Demographic dividend versus substandard education

Demographic dividend doesn’t rhyme with substandard education

India will enjoy a demographic dividend until 2044, as it has a relatively growing number of 25-64-year-olds in comparison to over 65 and under 25-year-olds. It can however only reap this dividend by creating 200 to 300 million jobs. In recent decades, most of the jobs created have been in the service sector. A relatively small, well-paid elite has driven its economic growth. But the education level of the majority of Indians is not high enough to enter this service sector. India needs to attract industry to create well-paid factory jobs. But before that, it needs to raise the quality of its substandard primary education. India has been the standard-bearer for the developing world in recent decades with its high growth rates despite skipping the industrialisation phase. To maintain these high growth rates, it needs to take a step back and embrace that industrialisation after all.

Consumption

Jobs, jobs, jobs. This is what India needs in order to capitalise on its demographic dividend. Millions of people can then join the middle class and drive up domestic consumption. "Already today, consumption is the engine of economic growth," Shumita Sharma Deveshwar of the research firm GlobalData TS Lombard confirms to me as we do our bit to boost consumption in a restaurant. Wine is not off the hook. Taxes on imported alcohol are sky-high, making wine very expensive. Tip: If you want to drink something without tearing a whole in your pocket, order a cocktail.

“I live in a suburb of Delhi called Gurgaon, where there are a lot of international companies.” Gurgaon is a planned city – a so-called SMART city – equipped with all the public infrastructure and institutions. The aim is to ensure that India’s urbanisation runs smoothly and that the major cities are not completely overwhelmed by uncontrolled migration. "One flat after another is being built here. And you really can't imagine how many huge alcohol shops there are here. The demand for alcohol is enormous, despite these high taxes. And you can see this explosive demand popping up in all retail products. This increasing demand for consumer goods is driving economic growth."

Stijn Rijckbosch , CFO of L'Oréal in India, is also optimistic. "The affluent consumer starts with an income of $20 a day. We’re not seeing this everywhere in India as yet, but for the wealthier middle class, it’s not far off. In addition, women are gradually becoming more important in society. They’re taking on more important positions, even though there’s still a long way to go. The combination of both clearly works to the advantage of L'Oréal’s beauty products."

According to the IMF, India will need to create between 145 and 330 million jobs for its growing population by 2050. Some figures (hold on, dear reader): in 2022, India's working-age population – 15 years and above as per the IMF definition – was just over 1 billion people. Of this group, 50% were working, with an employment rate of 53% and an unemployment rate of 5.7%. The upper part of the estimated range of 145-330 million jobs includes 84 million jobs that would exist if the employment rate had remained at 61%, as it was in 2005. 61% is also the average employment rate of other emerging economies within the G20. In addition to these 330 million jobs to be created because of the increase of the working population and the higher labour force participation rate, extra jobs in the service/industrial/construction sectors are required for workers today that want to move out of agriculture. Currently, 42% of the population is employed in agriculture (versus 22% in China and 2% in the US).

There is a huge bonus to this shift. Agriculture’s share of total employment is high, but its share of total value added (the total value added of all sectors is GDP) was only 15% in 2019 compared to 40% in 1980. The share of the services sector in value added has risen from one third to more than half. In terms of employment, the services sector accounts for a third of all jobs. The remaining quarter is split between industry and construction. The challenge is clear: guide (many) more blue-collar workers from the particularly unproductive agricultural sector to the more than four times more productive service and industrial sectors. By comparison, between 1990 and 2022, China’s productivity grew by 14 times, while India’s grew by 4 times. The main reason for this spectacular increase in China was the migration from rural to urban areas. The rest was the result of large capital investments that led to massive productivity gains in the industry. India also lacks such investments. However, the growing service sector has been responsible for productivity growth.

Shrinking share of agriculture

In the IMF’s baseline scenario, growth will increase by 6.2% in the coming years, which is also the average for the period between 2010-2019. Capital investments and the like account for 2/3rds of this growth, the inflow of new workers for 1 percentage point, while the rest comes from better workers and increased efficiency. In a first alternative scenario, this growth rises to 7.4% simply by raising the participation rate by 2 percentage points. In a second scenario, the employment rate remains constant but India manages to shift 5% of agricultural workers into industry. The expected growth rate then moves towards 6.8%. If the shift is from agriculture to services and construction – scenario three, and following the pattern of past decades – then growth will remain at 6.3%. Conclusion: the combination of rising labour force participation and a shift towards industry will win India the jackpot.

