Indian ‘Certainties’ Revisited – and the Changes They Will Drive

India has the largest potential labour force in the world, with over 850m people who are of working age, and this number is expected to exceed 1bn over the next decade. Moreover, the relative youth of India’s population, with over 50% of its people projected to be under the age of 30 in 2025, positions it well as source of global labour for decades to come at time when existing industrial powerhouses will face rapidly aging populations. In Germany and Japan, only c.27% of the population will be below the age of 303, while China’s population will continue to age significantly as well, with c.33% of the populace under 30 by 20253. This demographic dividend has the potential to fundamentally reshape India’s position in the world, creating a global leader across a wide range of sectors that will benefit from India’s growing and well-trained labour force. However, a large portion of this labour force is still severely unemployed in either the agriculture or unorganised sector, while female labour force participation remains low.

The government will need to actively address these issues if India is to truly realise its demographic dividend. The education gap in India today is significant. At 3% of GDP or c.$63bn, India’s central government’s annual education spending per student is about US$48, compared with US$940 per student in China and an OECD average of US$9000. The focus of policy will need to turn to:

1. Addressing Low Female Labour Participation. Female participation in India’s labour force currently stands at 27%, just over half the level of most emerging market economies. Moreover, this number has declined from over 36% as recently as 2005 due to a combination of cultural and economic reasons, with 20m women leaving the workforce in less than a decade. It has been estimated that fully bringing women into the labour force on par with men would add 60% to India’s GDP by 2025.
2. Building New Schools. There is currently a requirement for more than 70,000 new secondary school classrooms in the country and the government will need to employ creative financing structures to fund the massive capital outlay this buildout in infrastructure will require, potentially through the use of public-private partnerships.
3. Improving the Quality of Teachers in India. Despite having nearly 8m primary and secondary school teachers, India faces a shortage of trained educators, with 1.4m currently open teaching positions to be filled. To rapidly close this gap the government will need to consider launching massive nationwide college tuition schemes, working with India’s largest and best universities to subsidise education costs for high calibre potential teachers.
4. iv. Leveraging Technology to Bridge India’s Education Infrastructure Gap. India needs to complement the build out of brick and mortar secondary schools in the country with investment in technology resources. Mr Modi’s US$16bn Digital India campaign to drive connectivity and digital literacy has the potential to serve as a platform for digital education to overcome current infrastructure and manpower constraints, particularly in rural India, where 90m children between 0-8 years today lack access to high quality education

With China approaching middle-income levels, and its ongoing transition to re-balance its economy away from investment and production towards consumption-led growth, there is an opportunity for India to create a world leading manufacturing hubs that leverage its scaled labour pool and relative cost advantages. While other countries such as Vietnam and Indonesia have been early beneficiaries of China’s slowdown and transition, no country other than India has the sheer scale to substantially pick up the manufacturing volumes shifting out of China over the next decade. India has already begun building strong manufacturing capabilities across a targeted number of sectors, including defence, construction and [logistics] but it will need to significantly accelerate its current rate of industrialisation if it is to take the mantle of the ‘world’s factory’ from China (today, India’s industrial output per employee is almost 6x lower than that of China ).

Since coming into office, Prime Minister Modi has overseen an ambitious range of initiatives and reforms designed to support India’s industrialisation, including the Make in India campaign, removing the discretionary powers of labour inspectors, and increasing the flexibility with which manufacturing firms can hire employees. However, the size of the prize will likely necessitate an even more radical and wide-ranging policy overhaul. This would include among others:

1. Amending Archaic Labour Laws While the Indian government, under Prime Minister Modi has already taken steps to make it easier for Indian manufacturers to hire employees, the country’s manufacturing sector remains handicapped by archaic labour laws that make it difficult to retrench factory workers. The lack of flexibility also harms scale: 84% of India’s manufacturers employ less than 50 people – compared to just 25% of China’s manufacturers. If India hopes to emerge as the next major manufacturing hub of the world, laws such as these will need to be amended so that domestic manufacturing firms enjoy the same operating flexibilities as their counterparts in other developed and emerging market countries.
2. Providing Adequate Capital to Domestic Manufacturers. Today, Indian companies operate at a significant disadvantage against their global peers due to the sizeable difference between to Indian borrowing costs (8 – 10%) and that of international markets (close to 0%). This is a much more difficult problem solve quickly. Solutions will need to include attracting foreign capital into India, the government providing subsidised capital for strategic manufacturing projects and an overhaul of the Insolvency and Bankruptcy Code to help develop more efficient domestic credit markets.
3. Building Robust Transport Infrastructure. The competitiveness of India’s manufacturing sector is also dependent on the creation of robust transport infrastructure. Successfully doing so is expected to cost in excess of US$1.5tn, and this in turn will require earmarking government capital and incentivising domestic and foreign institutions to help build out world class roads, highways and ports that help facilitate the transport of goods and services across the country.

