Reshaping Tomorrow: What will India look like in 2025?

By Ejaz Ghani

What will India and other South Asian countries look like in 2025? The optimistic view is that India will achieve double digit growth rates but the pessimistic view is that growth will be derailed by several transformational challenges. This column introduces a new book asking what the story between now and 2025 might involve, and what can be done to reshape tomorrow.

What will India, and the other South Asian countries, look like in 2025? There are two contrasting views on this, the optimistic and the pessimistic. The optimistic outlook is that India will achieve double-digit growth rates (Buiter and Rahbari 2011). South Asia too will experience strong growth, primarily due to India. The pessimistic outlook is that growth will be derailed by many transformational challenges the region faces. Which of these two outlooks will prevail? We examine this in a recent book called Reshaping Tomorrow (Ghani 2011).

The optimistic outlook

The optimistic outlook is based on the favourable structural trends including improved governance, the demographic dividend, the rise of the middle class, and the new faces of globalisation.

All countries in the region have an elected government for the first time since independence. Governance has improved in two ways that will enhance the politics of democratic accountability (Mehta 2003). The first is the diminishing importance of identity politics, and the second is that the rates of incumbency ? the likelihood of a sitting legislator or state government being re-elected ? are down. This is leading to governance that is more focused on development.

While China's spectacular growth has already benefitted from demographic dividend, India is yet to do so (Figure 1). By 2025 India will be more populous than China. Its population will also be much younger. More than 10 million new workers will join the labour force, every year, for the next two decades. This is equivalent to the entire population of Sweden joining the labour force. The demographic dividend will benefit growth not only through the swelling of the labour force, as the baby boomers reach working age, but also due to society's ability to save more because working age happens to be the prime years for savings, and the increased fiscal space that will divert resources from spending on children to investing in infrastructure and technology (Bloom et al 2011).

A massive shift towards a middle class society is already in the making. India's middle class (daily expenditure of $10-$100 in PPP terms) will rise more rapidly compared to China, because Indian households will benefit more from growth than Chinese households, given the prevailing distribution of income (Kharas 2011). The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025 (Table 1). Growth, education, home ownership, formal-sector jobs, and better economic security are cause and consequence of an expanding middle class.

Figure 1. The demographic dividend and growth in GDP per capita 1980?2009

Source: World Development Indicators, 2010.

Notes: "Demographic Dividend" (DD) is calculated as the ratio: (working-age population)/(non-working age population)*100. Change in DD represents 2009 value minus 1980 value. Growth rate in GDP per capita uses GDP per capita in 2005 constant.

Table 1. South Asia's middle class 2010?25

Source: Kharas (2011)

The world has already benefited from global capital flows and trade in goods. It is now the turn of trade in services and migration. Technology has enabled services to be digitised, transported, and traded, long distance, at low cost, without compromising on quality. Trade in services are the fastest growing component of world trade during the last two decades. India's service export is growing at a much faster pace compared to goods export form China (Figure 2).

Figure 2. Service revolution

Global migration rates have been sluggish over the last 50 years. But this will change. Current demographic trends suggest a rapidly ageing population in OECD countries, and a young population in South Asia (Ozden and Parsons 2011). This generates powerful incentives for labour mobility, as well as unique opportunities for improved global efficiency. But there is an alternative outlook.


The pessimistic outlook

The pessimistic outlook is backed by equally strong arguments. History tells us that there are no more than a dozen countries that have managed to sustain an average growth rate of 7% a year for 25 years. Many have reached middle-income status, but very few have gone beyond.

Growth in the region could be derailed by lopsided spatial transformation, lack of entrepreneurship, large informal sectors, high levels of conflict, gender disparities, and deep pockets of poverty.

Rapid growth has produced billionaires in India. But, the broad character of the region remains agrarian and rural. This has more to do with the peculiarities of growth patterns -- services-led growth, which is more skill-intensive, compared to manufacturing-led growth, which is less skill-intensive, and the fragmented nature of transformation, than the pace of growth (Panagaria 2011). Slow growth in manufacturing despite rapid GDP growth should by itself not be a worry, provided it is not in the way of growth in employment opportunities for unskilled and low-skilled workers at decent wages in industry and services so that these sectors still manage to rapidly pull the underemployed workers in agriculture into gainful employment. With the changes in technology that have taken place, it is an open question whether labour-intensive industry will be able to survive and grow in the manner that the East Asian countries experienced.

