India has the largest potential labour force in the world with over 850m people who are of working age. Its current labour force of 500m is far below its potential but still greater than the combined forces of Japan, the European Union and the United States. Further, India’s working age population is expected to cross 1bn and surpass China in the next ten years. 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 a young, growing and most importantly well-trained labour force. India’s efforts to realise the demographic dividend to date have been focused on generating new jobs rather than improving the quality of existing jobs or balancing out the country’s gender-skewed work force. Women’s labour force participation remains extremely low and a large portion of India’s c.500m strong labour force is severely under-employed in either agriculture or the ‘unorganised’ sector. To put this in perspective, there are only c.30m private and public sector jobs supporting a population of 1.3bn! Clearly, India faces one of the greatest challenges of modern times; the nation is relying on 3% of the population of pay the taxes to provide services to the population. Easing this burden is only possible if the government is able to create employable talent on a scale perhaps only matched by China’s liberalisation over the past decade. Therefore, the key to realising the demographic dividend is the conversion of unskilled labour to valuable human capital.
The task is not one the government can handle alone. It will need to co-opt domestic private sector and perhaps even more importantly international corporations to transform its labour force. There is not enough time for the Modi government to train workers first and then for the employers to come, and given Mr Modi’s international campaign to attract foreign capital, it is likely to be aware of that. Success will come from simultaneously increasing labour force participation while realigning people towards more productive sectors, and raising productivity levels, while also solving for structural challenges that have impeded skill development in the country. The prize for creating and implementing a robust human capital development blueprint is significant. India, by virtue of its size and the fact that it is already the world’s fastest growing major economy, has a strong starting position. Therefore, by implementing an ambitious human capital development agenda, India has an opportunity to accelerate its growth rate to double digits for a sustained period and thereby transform itself into a global leader across multiple sectors.
Political Stability, a Low Development Base and a Determined Leader are Investible Assets
India’s people do not wish to revolt. Even in the face of massive incompetence and theft of state assets, they refuse to revolt. The country despite its many dire challenges chooses to support the ballot and exercise their fundamental right to elect their leaders. The penalty for governments that fail is simple, their power will be withdrawn. Mr Modi was elected on the platform of delivering development. Previous governments’ failure to deliver lasting growth has propelled Mr Modi into the limelight and the progress of his agenda to enrich the nation is the basis of intense discussion among India’s loud and free press and is closely watched by what is a highly hopeful international community.
One factor enormously in Prime Minister Modi’s favour: India is starting from a very low base. This is a massive advantage in a world where emerging market returns have fallen away and returns are proving difficult to make. PM Modi may have much to thank the former leaders of India for giving him this low base from which to grow the nation. The upside for investors in terms of returns on investment stand to be enormous given the low starting point, if nothing else. Luckily for India, it is also one of the few scaled emerging economies that has long-proven political stability within a functioning democracy, an open information culture that is not likely to be shaken by the internet and social networks and a government with a clear mandate to make change. In this position where bad fortune is also good fortune, India’s working age population of approximately 850m people represents one of the highest potential, and yet currently most underutilised assets in the global economy. “India’s new government has set an ambitious development agenda and commenced the implementation of reforms to unlock investments….Nevertheless, the pace of reforms will need to be stepped up to bridge the yawning infrastructure gap, unlock private investments, make Indian firms globally competitive, and strengthen the balance sheets of public sector banks.” World Bank, April 2015 Although India today is the fastest growing major economy, women’s participation in the labour force is extremely low relative to other countries (22% in India vs nearly 60% in the United States and 70% in China) resulting in a total labour force of only c.500m. Further, the productivity and value addition from its labour force on a per capita basis is half of China’s and less than 5% of the US and EU’s, due to a combination of factors including the economy’s dependency on agriculture, the low level of workers’ skills and the lack of investment in technology and automation. If India were to reach China’s position today, the productivity and incremental output generated over the next decade would fundamentally transform every sector of the country’s economy and reshape India’s position in the world to that of a leader across multiple fronts. Unlocking India’s labour capacity has the potential to cause some fundamental shifts in India’s position.
