India staring at demographic disaster

While India and China have long been the sole members of the billion-plus population club and with no other states in striking range, the UN’s announcement is both the making of a trivia question and an occasion to consider again the reality that the twenty-first century belongs to Asia. But then bigger populations come with bigger problems. As the United States and other western powers come to grips with their relative decline, hitching their star to India will not be a straightforward proposition.

Large populations fueled the Industrial Revolution and the incredible economic growth enjoyed by the west. While vast inequalities persist—even grow—global economic productivity has expanded unimaginably over the period, allowing more people to live longer and healthier than ever before.

India’s huge population is also a young population, with 52 per cent of its citizens under the age of 30. Young people are a valuable resource for any economy. They are in the prime of their working lives, they are avid consumers and fuel the larger economy and eventually they will have children of their own and buy even more stuff.

Countries in western Europe, and also Japan and increasingly China, are skewing older and facing tighter labour markets and greater pressures on public-sector entitlement programs such as pensions (turmoil in France) or health care.

But India’s younger population promises a huge—and growing—consumerist middle class and a seemingly unending supply of graduates itching to enter the workforce.

To absorb the demand for employment, the Indian economy must create over a million new jobs each month. It presently is creating way fewer, and job creation is slowing even further. Resentment over poor job prospects begets frustration that spills into violence. Nor is this a problem that can be solved by pulling on available policy levers such as India’s oft-maligned labor laws.

The failure of India’s education system is to be blamed for the current mess. Other culprits include the government’s hesitant and often contradictory approaches to foreign investment and international trade, and its protectionist tendencies that stifle innovation and prevent India from playing a meaningful role in global supply chains in the way that China, Vietnam, Malaysia and even Bangladesh have.

But a failure to harness the energies of the world’s largest population is not just a tremendous missed opportunity. It is a millstone weighing down India’s future. A frustrated, underemployed youth population turns restive quickly and the government’s tactic of distracting it with majoritarian populism and anti-minority scapegoating will not succeed forever. Worse, it will erode the one undeniable achievement of independent India: the building of a diverse, secular, democratic republic against all odds.

India is no longer rated a liberal democracy by reputed international organizations, and public opinion surveys indicate that the Indian public’s commitment to democratic norms is worryingly shallow.

For the United States and its allies, who have been reminded time and again of just how little influence they wield over India’s foreign policy, these trends should ring alarm bells. For the first time since the era of colonialism, the majority of the world’s population no longer lives in liberal democracies. Indeed, the world’s two largest countries, accounting for more than a quarter of all human beings, are actively illiberal and working against the international economic order so painstakingly erected after World War II to cement western hegemony.

If demography is destiny, then the UN’s announcement, while confirming what many knew to be inevitable, still changes everything.

Finally, favourable demographics will add to potential growth over the forecast horizon. India’s large population is clearly an opportunity. However, the challenge is productively using the labour force by increasing its participation rate. That will mean creating opportunities for this labor force to get absorbed and simultaneously training and up skilling the labour force.

The population growth will continue. What we focus on is the dependency ratio, which is the non-working-age population that is dependent on the working-age population.

For India, that will be among the lowest among large economies for the next 20 years or so. So that really is the window for India to get it right in terms of setting up manufacturing capacity, continuing to grow services, continuing the growth of infrastructure.

Capital investment will also be a significant driver of growth going forward. Driven by favorable demographics, India’s savings rate is likely to increase with falling dependency ratios, rising incomes, and deeper financial sector development, which is likely to make the pool of capital available to drive further investment.