Entrepreneurship is central to job creation. But South Asia has too few entrepreneurs. While India has a disproportionately high rate of self-employment and many small firms, this has not as readily translated into as many young entrepreneurial firms as could be hoped. Yet there is no question that entrepreneurship works. Formal-sector job growth has been strongest in regions and industries that have exhibited high rates of entrepreneurship and dynamic economies.

The informal sector remains overwhelmingly large and persistent (Figure 3). Around nine out of ten employees in India do not have formal jobs. What is worrying is that informal employment does not seem to disappear with rapid growth. There is a strong association between informality and poverty (Figure 4).

Figure 3. High concentration of informal jobs in South Asia

Source: OECD, 2009. World Development indicators 2010.

Note: Forty-eight countries with available data shown. Chart uses latest data on informal share of employment available (1995?99 or 2000?07). GDP prer capita is in 2005 constant PPP international $.

Figure 4. Strong association between informality and poverty

Source: OECD, 2009. World Development indicators 2010.

Note: Forty-five countries with available data shown. Chart uses latest available data on informal share of employment (1995?99 or 2000?07).

South Asia has experienced high levels of internal conflict (Figure 5). Most countries in South Asia are currently immersed in, or are just emerging from, conflicts of varying nature and scope, ranging from the recently ended civil wars in Sri Lanka and Nepal and insurgency in Afghanistan and Pakistan to low-level localised insurgency in India. The result is human misery, destruction of infrastructure and social cohesion, and death. The knock-on effects are huge (Iyer 2011).

Figure 5. High levels of conflict in the past decade in South Asia

Proportion of country-years in armed conflict, 2000?08

Source: Iyer (2011).

India, despite reaching middle-income status, is home to the largest concentration of poor people in the world. More than one billion people lived on less than $2 a day in 2005 in South Asia. Nearly 250 million children are undernourished and suffer from hidden hunger. Child mortality and malnutrition levels are among the highest in the world. More than one third of adult women are anaemic. One woman dies every five minutes from preventable, pregnancy-related causes. The share of female employment in total employment is among the lowest in the world.

What can be done?

Growth cannot be taken for granted. The link between demographics and growth is not automatic. A demographic dividend could morph into a demographic disaster, if people are not healthy, educated, and trained.

Globalisation also does not automatically engender growth. India needs the infrastructure ? ports, transport, and communications ? to take advantage of trade. This is not just about the shift away from agriculture and into industry and services. It is also about the transformation required to move into higher-quality goods and services.

Growth, however, is not an end in itself. Policymakers should not think of growth separately from inclusion. Increased income disparities should not be viewed as the price to pay for higher growth. A development response that aims to promote growth first and then deal with human misery later is not sustainable.

The demographic dividend is a time-bound opportunity. It provides policymakers an incentive to redouble their efforts to promote the skills of the working-age cohort so that it has the ability to contribute productively to the economy. Time is of the essence. Policymakers need to take action today to reshape tomorrow.

Ejaz Ghani is Economic Advisor at the World Bank

Disclaimer: This draws upon the work in Reshaping Tomorrow. The views expressed here are those of the author and not the World Bank and not FNArena's (see our disclaimer).

Reference

Buiter, W and E Rahbari (2011), "Global growth generators: Moving beyond emerging markets and BRICs", VoxEU.org, 22 April.

Bloom, David E, D Canning, and L Rosenberg (2011), "Demographic Change and Economic Growth", in E Ghani (ed.), Reshaping Tomorrow, Oxford: Oxford University Press.

Ghani, Ejaz (ed.) (2011), Reshaping Tomorrow: Is South Asia Ready for the Big Leap?, Oxford: Oxford University Press.

Iyer, L (2011), "Managing Conflict", in E Ghani (ed.), Reshaping Tomorrow, Oxford: Oxford University Press.

Kanbur, R and M Spence (eds.) (2010), Equity and Growth in a Globalizing World, Washington, DC: World Bank.

Kharas, H (2011), "The Rise of the Middle Class", in E Ghani (ed.), Reshaping Tomorrow, Oxford: Oxford University Press.

Mehta, PB (2003), The Burden of Democracy, Oxford: Oxford University Press.

Panagaria, A (2011), "Avoiding Lopsided Spatial Transformation", in E Ghani (ed.) Reshaping