Each of India’s major shortfalls – manufacturing, intellectual property development, agriculture and tourism – is a source of massive potential growth in value. Given that no other nation has such a low base coupled with the catalysing force of political leadership, the key strategic focus areas for India’s government and also for foreign capital are clear:
- Value from Addressing Gap One: Creating the Next Global Scaled Manufacturing Hub. The importance of manufacturing for India’s sustained economic growth has been clearly recognised by the country’s leadership, China having set the example. Today, the industrial sector represents only 26% of the country’s economic output, a lower percentage than that of Japan and Germany, countries that have achieved full industrialisation decades ago and have transitioned to post-industrial economies with large services sectors, a transformation that has yet to occur in India. Mr Modi’s “Make in India” campaign and other initiatives are designed to invigorate the industrial sector, attracting foreign expertise and investment and unlocking domestic capital to build India into a manufacturing hub. With a favourable demographic profile, an untapped labour pool of up to 350m people, and labour cost advantage of up to 50% over China, India has the potential to replace China as the world’s factory.
- Value from Addressing Gap Two: Contributing a Companion Global Leader in R&D and Broad Based Technologies to the US. India has already earned a global reputation as a leading destination for outsourced IT services with approximately 40% market share in outsourced services. More recently, with the growth of internet penetration, India has also become an entrepreneurial hub creating several large technology and e-commerce companies, some of which are now going global. Given this strong starting position, its large and growing domestic market, the existing talent pool, India has the potential to leverage these resources to emerge as the dominant global player in global IT, analytics, the internet of things as well as R&D. This will require equipping ever-larger number of young Indians with the necessary science, technology, engineering and mathematics skillsets to keep building its position.
- Value from Addressing Gap Three: Delivering the Food Basket for the World. India today has a bigger base of fertile land and an agricultural labour force the size of China’s but produces only a third of the output by value due to a lack of capital, subscale operations inefficient distribution and infrastructure and outdated farming methods. With the second largest absolute farming output by volume globally, India has the potential to be the world’s food basket while further increasing output and simultaneously redirecting labour to the manufacturing and services sectors. With India’s food exports currently at less than $50bn annually, there is significant scope for agriculture to be a driver of on-going economic growth, provided that the country can adequately address the key issues outlined above.
- Value from Addressing Gap Four: Providing the World with One of the World’s Great Tourist Destinations. India is a subcontinent with 5,000 years of continuous cultural history and yet has fewer UNESCO World Heritage sites than, say, Mexico . This is not due to the lack of sites of high potential appeal; it is due to the lack of investment in preservation, presentation and access. Further, the country is home to tropical beaches, rainforests, deserts, and some of the world’s most stunning alpine scenery, yet the country receives only 8m international tourists annually, nearly the same number that the city of Rome alone attracts in any year. India is clearly punching far below its weight in tourism (and other services sectors) that have the potential to be significant economic growth drivers as well as major sources of employment, with only 8% of the labour force today employed in tourism today. China, a country of comparable size and history but with fewer high potential tourist sites, given the destruction of many during the Cultural Revolution, generates over $550bn of revenues from the sector annually, nearly 25% of India’s current GDP.
If India is to address these gaps it will need to create jobs and employment on a staggering scale: over the next 15 years the net additions to the labour force imply creating nearly twice as many jobs as the entire United State offers today, or the equivalent of adding nearly the entire labour market of Canada, every year. In previous Sign of the Times we have looked at the potential drivers of double digit GDP growth that will be required to support this level of job creation: FDI liberalisation, infrastructure investments, India’s working age population of approximately 850m people represents one of the highest value assets of any country, and yet is one of the most underutilised assets in the global economygovernance reforms and privatisations, among others. Importantly, India will need to develop all the sectors of its economy in parallel waves rather than a sequential transition from agriculture to industry to services over time. India’s population (and work force) and ambition level is simply too great for a sequential shift. While relative productivity changes across different areas of the economy will drive the reallocation of labour between sectors within the three waves, this is too long a process and so the answer for India can only be to modernise the entire economy, creating scaled waves of agriculture, creating scaled waves of agriculture, industry and innovation, and new jobs in each. The scale of India’s education issue is unprecedented in the history of democraciesShould India overcome the key structural challenges to its economic development, including infrastructure investments, an investor-friendly regulatory environment, and greater collaboration between the public and private sector, and thereby create the potential for mass employment, it will need to then also address a new set of challenges related to the training of its workforce to the skill and expertise level required to actually execute the job opportunities created. While India has a number of respected educational institutions in the world, these are a drop in the ocean scale-wise, with only 12% of the population receiving tertiary education, and cover only tiny section of the range of skill sets required for India’s population to drive its economic transformation across the three waves.
