, the central government has not enacted big changes as unions have strongly pushed back, including many affiliated with the ruling BJP.

The next best opportunity for the Modi government could come after 2017, but only if the BJP is able to secure some major state election victories and alter the make-up of the Rajya Sabha - the upper house of parliament. "Until then, PM Modi's 'Make in India' campaign looks set to remain little more than a sound-bite," said economist Shah.

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PM Modi's economic reform agenda has faced formidable oppositionImage: Reuters/A. Abidi

The Modi government has also taken some incremental steps to help improve the investment climate, including by lifting caps on foreign direct investment (FDI). However, as analyst Vaishnav explains, the real work has to be carried out at the state level, where Modi has relatively little control over policymaking.

An inability to fully capitalize on the demographic dividend would not only represent lost economic opportunities for India's people, but might also result in a significantly slower rise in incomes, with potentially negative social and political implications. "Failure to boost incomes substantially for the rapidly growing population could also increase social tensions, and even pose a threat to political stability," said Shah.

Experts argue that, on the whole, PM Modi is learning that what he achieved on a relatively modest scale in Gujarat is much harder to pull off nationally across the whole country. Nevertheless, as analyst Kugelman pointed out: "While India may not succeed 100 percent, it will certainly do what it takes to ensure that a golden opportunity for a demographic dividend doesn't pass it by."