Will India deliver on its promise?

by Hansi Mehrotra

18th February 2016

Akhilesh Tilotia’s Making of India basically attempts to answer this question by taking an in-depth look at the social, political and economic transformations we are witnessing in India today. This series of articles, based on some presentations, summarise the key themes of the book.

Part 1 – The promise of India

India is in the throes of many simultaneous transitions: a young demographic is preparing to launch itself into the changing economic structure. Their ability to skill themselves for the opportunities thrown open by a changing India can lead to a savings and consumption boom. The opportunities for such advancement that India has thrown up over the last quarter of a century have been primarily in the services sectors: India is now hoping to turn into manufacturing powerhouse. In any case, India is no longer dependent on agriculture for its output and this means that cities are taking centre stage in terms of driving growth. Among all these transitions, the relationship of the Indian citizen with its government, its society, its businesses and its money is changing fast: led and abetted by a communication and digital revolution. Each of these aspects presents many practically unbounded opportunities but also require the effective channelization of the energies.

 

Demographic dividend has already been born

The cohort of kids born in India between the census years 1991-2001 was the largest cohort – all successive cohorts have been and are now expected to be smaller. The implication of this is clear: the demographic dividend of India has already been born and over the next few decades will be powering the rise in its workforce. India’s workforce of 484 mn people (in 2011) has the potential to increase to 850 mn by 2025. This compares with the peak workforce of 830 mn that China will have in 2016. As China loses numbers in its workforce, potentially, 366 mn people can join the workforce in India over a decade and a half; 23-25 mn people will become eligible to join the workforce every year. However, women have hardly been a part of India’s workforce – whether they finally join in and become partners in India’s progress will be critical in determining the power of India’s demographic transition.

India’s efforts at educating its youth to power this transition have been a mixed bag: the government schemes have brought more than 95% the young kids to school. However, the quality of schooling is so obviously poor that parents have increasingly shifted their kids to private schools. This means that a vast majority of kids who are still part of the public schools are not prepared at the foundational level to pick up skills that will eventually be required in the job market. What India also lacks is a parallel track of education where kids (say in their early to mid-teens) can move to finding the vocations that they find interesting or remunerative. India is still stuck with the model of primary, secondary and tertiary education. This system now over-produces kids who have gone through their tertiary education but significantly under-produces qualified people with vocational skills: no wonder we shake our heads in dismay when we find that the starting salaries being offered to engineers is similar to what cab drivers make.

On one hand, the next generation cannot simply do what the previous generation was doing, on the other, there is a dearth of teachers. Those who can make money in the new economy do so rather than becoming teachers.

 

The rise of the cities

In the era when manufacturing-led the growth of an economy, new cities came up around manufacturing hubs. In a services-dominated economy, older cities expand out. India’s urbanisation will be the expanding out of the current cities and not the creation of new ones. India is also witnessing a trend in what the government still recognizes as rural India: around a quarter of India’s rural population lives in villages that have more than 5,000 people. Such large villages would be classified as urban in most countries in the world and no wonder they too are demanding service quality levels of their utilities (roads, power, water) that match urban standards. Unfortunately, the urban standards themselves are nothing to write home about. India has run down many of its urban utilities under the garb of hypocrisy: pricing the services of the utilities low so that the poor can afford; however, it so impoverishes the utility that the poor can hardly be served by them. Two sectors that will be the largest beneficiaries of urbanisation will be the real estate and transport sector – however, the nature of the industry in these sectors will radically alter.

India will need to annually invest 8-10 per cent of its GDP on developing its urban infrastructure and this will amount to US$ 2-2.5 trillion over the next decade. To fund such large investments, cities will have to look towards its own citizens, whether it is through better monetising of its lands, higher usage charges for public goods or higher property taxes.

Flexible master plans are important; India will possibly double the size of its urban area over the next decade from 3 per cent over overall land area to 6 per cent.

 

Consumption changing from necessities to discretionary

Expenditure on basic necessities like healthcare, housing, education and transport will grow significantly ahead of the overall consumption market and the growth of GDP. Categories like leisure, hotels and miscellaneous growing faster than the overall growth rate indicates there will be a move towards a better quality of life. Food, which takes up, on an average, almost half the wallet of an average Indian, will see slower expenditure growth.

India’s large and varied population makes it a consumption market that houses a significant number of households across the spectrum.

Conclusion

The promise of India is in the well-known long-term themes of demographics, urbanisation and consumption. This article reiterates these long-term themes as strong secular transitions. In the next article we will look at ‘pricing’ being the key to many of these transitions.