Addressing India’s Education Core Issues Catalyses Progress and Enables its Real Transformation
The fundamental transformation of India’s labour force will require significant changes to all levels of India’s education and training capabilities. India requires not just more schools and more teachers, but higher quality education covering a wide range of skills and capabilities. Transforming education in this manner will require significant public and private sector coordination, high investment levels in building education resources and targeted policy reforms to facilitate execution. The key structural challenges facing the transformation of India’s labour force include:
- Catalysing Agent One: Women. 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. Worryingly, this number has steadily declined, rather than increased, over the years due to a combination of cultural and economic reasons. “Women hold up half the sky.” Mao Zedong Indian society expects women, particularly after they are married, to prioritise household chores over formal employment. Women in India are also faced with the prospect of working in jobs that are not commensurate with their level of education and skills, and the frustration borne from this causes many to drop out of the labour force altogether.
- Catalysing Agent Two: Schools. Addressing Insufficient Schooling Infrastructure. India’s schooling system is overwhelmingly skewed towards primary schools. On average, there are five times more primary schools than secondary schools in the country, with this ratio reaching as high as 12:1 in certain states. This imbalance can be attributed to an exponential increase in small, “primary-only” schools in the country, and a consequence of this is students being unable to either find or afford schools to complete their secondary education.
- Catalysing Agent Three: Teachers. Addressing Teacher Quantity and Quality Issues. India currently faces a shortage of over 1.4m trained teachers, with highly populous states like Uttar Pradesh, Bihar and West Bengal facing the most severe shortages. These three states have a combined population of 390m. The entire teaching corps of the United States, (population of 320m) by comparison is 3.1m, indicating the severity of India’s teachers’ gap. With teacher salaries and benefits far below international averages , the country is unable to attract sufficient and sufficiently qualified individuals to teach. As a result, the average student – teacher ratio in secondary schools in India is 42 – higher than the benchmark of 30 that was mandated by the government in 2009.
- Catalysing Agent Four: Training. Addressing Insufficient Vocational Training. The number of people enrolled in vocational training programs in India currently stands at 5.5m, significantly lower than the equivalent number in China (90m) and the United States (11m). Perhaps more importantly, the quality of industrial training being imparted at vocational training centres in India is well below global standards. A recent survey amongst Indian companies revealed that only around 20% of Indian engineering graduates are employable due to poor quality education or a lack of communication skills.
- Catalysing Agent Five: Industry Resourcing. Addressing Existing Resources Mismatched with Industry-Sector Needs. Another challenge arising out of India’s current skills development framework is its mismatch with the changing needs of the labour force. The construction sector is likely to create over six times as many jobs as information technology and related services sectors by 2022For example, despite the fact that the construction sector is likely to create over six times as many jobs as IT and related services sectors by 2022, skills development policy remains heavily skewed in favour of services in general and information technology in particular. The largest training need in India today is that of casual workers with little formal education, who account for nearly 90% of the labour force and need support and training to succeed in high growth sectors with mass employment potential such as manufacturing and infrastructure.
- Catalysing Agent Six: Private Sector. Addressing the Lack of Private Sector Education. While the private sector already plays an important role in India’s education system with a majority of urban students attending private institutions, it remains highly regulated and dependent on government approval to be able to provide recognised degrees. Furthermore, the restriction of ‘for-profit’ business models, has limited private investments in the education sector far below its potential, despite that the fact that that households across the income spectrum are willing to invest a considerable portion of their income towards their children’s education.
