Will India's demographics be a blessing or a curse?
It depends on the success of manufacturing
It is not yet clear to me whether India’s current demographics will prove to be a good or bad thing over the next two decades. For me, the answer to this question lies squarely in its ability to develop a robust manufacturing sector, particularly one that is export-oriented.
Conventional wisdom seems to take as a given that having a young population and low dependency ratio is universally a good thing. Analysts often point out how China’s three-plus decade boom was fueled principally by a “demographic dividend” inspired by its One-Child Policy, often ignoring the myriad other factors that contributed to its economic development.
Having a relatively young population that is starting to enter its peak productivity years in the workforce can be both good and bad and it depends largely on one factor – can your economy generate enough jobs for all of them? Because having lots of unemployed and disenfranchised young people can be a recipe for disaster.
In China's case, the excess labor pool turned out to be a good thing because it was able to develop a healthy manufacturing sector, one that could create hundreds of millions of jobs to soak up the stream of labor coming out of the farms (the “migrant worker”). A large low-cost labor pool, organized to scale in the right manner, has been a major source of comparative advantage for China in the manufacturing arena for the last three decades.
In India’s case, I do not yet see the same structure in place yet. India has a thriving IT/BPO sector, but there are simply not enough seats (approximately 3 million) there to soak up the 20+ million entering the workforce every single year. Its manufacturing sector is finally getting focus as characterized by the “Make in India” campaign but it is not clear how long it will take the reforms to be implemented and when they will start to have material impact on the economy. In the meantime, you have a growing legion of young people that lack employment or are under-employed.
Whether India is ultimately able to make productive use of its young workforce is going to be primarily driven by its ability to develop a manufacturing sector. If we look back a decade or two from now and see no material increase in India's manufacturing or export capabilities, it is a very likely sign that it has failed to take advantage of its demographic dividend.
This was originally published on Quora in April 2015.