Dispatches from India

India’s society is young, growing, and urbanizing – setting the demographic foundation for decades of turbo-charged economic development. The number of Indians aged 12 or younger exceeds the United States’ entire population.¹ Over the next two decades, India is expected to add more people to its labor force each week than the U.S. adds in a year,² while its urban areas are forecast to gain a New York City’s worth of new residents every ten months.³

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Today, the average Indian is a 27-year-old villager eking out a modest living from  agricultural-related rural labor.⁵ By 2050, the average Indian will be a 37-year-old  city-dweller, with a manufacturing or services job generating over three times more  economic output than farm work.⁶ The members of her generation will enter the  prime of their working lives with relatively few dependents to support, allowing India  to re-invest an increasing share of its income into infrastructure and education. 

Expansion in the working-age share of a country’s population (a phenomenon  known as a “demographic dividend” – see page 4) and rapid urbanization (see  page 6) are each historically-proven drivers of elevated growth in per capita GDP  – even when occurring in isolation. Through our analysis of decades of  demographic and economic data (see page 11), however, we demonstrate that  countries experiencing a demographic dividend and rapid urbanization  simultaneously grow per capita income at a rate much faster than economies  benefiting from only one or the other.  

India – uniquely among the world’s major economies – boasts the powerful  combination of both phenomena, underpinning projections for a sustained period  of elevated per capita GDP growth.  

India: the world’s youngest major economy 

India has the youngest population among the world’s twenty largest economies.  Two-thirds of its 1.3 billion people are 35 or under; the roughly half a billion Indians  who are under 20 years old account for one-fifth of the entire world’s young people.⁷ 

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Since the birth of today’s median-age (27-year-old) Indian, the country’s birthrate⁸ has dropped by two-fifths.⁹ This has given rise to a “youth bulge” – a generation larger than those immediately before and after it – that is steadily working its way through the age structure. As this “boom” generation gradually enters the labor force between 2015 and 2050, India’s workingage population (defined as people aged 15 to 64) is projected to expand by 33% – in stark contrast to the grim demographic trends facing China and most of the world’s developed  economies, which will struggle to support ballooning numbers of senior citizen  dependents even as their labor forces shrink.¹⁰

Demographics  

India’s demographic dividend   

Due to the combination of India’s youth bulge, continued steady declines in the  country’s birthrate,¹¹ and the limited number of Indians approaching retirement, the  expansion in India’s workforce is set to outpace its overall population growth  through the 2040s. Within the next two decades, India will have the highest ratio  of working-age people to dependents among the world’s twenty largest  economies.¹² 

The forecast steady expansion in the working-age share of India’s population – a phenomenon known as a “demographic dividend” – can be expected to  provide a significant and sustained boost to the country’s economic growth.  Across decades of economic history, there has been a strong positive correlation  between increases in the working-age proportion of a population and faster  economic development.¹³ Demographic dividends were key factors behind the  exceptionally high growth rates achieved across Europe and much of East Asia in  the decades following World War II, as baby boom generations entered those  regions’ labor markets.¹⁴  

A demographic dividend lifts average incomes in two ways. As a growing share of  the population begins contributing to GDP and the number of dependents per  worker falls, GDP per head goes up. However, this first-order, “arithmetic” effect  explains only approximately one-quarter of the overall uplift in per capita income  growth achieved across historical examples of economies experiencing a  demographic dividend.¹

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Most of the economic benefits of a demographic dividend arise from an  assortment of second- and third-order “behavioral” effects. Because workers  (unlike children and retirees) accumulate savings, an expanding ratio of  working-age people is associated with a rising domestic savings rate –  increasing the resources available for investment and allowing a country like  India (which already invests in excess of its domestic savings) to fund that added  investment without relying on foreign capital.¹⁶ 

With relatively fewer dependents to support, more capital can be directed toward  productivity-enhancing investments (as opposed to, say, old-age pensions).¹⁷  As families become smaller, they are able to provide each of their offspring with  higher-quality food, healthcare, and education. Falling infant mortality and  better schooling (particularly for girls) improve children’s life prospects and  reinforce the lower-birthrate trend at the root of the demographic dividend. 