A Time for Big Ideas
Calculating a return on human capital investment is not easy due to the wide time gap between investment and economic outcomes. This complexity notwithstanding, there is abundant empirical evidence to suggest a strong correlation between investments in education, and personal earnings, which in turn are driven by profitability and productivity. In South Korea, for example, one year of additional schooling translated to a 6% increase in individual earnings, and similar statistics can be found across a number of East Asian countries. If India hopes to realise its demographic dividend in the manner that some of its Asian peers did between 1960 and 1990, its government will need to adopt a similar long-term view, and implement far-reaching reforms that are aimed towards creating a robust skills development framework across all levels of education. In order to successfully implement these reforms it will need to launch a number of scaled and radical initiatives that create and sustain momentum across a number of policy focus areas.
Five Big Ideas for Transforming India’s Human Capital
Initiative Number 1: Build 10,000 New Schools Every Year for Seven Years.
There is a an acute shortage of secondary schools in India, with the ratio of primary to secondary schools as high as 12:1 in certain states. There is currently a requirement for more than 70,000 new secondary school classrooms in the country and with the government unlikely to able to bridge this gap alone. This can only be solved through public-private partnerships to facilitate the requirement investments. A partnership between government, large private sector investors and education companies will be needed to construct and operate the new secondary schools, with guaranteed exits at pre-determined returns rates for investors, and long term contracts to operate schools for education companies. The success of such a pilot project could be instrumental in accelerating private sector participation in India’s education sector, which in turn should help bridge the country’s education infrastructure gap.
Initiative Number 2: US$5bn College Tuition Fund for Teachers.
India can overcome the 1.4m shortfall in trained teachers (highlighted above) with the help of college tuition schemes designed to incentivise college graduates to become teachers. The government will work together with India’s ten largest universities to subsidise college tuition costs for high-calibre individuals in exchange for their commitment to teach in public schools for a fixed period following their graduation. In addition to improving both the quality and quantum of teachers in India’s schools, the successful implementation of this model could also help improve higher education enrolment in the country.
Initiative Number 3: Digital Education Platform for 300m Students.
India will need complement the build out of brick and mortar secondary schools across the country with investment in technology resources, tapping India’s growing mobile and internet user base. A partnership between large internet providers, mobile and tablet device manufacturers, and education content providers can create high quality digital educational content that is easily accessible to students in rural areas. France adopted a number of similar measures in the late 2000s and in a short period of time this resulted in more than 95% of its student population having access to digital education resources.
Initiative Number 4: Create 500 New Universities. One of the major inhibitors to the growth of tertiary education in India is regulatory in nature. Presently, an educational institution is required to have 22 acres of land in order to be deemed a university. With real estate disproportionately expensive in urban areas, this regulation pushes private education players to remote rural areas, and enrolment levels suffer accordingly. Simply easing existing land requirement regulations would enable private players to establish smaller, high-quality universities within large cities like Mumbai, Bangalore, Delhi and Hyderabad, allowing them to develop closer links with industry and commerce. This is a model, already followed by some of the world’s largest cities, including New York and London, would go a long way towards helping the country meet its 30% gross enrolment rate target, up from c.20% today.
Initiative Number 5: Dual Education System for 300 Occupations.
Launching a dual education system on the German apprentice-training model would jumpstart India’s required efforts to develop robust and scaled vocational training capabilities. Partnerships between government with industry leading companies and major employers, as well as with industry associations will create industry-specific apprenticeship and vocational training degree programs, and students enrolled in these programs would combine classroom-based training with practical skill training as apprentices at companies, receiving industry-specific degrees or certifications upon completion. With a target of training course and degrees for 300 different occupations, the system could create millions of qualified graduates annually upon rollout.
The Prize: The Impact of Successfully Reforming India’s Skills Development Agenda
Successfully addressing India’s education and training challenges will enable the creation of a vastly different India by 2030 in terms of employment, sector growth and economic output, creating a country with global competitiveness across all fields of economic activity. We have developed two scenarios for India’s development based on its ability to fundamentally reform education to grow and transform its workforce over the next decade.