Other analyses also point to huge growth potential. Bloomberg Economics forecasts a gradual rise in economic growth towards a peak of 8.5% in early 2030, driven by corporate tax cuts, incentives for manufacturers and privatisation of state-owned assets. Closing the gender participation gap alone will add an additional 30% to India’s GDP by 2050.

Women’s empowerment

The employment rate for men is 76.7%. For women, it is 28.6%. Sixty per cent of them work in subsistence agriculture, especially in rural areas. In China, one of the best-performing countries in the Asia-Pacific region, the average female employment rate is 61%. India is a very traditional society. Women go to work, but when children are born, the woman takes care of the children and stops working.

A feeling of insecurity keeps women from working in industry. At Bekaert Dramix® India in Pune, only 50 of the 1,350 employees are women, says top manager Srikanth Chakravarthy in an interview with De Standaard[1], and this despite the fact that Bekaert drops female employees off at their homes in a van after work. What’s more, they receive all sorts of benefits, such as free sanitary towels and a few hours of rest if they are in severe pain during their periods. “But it’s still difficult to convince girls and women to join us in the factory,” admits Chakravarthny.

To attract women to industry, there is a gradual move to create "women-only" factories. “Foxconn has such factories in Taiwan, China and Vietnam,” says Sameer Narang, Head of Economic Research at ICICI bank. “It also wants to set up such a factory in India too.” But the hurdles facing industrial companies are far from over. "In these other countries, employees work 12-hour shifts. In India, the law restricts workdays to 8 hours. In some states such as Uttar Pradesh and Karnataka, they wanted to change this or the companies won’t come. But after protests, the proposal was temporarily withdrawn." Labour and other laws need to be adjusted. We will discuss these in another contribution.

Top Indian CEOs

India is often seen as a standard-bearer for developing countries because of its high growth rates despite skipping the industrialisation phase. In recent decades, this growth has mainly been driven by the service market. “That’s the result of our education system,” explains Parth Shah , Director of the Indian School of Public Policy. "In China, South Korea, Taiwan, Vietnam and so on, governments invested mainly in lower and secondary education. So everyone receives at least a solid primary education up to grammar school. Maybe they did not pursue higher education, and perhaps those countries did not even have good universities or colleges. But that was the norm in most parts of the world."

What did India do? Exactly the opposite. "We invested even more in higher education from the 1950s to the 1990s. It wasn't until after the 1990s that we started investing more in primary and secondary education. That’s why today, with the Indian Institutes of Technology, we have a network of top engineering and technology institutions (IITs) as well as world-class management schools (IIMs). And because India is so big, we have smart people, even if they have not always gone to good schools. What IITs and IIMs have done is simply select the 1,000 smartest people out of the millions of students taking the entrance exam. And that has had two consequences for India. First of all, it has produced people who run global companies." Well-known examples of Indian CEOs include Sundar Pichai (Alphabet), Satya Nadella (Microsoft), Shantanu Narayen (Adobe), Punit Renjet (Deloitte) and Vasanat Narasimhan (Novartis). There is even a British Prime Minister of Indian origin.

Weak primary education

But the great masses – and this is the second less positive point – have had very little education. "Because of that huge gap, we have evolved directly from agriculture to services," Professor Shah continues. "The small group of a few million people who entered the top universities did not go to work in factories. They chose the call centres and back offices that were at the heart of India’s rapid growth in the nineties. Those who went abroad did well, but so too did those who stayed in India. But going to work in a factory? Nobody did that." This is also why China, and more recently Vietnam, have been more attractive to international industrial companies. And why India has so far missed the globalisation train in industry.

But that will change, according to the professor. "Ninety per cent of farmers' children no longer want to work in agriculture." A developing industry needs to create jobs for them, as well as for the growing workforce in the coming years. But the quality of education is insufficient to employ graduates in industry. Almost everyone goes to school, but they don't learn much. That said, the overall literacy rate for 15-24-year-olds has risen from 55% in the 1980s to 90% today, putting it on a par with Indonesia and Nepal. But according to a survey by NGO Pratham in 2021, barely 43% of fifth-grade students (10-11 years old) in rural areas can read at second-grade level (7-8 years old). In 2005, this figure was 53%. Public education in rural areas, where 2/3rds of the population live, is also much poorer than in cities.

