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S. D. Naik

In about 50 years, India's surging population may be more a boon than a bane, if a recent Goldman Sachs projection comes true. With a surplus of working age people vis-à-vis current G-6 biggies such as the US and Japan, India could benefit fro m low labour costs, and even become one of the three richest economies! For this fairy-tale scenario to materialise, however, concerted efforts to develop human capital have to begin now, says S. D. Naik.

OVER the last few months there has been a sudden surge of optimism about the growth prospects of the economy. The Reserve Bank of India has upgraded its GDP forecast for 2003-04 to 6.5-7 per cent, the CII projects it at 7.2 per cent and the Finance Ministry's mid-year review, released on November 14, estimates it will cross 7 per cent. Even the usually conservative Centre for Monitoring Indian Economy (CMIE) has now upgraded its forecast to 7.4 per cent.

More important, most economists in India and abroad believe that the annual GDP growth rate of over 7 per cent is likely to sustain over a longer period. While the IT sector has helped India achieve global recognition, its manufacturing sector is also showing signs of a remarkable turnaround. It is set to enter a growth phase. Many Indian companies have gone for acquisitions abroad and increased their exports significantly.

The Finance Minister, Mr Jaswant Singh, stated at the recent India Economic Summit that India was on the verge of "explosive growth". Business Week speaks of India rising. The global business community is now looking at India with new respect.

The most optimistic and much talked about long-term projection about the economy has come from Goldman Sachs, in an economic research paper titled "The path to 2050" released in the first week of October.

While comparing the growth prospects of the leading emerging market economies — Brazil, Russia, India and China (BRIC) — with those of the G-6 (the US, the UK, France, Germany, Italy and Japan), the paper says that the combined size of the BRIC economies will exceed that of G-6 in dollar terms by 2039 (at present, they account for just 15 per cent of the combined GDP of the G-6).

Of the present G-6, only the US and Japan will find place among the six largest economies in dollar terms by 2050. China will be the largest, followed by the US, India, Japan, Brazil and Russia.

According to the paper, about one-third of the rise in the dollar GDP of BRIC economies will come from appreciating currencies, and two-thirds from faster economic growth. This is, of course, based on the assumption that these economies will continue to pursue progressive economic policies and develop economic institutions to support growth.

What the paper says about India is quite flattering. It says that, among the BRIC economies, India has the potential to grow even faster than China over the next 30 years and 50 years and that by 2010 India's growth rate should exceed that of China.

What is the basis for this highly optimistic projection about India? It is driven largely by what the financial services firm calls the `demographic dividend' India is likely to reap over the coming decades because of the sharp surge in its working population.

It is estimated that by 2020 the US will be short of 17 million people of working age, China 10 million, Japan 9 million and Russia 6 million. Against this, India will have a surplus of 47 million working age people.

The implication of this is that India will continue to 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.

For a country that has been struggling for decades to step up the rate of growth, provide job opportunities to the growing army of unemployed and improve the standard of living of millions condemned to live below the poverty line, these projections appear too good to be true.

For decades, economists and sociologists have argued that the country's huge population base and its high rate of growth have acted as a drag on the rate of growth of the economy and per capita income. Now, suddenly, the current stage of demographic transition is being seen as an opportunity to leapfrog to a higher economic growth trajectory.

Not surprisingly, the Goldman Sachs projections have created a stir in India and abroad. Economists have been debating whether the projected surge in working age population will prove to be a boon or a bane. The final outcome would depend on whether we succeed in providing health, education and employment opportunities to our growing population.

According to Mr Arun Maria, Chairman, Boston Consulting Group, to ride the huge demographic wave and not be swamped by it, India needs a dynamic education system.

Dr Shankar Acharya points out in a recent article, that the `demographic dividend' in the Goldman Sachs paper refers to only the supply of labour, while nothing is mentioned about the demand for it. He says that in 1999-2000, while the labour force grew at over two per cent a year, employment growth was just one per cent per annum even as the economy grew at a relatively higher 6.5 per cent per year. Consequently, the backlog of unemployed and underemployed has only increased over this period.

Professor Arvind Panagariya refers to the huge surplus labour force in Indian agriculture that needs to be provided with alternative job opportunities in industry. Today, 65 per cent of India's labour force is in agriculture, in comparison to China's 25 per cent. Industrial output in India accounts for about 27 per cent of GDP, compared to almost 50 per cent in China.

He, therefore, argues that only rapid industrial growth, which could pull labour from underemployment in agriculture into high productivity jobs in industry, can lead to the speedy transformation of the economy. Unfortunately, there has been a significant increase in joblessness over the past decade in spite of the relatively higher output growth and a slower growth in labour force.

Moreover, the increase in the percentage of unemployed in the country is accompanied by a further deterioration in the quality of employment in the recent period with large-scale underemployment and casualisation of labour. At this rate, the Tenth Plan target of creating 10 million jobs every year also appears elusive.

The recent violence over the railway recruitment tests for class IV jobs in Assam and Maharashtra indicates the shrinking employment opportunities and growing social tensions. There were 74 lakh applicants for 20,000 jobs that were available after a long gap.

For every lower level job advertised by the government, at least 10,000 applications are received. Thanks to the demographic wave, the country is facing a paradoxical situation.

On the one hand, there is a scramble for the seats available in IITs, IIMs, engineering and medical colleges and, on the other, most graduates, except those coming out of the few centres of excellence, find it difficult to find suitable jobs.

There is also a growing mismatch between the jobs created and the skills required to perform those jobs. For instance, today more jobs are being created in the IT sector and business process outsourcing (BPO) activities.

However, people seeking jobs in these sectors should have a few years of college education and some training in computer operations. At present, only 6-7 per cent of the college-going-age students are in college, and even fewer can afford technical and engineering education.

Even more important, the country has to seriously address the challenge of human development, if it has to find a place among developed nations, at least by 2030, if not by 2020.

As of now we have a huge backlog of illiteracy. Even our relatively poor literacy rate of 65 per cent is misleading as it includes even those who have learnt only to sign their names.

Almost 50 per cent of the population above the age of 25 has had no proper schooling; only 25 per cent has completed primary education and only eight per cent has completed secondary education. In absolute terms, some 300 million people are illiterate and 220 million live below the poverty line.

Compare this with China, with whom we want to compete in the coming years. In 2001, China's per capita income was $890, nearly double that of India's $450. Adjusting for purchasing power, the Chinese were nearly 70 per cent wealthier than Indians. Only five per cent of Chinese now live below the poverty line compared to India's 29 per cent.

China's share in world exports is nearly seven time that of India's. China's GDP growth over the last 25 years was over eight per cent per annum against India's 5.5 per cent. In terms of human development, China is far ahead of India with much higher levels of life expectancy, literacy and living conditions.

The UNDP's Human Development Report (HDR) 2003 ranks India 127 out of 175 countries in its Human Development Index (HDI). The rank of a nation is determined on the basis of a composite index, which combines per capita income, life expectancy and the level of literacy.

For the first time, the latest HDR also refers to the disparities among Indian States. It bemoans the fact that India contains regions of intense poverty relieved little by overall national growth. It has also vividly brought out how the States that are backward in literacy and health-care have also lagged in economic growth.

The country will, no doubt, need massive investments in agriculture, infrastructure, industry, R&D, housing construction and tourism to generate more job opportunities for the growing labour force.

At the same time, unless concerted efforts are made simultaneously to develop human capital, the country cannot hope to make rapid economic progress.

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