- Scenario One: Incremental Development Yields 7.8% GDP Growth. In the absence of radical changes, India will continue to track to current expectations regarding human capital and sector development. While the labour force will grow significantly, female participation will continue to be low and the allocation of labour across sectors will hold back the development of key industries. This implies average GDP growth of 7.8% broadly in keeping with the current rate of expansion.
- Scenario Two: Labour Force Transformation Yields 12.9% GDP Growth. Should India however execute the five Big Ideas (or others like it) and address the structural issues facing the country’s human capital development, the impact on its economy will be fundamental. Not only would the country expand its workforce overall through higher participation rates, an optimised allocation of labour would facilitate the transformation of the economy, creating a modern agricultural sector and driving industrialisation with higher productivity and growth. Should India achieve this level of transformation, it could follow in the footsteps of China and generate double digit economic growth rates through 2030.
The key assumptions regarding the country’s labour market and the impact on its economic structure through 2030 for both scenarios are detailed below.
India under both of the above scenarios will have the largest labour force in the world. If it is able to achieve the transformation scenario however, it will also have the largest industrial workforce, the largest number of annual university graduates, including many of the most skilled engineers and scientists globally, as well as one of the world’s largest and most flexible education sectors, capable of managing the country’s full industrialisation and the subsequent transition to a consumption and services driven economy.
Conclusion: Time for Strategic Decisions and, More Importantly, “Cunning Smart” Execution
India’s current growth and the reforms enacted by the Modi government to date place it on a trajectory that has the potential to fundamentally transform the country over the next decade. However, India’s greatest potential asset, its demographic dividend, is also a source of potential risk. If India is not able to train and gainfully employ the next generation of workers, economic growth will not translate into commensurate increases in real incomes, and the country will be faced with a growing number of underemployed and increasingly discontented citizens. If India is not able to train and gainfully employ the next generation of workers…the country will be faced with a growing number of underemployed and increasingly discontent citizens.
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.” Adam Smith The scale of the issue is unprecedented in the history of democracies. However, there are many lessons from other countries that have successfully implemented solutions in the past. India will need to learn the lessons of these other countries well if it is to succeed in reaching its economic and development objectives. However, the sheer scale of India’s population and the size of the human capital gap create an additional challenge; India will need to turn its agricultural resources into a modern industrial agricultural asset, its manufacturing facilities into a mega-scale industrial asset and its IT resources into a next generation information age asset. It will not be easy to build the political consensus around the need for and shape of the required reforms. Given that India’s structural issues are deep and complex and Mr Modi’s mandate, while hugely successful, does not give him the ability to control the Upper House (where the BJP-led coalition has 26% control) and therefore pass legislation, the implementation of this transformation will require him to change tactics, go on the offensive and also be highly diversionary in getting the states to implement these changes in a rapid and coordinated fashion.
Policy issues aside, the implementation of transformation in India’s education sector will require scaled private sector participation, and India’s existing corporations alone will be insufficient given the size of the task. The skills required to deliver modern agriculture, mass industrialisation and advanced services today reside in companies from countries ahead of India in the development curve. Mr Modi will need to co-opt foreign companies to invest not just in hardware and infrastructure but also in local skills development in a scaled manner. Further, the development of India’s private education sector will require significant capital, making it a high potential area of investment for both domestic and foreign financial investors. Not solving these issues will not only thwart Mr Modi’s agenda but will shatter the hopes and aspirations of 1.3 billion people, soon to be 1.6 billion.
2. Refer to GPC’s August 2014 Sign of the Times, “Unleashing India’s Industrial Potential: Building a Globally Competitive Manufacturing Base.”
3. Source: Economic Times
4. Source: UNESCO World Heritage Centre
5. Refer to GPC’s August 2014 Sign of the Times, “Unleashing India’s Industrial Potential: Building a Globally Competitive Manufacturing Base.”
6. Refer to GPC’s April 2015 Sign of the Times, “India Has to Create Big Waves to Succeed.”
7. Annual high school teacher salary in India is ca.$3,500, vs. ca$10,000 in Indonesia