These demographic forces have already had a positive impact on India. Since  the turn of the millennium, the year-over-year declines in India’s infant mortality  and birthrate have accelerated.¹⁸ Over the same period, the proportion of Indian  high school-age children who are enrolled in school has doubled, to nearly two 

thirds.¹⁹ 

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Today, two-thirds of Indians still live in rural areas – making the country  roughly as urbanized as China in 1995, South Korea in 1965, Japan in 1935,²¹ Europe in 1905,²² or America in 1885.²³  

However, India’s rural-to-urban migration is gathering pace, setting it on the rapid urbanization trajectory followed by every country in history that has achieved an  extended period of robust growth or reached “developed” (a.k.a. “industrialized”)  economy status. It took India nearly sixty years (between 1958 and 2015) to grow  its urban population by 340 million (to a current total of approximately 420 million).  It will add the next 340 million in half the time – laying the groundwork for decades  of elevated economic growth.²⁴  

Urbanization is typically the biggest single factor driving gains in a developing  country’s per capita income. The process by which urbanization accelerates  income growth is well-understood. In every case to date – starting with Britain and  the Netherlands in the 18^th century – it has been led by a shift of agricultural  laborers to urban jobs in manufacturing or services.²⁵ The average productivity of  a worker in the latter two sectors is typically more than three times that of a farm  laborer.  

As cities grow larger and the urban share of a population increases, a second  effect – faster growth in urban productivity – becomes increasingly potent.⁶  Productivity is higher in cities than in rural areas, and in bigger metropolises  relative to smaller cities, due to “economies of agglomeration” that arise from  clusters of increasingly specialized firms, suppliers, customers, and skilled  employees.²⁶ Prominent Indian clusters include Chennai (automotive  manufacturing), Vadodara (chemicals), and Bangalore (IT services).  

India’s urbanization yields second-order effects that further reinforce its economic  benefits. Urbanization speeds the progression towards lower birthrates: Indian  cities’ fertility rate stands at approximately 1.8 – far below rural areas’ 2.5 rate, and  roughly in line with that of the developed world.²⁷ As new city-dwellers find  employment, develop smaller families, and recognize the value of education in  competitive urban job markets, they gain both the resources and the incentive to  invest in additional schooling for their children.²⁸ 

Equipped with more advanced skills, subsequent generations gain access to even  higher-productivity (and better-paying) opportunities – setting into motion a  “virtuous cycle” of growing prosperity.²⁹ As cities expand and become more  productive, they reinforce the economic incentives driving rural-to-urban  migration.³⁰ Evidence for urbanization’s role as a catalyst for India’s economic  advancement can already be seen in the disproportionate economic heft of the  country’s existing urbanites: the one-third of India’s people who already live in  cities contribute an estimated two-thirds of total GDP.³¹ 

India’s slums 

The epic scale of India’s urbanization is not without its growing pains: most  visibly, in the form of the country’s notorious slums – which accommodate  millions of Indians, including over two-fifths of the total population in Mumbai  and other large cities.³²  

To a Western observer, slums may seem like places of static, squalid misery:  crowded, dismal shantytowns without adequate sanitation, police protection, or  other basic services essential for a dignified life. Yet given such conditions, why  would millions of Indians leave villages for life in slums?  

Although not obvious to a Westerner, India’s slums are largely the result of rational  choices made by migrants in pursuit of higher-paying jobs and better opportunities.  In China, authorities employ a system of internal passports to limit the flow of  migrants into cities.³⁴ By contrast, India’s democratic society affords its citizens  free mobility, while also enabling interest groups to lobby for laws that impede the  development of affordable housing. In Mumbai, a 1947 rent control act deters  construction of rental apartments. As a consequence, slums – settlements built  illegally on public land – represent the city’s “only free market in rental housing”.³⁵  Meanwhile, vested interests preserve prime tracts of real estate for sub-optimal  use. India’s Ministry of Defense, for example, operates 97 golf courses covering  over 8,000 acres of mostly urban land.³⁶ 

Slum-dwellers’ alternative is not an idyllic pastoral life, but rather erratic agricultural  work in an un-electrified village with little in the way of educational provision³⁷ but  plenty of suffocating customs (e.g., co-habitation with one’s in-laws, child marriage,  and caste-based discrimination) that severely constrain autonomy³⁸ – especially  that of young people.³⁹

Last year, I asked a young Mumbai resident, Aditya, why he had traveled hundreds of miles from  his village in Rajasthan – leaving behind his wife and children – to work as a driver in the  metropolis, where such work earns an average monthly salary of around ₹13,000 ($200).⁴⁰ The  answer was because for him, it was an upgrade. Even after paying his rent for a small shared  room, Aditya netted enough money driving in Mumbai to support his family back in Rajasthan –  and far more than what he could have made working back in the countryside.  