130m people have moved to India’s cities over the last two decades, and another 230m are projected to move there within the next 20 years. Automation in agriculture, which today still provides employment to 51% of India’s workforce, vs 37% in China and only 2% in fully industrialised countries such as the US. With most of these people belonging to the working class, this flow of population represents an opportunity for India to create meaningful employment across its manufacturing and services sectors. However, India is struggling under the massive existing urbanisation flows, which have led to the creation and growth of some of the world’s largest slums, housing nearly 10% of India’s population. If India is to derive value from its on-going urbanisation it will need to transform its slums and implement a wide-ranging series of actions that allow its cities to play their part in its evolution to a middle-income country. Key reforms include:

1. Creating an Open Knowledge Economy In a previous Sign of the Times , we highlighted the strong correlation between the freedoms enjoyed by a society, and its development potential. As the world’s largest democracy, India needs to leverage this “freedom advantage” to create an open economy where the government, slum dwellers and not-for-profit organisations work together to tackle India’s urban issues.
2. Implementing Sustainable Slum Rehabilitation Practices. A serious rethink over current slum rehabilitation practices is required in India. A previous Sign of the Times examined what it would take to transform India’s slums: India cannot just bulldoze the slums and pile up the people into apartment blocks. A real solution would involve architecture that lays the foundation for a prosperous borough, building high-quality, low-cost, multi-storey, diverse formats within current slums, and integrating these with the rest of the city. This will require a gradual and continuous upgrading of slum infrastructure through innovative public-private models and by leveraging the many dynamic charities and NGOs in India. Importantly, such a model would see slum-dwellers themselves become a driving force in the improvement of their living conditions by empowering them to identify solutions and then providing the financing to implement them.
3. Overhauling the Quality of Life in Rural India. India cannot solve its slum problem by focusing on cities alone. The government must look to stem the tide of people relocating from villages to cities each year, and crucial to this is investing in the improvement of infrastructure, employment opportunities and overall quality of life in India’s smaller towns and villages where today, per capita income is more than 60% lower than what it is in large cities . Recent voting in the US and UK demonstrates the dangers of leaving behind large rural populations for society as a whole.

India’s status as the world’s largest democracy is an often-quoted truism that hides what is in fact a significant accomplishment on the country’s part. Not only is India’s form of government one of the oldest continuous democracies in Asia, it has also delivered what has been considered generally free and fair elections for 70 years, overcoming a number of challenges that in many other countries have caused democracy to falter. The sheer size and diversity of India, home to 1.3bn people and 22 official languages, makes the execution of democratic processes and formation of free institutions unwieldly to say the least. More importantly, democracy’s success in other countries has been closely tied to income and wealth, with a GDP/capita of $6,000 considered to be the threshold below which democracy commonly fails. India’s GDP/capita today is still below $2000 and has been significantly lower throughout its democratic existence. Further, India enjoys a strong and vibrant civil society and a free and open press.

The peaceful transition of power to Mr Modi’s BJP party after [30] years of Congress rule is a testament to the strength of India’s democracy. However, the government will need to continue to strengthen key institutions and streamline governance processes to ensure that the country continues to reap the societal and economic benefits of democracy. Key areas for attention include:

1. A Continuing Campaign to Reduce Corruption. Despite being the world’s largest democracy, India ranked a lowly 79th in the Global Corruption Perception Index, alongside countries including Belarus and China. The Modi government realises the need to change this perception, and while its demonetisation scheme represented an important first step in its attempt to fight corruption, a previous Sign of the Times had identified a series of follow initiatives needed to build on the progress already made, for example by targeting unaccounted wealth across other asset classes such as gold and real estate.
2. Initiating Campaign Finance Reforms. Laws pertaining to election campaign finance in India are in urgent need of reform. Political parties are currently not required to report any contributions below INR 20,000 and money launderers and political officials have exploited this loophole repeatedly. Replacing these laws with legislation that requires political parties to disclose all sources of funding, no matter how small, is a critical step to help identify and eliminate illicit wealth in the country.
3. Institutionalising Anti-Corruption Mechanisms. The Indian government will need to lead by example when it comes to the fight against corruption. This starts with the strengthening of anti-corruption institutions, such as the Central Vigilance Commission. Benchmarked against international comparables the commission, which today employs only 250 people, should employ 25,000. Further, while the bill to appoint a corruption ombudsman, the Jan Lokpal, was finally passed in 2013 on the eleventh attempt (since 1968), it has to date not yet been executed. Finally, the government will also need to draft revised legalisation that better protects whistle-blowers in India.

