India@75 is on the threshold of becoming the most populous country with over 1.4 billion people. The large population has not been a constraint on India achieving remarkable successes in its economic and social development so far and these are reasons to celebrate. India still has a relatively productive age profile: 50% of its population is below the age of 25 and the average age of the population as a whole is 28.7 years as compared to 38.4 years in China and 48.6 years in Japan. However, India, too, will start aging soon, with its average age slated to reach 38.1 years in 2050. The so-called demographic dividend is a declining asset. The next 25 years, with India@100 as the next marker, may determine whether India will stagnate eventually in a middle-income trap or whether it will cross the threshold into a high-income prosperous country.
Countries that have been able to leverage their demographic dividend phase have done so through a significant and sustained transfer of labor from less productive agriculture to the more productive industrial and service sectors. This is paralleled by increasing urbanization since manufacturing and service jobs are located in urban areas. We have seen the process unfold clearly in China’s trajectory of high growth for four decades since 1978. Only 7.3% of China’s GDP is generated by agriculture, while 40% is from manufacturing and 53% is from services. The key to leveraging the demographic dividend is to rapidly expand manufacturing. Manufacturing in India constitutes only 15% of the GDP and has remained stagnant. The service sector in India constitutes over 50% of the GDP, about the same as China. The prospects of a further significant increase in employment in the service sector are therefore limited. Is there any prospect for India to raise its share of manufacturing, thereby creating more productive jobs in the next 25 years? This remains the key challenge.
According to economic theory, a country’s development strategy should take into account its resource endowment. If it is a country with abundant labor resources, such as India, the optimal strategy would be to incentivize labor-intensive manufacturing. That does not seem to be the case. If you take the Production-Linked Incentive (PLI) scheme, worth Rs 2 lakh crore in the 2021-22 Budget, it is heavily weighted in favor of capital and technology-intensive industries, such as IT hardware, electronics, pharmaceuticals, medical devices, automobiles, and textiles. Except for textiles, there may be relatively little employment generation. It is claimed that the PLI scheme would generate 6 million jobs but it is not clear how this figure has been arrived at and over what period it is likely to be achieved. The objective appears to be to create national champions which may be able to achieve import substitution and increase higher-value exports.
There is a steady shift of a wide range of labor-intensive industries, chiefly textiles, electronics, and consumer durables from China due to rising wages but also in order to reduce exposure to China because of rising geopolitical risks. Despite the scale, the Indian economy offers, only a small percentage of the investment has migrated to India. Most have gone to Southeast Asia, chiefly Vietnam and Bangladesh. India is unable to attract investment that will help transform the country into a competitive manufacturing base for exports. Most foreign investment coming to India, although substantial, is for accessing the domestic market. Higher tariffs are welcome to such foreign investors but not to those who wish to manufacture for export. This needs to change. Countries like the US, Japan, and Australia, which are India’s partners in Quad, are already looking to create reliable supply chains away from China. So are countries in Europe. India has a golden opportunity to leverage a favorable geopolitical moment into a long-term economic opportunity.