Although a Westerner may find it difficult to see them as such, slums are  steppingstones in the process of urbanization and economic development. Slums  give migrants access to education for their children, allowing them to rise into the  urban middle-class – making room for the next wave of arrivals.⁴¹ UN data show  that over the past two decades, tens of millions more Indians have relocated out of urban slums⁴² than moved into them.⁴³ 

India’s extraordinarily competitive labor costs 

The average compensation of a single German factory employee (roughly $46  per hour) is equivalent to the wages of approximately thirty Indian  manufacturing workers.⁴⁴  

Given the hundreds of millions of villagers yet to migrate into its urban workforce,  India should be able to sustain this competitive advantage – a key feature of its  increasing appeal for job-creating manufacturers – for decades.  

In China, average manufacturing wages have risen by double-digits each year  since 2010. Not coincidentally, that was also when the country’s demographic  dividend came to end, its demise hastened by China’s decades-long “one child”  policy.⁴⁵ By contrast, manufacturers can count on India’s ongoing demographic  dividend and rural-to-urban migration to ensure a ready supply of low-cost labor  for the foreseeable future.⁴⁶ Alternatives such as Vietnam and Indonesia may also  be attractive, but India is “the only country [with] the scale to take up where China  is leaving off.”⁴⁷  

My visits to Indian companies usually involve interacting with an overstaffed  security gate, a team of receptionists, an elevator operator, and multiple people  offering tea and coffee. At hotel gyms, I’ve learned not to try to get a towel myself:  there’s an attendant whose job it is to hand it to you. On a 2014 visit to the campus  of a Gujarat steel pipe manufacturer, I observed dozens of people tending to the  landscaping and touching up the walls. The CEO explained paternalistically that  India’s “luxury” of “too much labor” allowed him to hire hundreds of “peons” – a  word (often used in a derogatory way in the West) that I last came across in a book  about medieval history.  

India’s complementary demographic advantages 

Demographic dividends and rural-to-urban migrations are each historically proven drivers of elevated growth in per capita income – even when occurring  in isolation. India – uniquely among the world’s major economies – boasts  the powerful combination of both phenomena. 

To quantify each phenomenon’s economic impact, we conducted an analysis  combining World Bank and United Nations data on twenty-five leading economies’  working-age populations, urbanization rates, and real (inflation-adjusted) U.S.  dollar per capita income growth over the 1950-2016 period.⁴⁸ For each of those  67 years, we assigned each country to one of four buckets:  

(1) Economies that saw neither substantial growth in the working-age share of  their population (i.e., a demographic dividend) nor a substantial increase  in the share of their population living in urban areas (i.e., rapid  urbanization);  

(2) Economies experiencing a demographic dividend, but not rapid  urbanization;  

(3) Economies undergoing rapid urbanization, but not a demographic  dividend; or  

(4) Economies experiencing both phenomena simultaneously.  

We then averaged together the data points falling into each of the four  categories, and compared the results to the overall average of all the data points  in our 67-year, twenty-five-country sample. Major economies experiencing  either a demographic dividend or rapid urbanization (but not both) had  noticeably faster income growth, compared to the overall average. Per capita  income in economies undergoing both phenomena simultaneously, however,  grew much faster – at an annual rate two full percentage points above the  overall average.⁴⁹ 

As recently as 2010, five countries met the criteria for inclusion in bucket (4): China,  Thailand, Vietnam, Malaysia, and Turkey. Since then, all five have seen their  demographic dividends taper off, relegating them to bucket (3). In 2010, India was  still in bucket (2), with the pace of its urban-to-rural migration on the cusp of our  threshold for “rapid” urbanization. Today, the combination of a demographic  dividend and rapid urbanization is present in only one major economy: India. 