India like ever country the world over has been subject to rapid technological advancement. A four-fold increase in internet users, the more than doubling of smartphone penetration in rural India, the growth of and access to computing power, automation across nearly every industry and medical advances reducing the cost of treating are creating significant economic and social benefits for the country. Technology has the potential to be a key driver in helping India leapfrog industrial structures and infrastructure challenges that would be cost and time intensive to develop: mobile telephony has created a national communication network in a country that has to date failed to solve the ‘last mile’ problem of fixed lines, e-services are reducing the need for physical infrastructure, and digital learning platforms are helping bridge India’s education infrastructure gap.

India has the opportunity to leverage technology to become a global leader among innovative economies. The sheer scale implied by India’s mass technology adoption makes it well suited to creating a deploying technology driven business models and innovation designed to meet the needs of its population. The prize for successfully doing so could have a potentially transformative impact on a number of sectors including healthcare, education, media and entertainment. Successfully realising this prize will require, among other things:

1. Strengthening IP and Copyright Protection Laws For all the economic progress it has made, India 43rd out of 45 countries in terms of intellectual property protection . Across a wide range of areas such as online piracy, licensing, and publishing, the standard patent protection and enforcement in India is significantly lower than globally accepted standards. The government will need to significantly existing policies, and build on the positive rhetoric of its recently drafted Intellectual Property Rights Policy to pass legislative reforms that innovators need
2. Encouraging Research and Development. The long-term growth of companies and industries in India will be driven, to a large extent, by the ability of Indian companies to develop IP-driven innovative products and services across critical sectors like agriculture, healthcare and education. Today, R&D spending in the country is less than 1% of GDP, which is significantly lower than spends in other Asian countries like China, Singapore and South Korea. The government has an important role to play in helping bridge this gap and will need to create an environment that is conducive to research and development through allocating greater capital towards the award of research grants and, taking a page out of the US playbook, will need to make a leap in measures to promote the private sector to work with academia.
3. Incentivising Sector Specific Innovation Funds. The government’s infrastructure fund is beginning to attract significant capital. This needs to expand beyond infrastructure to other key sectors like technology. In Israel, a government fund matching venture investments in the country (alongside tax credits for investors) effectively kick-started the venture capital industry and the domestic IT sector, driving a 60-fold increase in technology investments within a decade of its launch India should adopt a similar approach to drive innovation and investment in key high growth sectors such as information technology, life sciences and material sciences.

1.    See the May 2017 Sign of the Times: 12 Certainties with the Potential to Transform India by 2025

2.    Sources: United Nations World Population Prospects, the British Council, Planning Commission of India, McKinsey Global Institute, the Times of India, India Energy Outlook

3.    United Nations, Department of Economic and Social Affairs, Population Division. World Population Prospects: The 2015 Revision.

4.    Ibid

5.    British Council, The Shape of International Education to 2025 

6.    Planning Commission of India, India 2011 Census, United Nations, Department of Economic and Social Affairs, Population Division. World Population Prospects: The 2015 Revision.

7.    McKinsey Global Institute

8.    Times of India 

9.    IEA, India Energy Outlook

10.    Source: Population Pyramid

11.    Sources: OECD, India Union Budget

12.    Source: GPC analysis, based on data from National Accounts and CIA World Factbook

13.    Source: McKinsey

14.    See the April 2012 Sign of the Times: China and the Freedom Advantage

15.    For more, see the October 2013 Sign of the Times: Transforming India’s Slums: A Critical Step in Creating the New India

16.    Source: National Accounts

17.    Source: Fareed Zakaria The Future of Freedom

18.    See the Feb 2017 Sign of the Times: India’s Demonetisation Scheme: A High Stakes Move to Attack India’s Informal Economy

19.    Source: US Chamber of Commerce IP Index 2016

20.    Source: 2011 India Census