President Barack Obama and Prime Minister Singh of India walk along the Cross Hall of the White House towards the East Room for the arrival ceremony of a State Visit, November 24, 2009.

India has youngest workforce among large economies; Demographics necessary for strong growth but insufficient condition

Among the large economies in the world, India will continue to have the best demographic trend as measured in terms of age dependency (ratio of old and children: people under 15 or over 65 to working age population - people 15-64). However, while a positive demographic trend may be a necessary condition for strong growth, it is an insufficient one - - in recent times, the  Irish have discovered that the sunny horizon painted by a number of economists who bought into the notion of the primacy of a "demographic dividend," was a prospectus for visionless politicians, provided by fools or individuals in search of a "big idea" to grab public attention.

India's economy is on a tear and on Monday, the government reported that GDP (gross domestic product) expanded 7.9% in the three months to Sept. 30th from a year earlier after a 6.1% gain in the previous quarter.

The World Bank estimates that three-quarters of the population live on less than $2 a day and its president, Robert Zoellick, who is currently in the country, said today: "With India’s strong human capital and cutting-edge innovation, it is clear the knowledge and technology content - - the real competitive smart-edge of India’s exports - - is going to rise. India’s increasing globalisation will be driven by the country becoming a source for some of these specialised products.  As it further integrates with global production chains, it will do so not by making more of the same, but by making products of new value."

Morgan Stanley economists Chetan Ahya, who is based in Singapore and Tanvee Gupta, an Indian resident, say that in simplistic terms, the median age in India will rise from 25 in 2010 to 30 in 2025, while in China it will rise from 34 to 39. In the US, Western Europe and Japan it will rise from 37, 42 and 45 to 39, 46 and 51, respectively. As of 2009, India's total working age population (age 15 to 64) is likely to hit 765 million or about 17% of the world's working age population. The UN Population Division estimates that, over the next 10 years, India's working age population is set to grow by a cumulative 138 million - - significantly greater than the expected increase of 33 million in China. This compares with an increase of 12 million in the US and declines of 8 million in Japan and 18 million in Europe.

The economists say India needs to convert the advantage of having a growing working population into a virtuous loop, creating productive jobs for the expanding workforce; in turn, this should translate into higher savings, investment and economic growth.  To be sure, the government has been gradually initiating reforms to create productive job opportunities, thus lifting GDP growth. A benign globalisation trend has also played a key role in accelerating job creation.

One of the largest suppliers to the world's skilled labour pool

Ahya/Gupta say that while the quality of India's current workforce - - though improving - - is still clearly lagging, with 34% of the adult population classed as illiterate (as of 2007). However, they believe that the quality mix of the fresh additions to the workforce over the next 10 years is likely to be dramatically different. Currently, they estimate that only about 7-9% of the population moving into the 15-year+ age bracket is illiterate. This ratio could dip to well below 5% over the next few years.

To understand the potential shift in the working age population's education level, the economists conducted a pro forma simulation of the flow across various education levels. This simulation assumes current trends in enrollment, promotion, repetition and drop-out rates are maintained/witness improvement over the coming decade and that there is a commensurate rise in education-related infrastructure. The simulation indicates that there could be a steady rise in the out-turn of students at all three levels of education.

Enrollment rates in primary schools have already witnessed a significant rise over the past few years - - both on a net and gross basis. The key reason for this improvement has been the success of the government with the Sarva Shiksha Abhiyan program (providing universal primary education) and the Mid-Day Meal Scheme (under which a free lunch meal is provided to students to encourage them to attend school). Out-of-school children (in the primary age group who are currently not in school) have dropped to around 5.6 million (per World Bank estimates) in 2007 from 18 million as of 2000. Additionally, the drop-out ratio has witnessed a significant improvement in recent years. According to District Information System for Education (DISE) data, the retention rate (i.e., the percentage of students who complete their education) at the primary level has shown a steady improvement over the past three years. It improved to 73.7% in F2008 (12 months ended March 2008) from 58% in F2005 and 53% in F2004.

The simulation exercise suggests that, if the current trends are maintained, the number of students graduating from primary school each year (out-turn) could increase from 18 million in 2008 to 20.3 million in 2015 and further to about 21.4 million by 2020. The impact of this higher enrollment would be felt in out-turn at the secondary level as well. Secondary enrollment rates have already started to pick up.

Secondary and tertiary level educated population to rise significantly

According to World Bank data, the secondary school gross enrollment rate has picked up to 57% in 2007 from 46.2% in 2000. In India, there are two key secondary education levels - - lower secondary (education up to Grade X) and higher secondary (to Grade XII). The simulation suggests that lower secondary out-turn could increase from around 7.8 million in 2008 to 11.8 million by 2015 and further to about 14.5 million by 2020. Out-turn at the upper secondary level could also increase from around 5.3 million in 2008 to 9.2 million by 2015 and further to 11.2 million by 2020. Finally, this improvement would also filter through to the tertiary level. Out-turn at the tertiary level could increase from 3.5 million in 2008 to 5.9 million by 2015 and about 7.2 million by 2020, per the simulation. This would imply an increase in India's tertiary educated workforce from 48-50 million in 2008 to 116 million by 2020.

India and China outpacing other key countries

The economists say that with the increased focus of the government and private sector in providing higher education facilities, and the rising young population, both India and China have already begun to outpace the US, Brazil and Russia. The out-turn of the tertiary graduates in China has been much larger than India due to the significantly larger delta in population in the 20-24 age bracket in China compared with India. However, this trend is likely to change over the next few years, with India witnessing a larger delta in population in this age bracket compared with China. In others words, by 2020 they estimate that India will emerge as the largest in the world in terms of annual out-turn of tertiary graduates.

Government effort critical to achieve estimates

The availability of infrastructure and teachers will be the key to ensure that the quality of education imparted and the supply of an educated workforce does not suffer or become constrained with the rapid growth. To realise the estimates of growth in primary, secondary and tertiary educated population, the government will need to ensure that there are adequate measures initiated to increase the number of teachers and professors. India's pupil-teacher ratio at all three levels is higher than that in other key countries.  At the tertiary level, the economists' estimates require that 40,000 teachers/professors be added each year to maintain the current pupil-teacher ratio. This compares with the outstanding stock of teachers at the tertiary level of 540,000.  As per World Bank data, India's pupil-teacher ratio at the tertiary level at 22 (as of 2004) is higher than that in China (at 19.1 as of 2007) and the US (at 13.6 as of 2007). If India were to transition to these rates to ensure quality of education, the required annual additions to the teaching faculty would be around 53,000 and 88,000, respectively.

Bottom line

Over the next 10 years, the Morgan Stanley economists say that the quality mix of fresh additions to the workforce is likely to be dramatically different. Assuming the government initiates the right policy measures, India will likely emerge as the largest in the world in terms of annual out-turn of secondary and tertiary-educated talent.