Among economies with shrinking labor forces, those that are still experiencing  rapid urbanization (such as China and Thailand) continue to boast relatively  dynamic growth – despite the fact that such countries cannot count on the positive  feedback loops between expanding working-age populations, rising savings, and  the investment needed to create high-productivity urban jobs.⁵⁰ To a somewhat  lesser extent, the same is true of economies that completed a rapid urbanization  long before the peak of their demographic dividends (e.g., Mexico and Saudi  Arabia).⁵¹  

Unsurprisingly, bucket (1) showed the lowest average annual growth in per capita  income: 2.7%, a full percentage point below the overall average. The economies  falling into this category – as of 2016, every high-income country in our sample  (including the U.S., Japan, and Germany), plus Brazil, Russia, and Argentina –  can only continue to improve their standards of living by increasing the productivity  of their already-urbanized, greying workforces.  

Over the past 25 years (since 1992), India’s per capita GDP has grown more than three times  faster than it did in prior decades.⁵² Part of this improvement owes to the major economic  reforms introduced following the country’s 1991 crisis (a topic for a future post). However,  India’s demographic dividend and a significant acceleration in the pace of its urbanization  deserve most of the credit.⁵³ 

With a labor force projected to grow through the 2050s, a steadily rising ratio of  working-age people to dependents, two-thirds of its people yet to move into higher productivity cities, and remarkably competitive labor costs, India boasts an  exceptional combination of complementary demographic advantages. Their  simultaneity – unique among the world’s major economies – forms an  extraordinary dynamic, one that will serve as a powerful tailwind to India’s  economic growth for decades to come.  

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Andrei Stetsenko  

June 2, 2017

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References  

¹ Government of India, Ministry of Home Affairs. Census of India, Population Enumeration Data  (2011), Series C-13: Single Year Age Returns by Residence and Sex. Retrieved from  http://www.censusindia.gov.in/2011census/C-series/C-13.html  

² United Nations, Department of Economic and Social Affairs, Population Division. World Population  Prospects (2015), File POP/7-1: Total population (both sexes combined) by five-year age group,  major area, region and country, 1950-2100, Medium fertility variant. Retrieved from  https://esa.un.org/unpd/wpp  

³ United Nations, Department of Economic and Social Affairs, Population Division. World  Urbanization Prospects (2014), File 3: Urban Population at Mid-Year by Major Area, Region and  Country, 1950-2050. Retrieved from https://esa.un.org/unpd/wup  

⁴ Gagnon, Bernard. “Young students, Mumbai” (February 2006). Wikimedia Commons. Retrieved  from https://commons.wikimedia.org/wiki/File:Young_students,_Mumbai.jpg  

⁵ United Nations, Department of Economic and Social Affairs, Population Division. World Population  Prospects (2015), File POP/5: Median age by major area, region and country. Retrieved from  https://esa.un.org/unpd/wpp  

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⁸ Refers to India’s “total fertility rate”, defined as the average number of children born to a woman  over her lifetime – assuming the woman lives to the end of her childbearing years and bears children  in accordance with age-specific average fertility rates of the specified year.  

⁹ To approximately 2.4 children per woman, as of 2014. United Nations, Department of Economic  and Social Affairs, Population Division. World Population Prospects (2015), File FERT/4: Total  fertility by major area, region and country, 1950-2100. Retrieved via The World Bank, World  Development Indicators, http://data.worldbank.org/indicator/SP.DYN.TFRT.IN  

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¹² United Nations, Department of Economic and Social Affairs, Population Division. World  Population Prospects (2015), File POP/11-A: Total dependency ratio by major area, region and  country, 1950-2100, Medium fertility variant. Retrieved from https://esa.un.org/unpd/wpp  

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ZPPRMU8gC&pg=PA109  

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³⁰ Dyson, Tim. “The Role of the Demographic Transition in the Process of Urbanization” (September  2009). London School of Economics. Retrieved from  

http://sgfm.elcorteingles.es/SGFM/FRA/recursos/doc/Actos/2009/Ponencias_ingles/Long_term_Impli cations/405329082_2192009135719.pdf 

³¹ Tewari, Meenu et al. “Reimagining India’s Urban Future” (August 2015). The University of North  Carolina at Chapel Hill, Indian Council for Research on International Economic Relations. Retrieved  from https://planning.unc.edu/news/Working_Paper_306.pdf  

³² Zhang, Yue. “Building a Slum-Free Mumbai” (March 2016). Woodrow Wilson International Cente  for Scholars, Urban Sustainability Laboratory. Retrieved from  

https://www.wilsoncenter.org/article/building-slum-free-mumbai  

³³ Manalam, Chandrashekar (Shekar). “Dharavi Slums” (2000). Manalam Photography. Retrieved  from http://dighist.fas.harvard.edu/courses/2015/HUM54/exhibits/show/view_from_below/item/1561  