The main reason for the – recent – sharp fall was the Covid lockdown, during which schools remained closed for two years. This exacerbated an already weak system. According to The Economist, poor governance and pedagogy remain the main causes. Spending on education has risen sharply over the past decade, but at just under 3% of GDP, it lags far behind the other BRICS countries China (4.3%), Russia (3.6%), Brazil (4.7%) and South Africa (6.9%). "Ten years ago, only one third of state schools had washbasins to wash their hands and barely half had electricity; today, around 90% have both. Since 2014, India has opened nearly 400 universities. Enrolment in higher education has increased by a fifth." Free food attracts the poorest and keeps them off the streets. Great strides have also been made in terms of infrastructure and framework.

Reforms needed in education

Progress has been made, but that doesn't mean that children are learning more in these new classrooms. "Teachers often don't come to class. And those who do, use a rigid syllabus that is unsuitable for many of the children (most of whom are among the first generation in their families to actually go to school, and can therefore expect little help from their parents)."

Instead of throwing more money down the drain, India needs to implement reforms in three areas, according to The Economist:

1.       Children need to be schooled at the right level. Pupils should not be admitted to a higher grade without mastering the subject, for example through "learning camps".

2.       The system needs to be made more meritocratic and accountable. Teachers should be recruited on the basis of their talents, not their connections. "Since 2011, when the government introduced a test for prospective teachers, 99% of candidates have failed it every year."

3.       Policymakers need to do more to support good private providers of education, for instance through vouchers and public-private partnerships. Because of failing public schools – where a quarter (!) of teachers play truant every day – almost half of families send their children to private schools, especially in rural areas.

Mismatch between skills acquired (or not) and skills required

Today, there is a huge mismatch between the skills acquired and those required in different occupations, ranging from managers to factory workers. As a result, foreign companies are hesitant to come to India. But it also means that many top engineers from these prestigious IITs can’t find satisfactory jobs within India. “For mechanical engineers, the labour market in India remains difficult,” says Suman, a 33-year-old PhD student at the Faculty of Electrical Engineering at IIT Mumbai[2]. "The top ten per cent always find a good job. But the rest – the engineers who do not really excel in terms of marks – have to go to Germany or other Western countries if they want to work in an industrial company." 

Raman Madhok , economic diplomacy advisor for the Belgian Consul General in Mumbai – and former student of IIT – confirms this. "I am in close contact with a university for managers and engineers. We have around 4,000 students. Japanese companies with a shortage of staff visit our school. In their third or fourth year of study, they select a few of them. These are then given a three-month training in Japanese language and etiquette so that by the time they graduate, they can be employed by Japanese companies on a three-year contract. After three years, they come back."

The same is now happening with Norwegian and Swedish companies. Is this a problem for India? "If they stay over there, then we’ve got a brain drain," Madhok admits. "But in many of these countries, they don't want to grant permanent residency to these foreign workers. Then they have to come back, but they’ll come back as well-trained engineers and possibly even well-trained entrepreneurs." Engineering colleges in India are known for their in-depth theoretical knowledge but complete lack of practical experience. "So it becomes an opportunity, and not necessarily a brain drain."

Private schools

Over the past quarter of a century, the private sector has invested heavily in education. Demand has been particularly strong in rural areas. “Admittedly, these private schools are not top notch either, but they are better than the public schools,” says Professor Shah. "You pay a fee. So you can demand some accountability from the private school. The teacher shows up every day, teaches in class and gives the children some homework. The homework may not make much sense. But having the child sit down in the evening and do their homework teaches them discipline. And that’s what you need in factories. That mentality has been missing until now. These future workers can now sit in a factory and do their jobs for eight hours. Most can read and follow instructions, which is important when operating machines.”

"And so I think factories and entrepreneurs will gradually come here,” Professor Shah continues. "Before, they didn't, because even if they had the money to invest in a factory, they couldn’t find good employees. Now they can. There are people coming straight out of school now who can be trained. And that is exactly what Indian companies are doing. They’re investing a lot of money in training." But in order to attract these international companies effectively, Modi has to tackle a few other important projects.

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[1] Nico Tanghe, "Is alles binnenkort 'Made in India'"["Will everything soon be 'Made in India'?"], De Standaard, 28 October 2023

[2] Nico Tanghe, ‘Boomt de economie? Dat voelen wij niet: alleen de rijken worden rijker’ [‘Is the economy booming? We’re not feeling it: only the rich are getting richer’], De Standaard, 4 November 2023