³⁴ “Ending apartheid” (April 2014). The Economist Special Report, China: The rural-urban divide.  Retrieved from http://www.economist.com/news/special-report/21600798-chinas-reforms-work-its citizens-have-be-made-more-equal-ending-apartheid  

³⁵ Tabarrok, Alex. “A Twisted Tale of Rent Control in the Maximum City” (April 2017). Marginal  Revolution. Retrieved from http://marginalrevolution.com/marginalrevolution/2017/ 04/ twisted-tale rent-control-maximum-city.html  

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http://documents.worldbank.org/curated/en/652971468293129522/pdf/WPS6665.pdf  

³⁷ Anand, Geeta. “Fighting Truancy Among India’s Teachers, With a Pistol and a Stick” (February  2016). The New York Times. Retrieved from https://www.nytimes.com/2016/02/20/world/asia/india primary-school-system-uttar-pradesh.html  

³⁸ Barry, Ellen. “Young Rural Women in India Chase Big-City Dreams” (September 2016). The New  York Times. Retrieved from https://www.nytimes.com/2016/09/25/world/asia/bangalore-india women-factories.html  

³⁹ Yardley, Jim. “In One Slum, Misery, Work, Politics and Hope” (December 2011). The New York  Times. Retrieved from http://www.nytimes.com/2011/12/29/world/asia/in-indian-slum-misery-work

politics-and-hope.html  

⁴⁰ Pokharel, Krishna and Bellman, Eric. “How Much Do Indians Pay Their Many Domestic Helpers?”  (May 2016). The Wall Street Journal. Retrieved from https://blogs.wsj.com/indiarealtime/2016/05/  03/how-much-do-indians-pay-their-many-domestic-helpers/  

⁴¹ Sanyal, Sanjeev. “India: Preparing for the Great Migration” (November 2014). LSE Cities: An  International Centre Supported by Deutsche Bank. Retrieved from  

https://lsecities.net/media/objects/articles/india-preparing-for-the-great-migration/en-gb/  

⁴² United Nations Human Settlements Programme, State of the World’s Cities 2010/2011. “Cities for  All: Bridging the Urban Divide” (March 2010). Retrieved from https://unhabitat.org/?mbt_book=state of-the-worlds-cities-20102011-cities-for-all-bridging-the-urban-divide  

⁴³ United Nations Human Settlements Programme, World Cities Report 2016. “Urbanization and  Development: Emerging Futures” (February 2017). Retrieved from http://wcr.unhabitat.org/wp content/uploads/2017/02/WCR-2016-Full-Report.pdf  

⁴⁴ Refers to trailing two-year average of most recently available (2014-2015) hourly compensation  data. The Conference Board, International Labor Comparisons Program. International  Comparisons of Hourly Compensation Costs in Manufacturing (2015), Summary Tables. Retrieved  from https://www.conference-board.org/ilcprogram/index.cfm?id=38269  

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⁴⁶ The Conference Board, International Labor Comparisons Program. Hourly Compensation Costs  (2015). Retrieved from https://www.conference-board.org/ilcprogram 

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⁴⁸ International Monetary Fund, World Economic Outlook Database (April 2017). Gross domestic  product based on purchasing-power-parity (PPP) per capita GDP. Retrieved from  

https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx 

⁴⁹ United Nations, Department of Economic and Social Affairs, Population Division. World  Urbanization Prospects (2014), File 2: Percentage of Population at Mid-Year Residing in Urban  Areas by Major Area, Region and Country, 1950-2050. Retrieved from https://esa.un.org/unpd/wup  

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⁵¹ Martine, George, Alves, Jose Eustaquio, and Cavenaghi, Suzana. “Urbanization and fertility  decline: Cashing in on structural change” (December 2013). International Institute for Environment  and Development, Human Settlements Group. Retrieved from  

http://pubs.iied.org/pdfs/10653IIED.pdf  

⁵² The World Bank, International Comparison program database (2017). GDP per capita based on  purchasing power parity. Retrieved from http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD  

⁵³ Aiyar, Shekhar, and Mody, Ashoka. “The Demographic Dividend: Evidence from the Indian  States” (February 2011). International Monetary Fund, WP/11/38. Retrieved from  

https://www.imf.org/external/pubs/ft/wp/2011/wp1138.pdf

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