Productivity not age key to Indian growth

The following comment by me appeared in yesterday’s issue Fund Strategy.

If demography was key then Zimbabwe, with a median age of only 20.3 years, according to the Central Intelligence Agency, would be a haven of prosperity. Yet it is Africa’s worst-performing economy by far. India, too, would have been more dynamic in the past yet it has gone through prolonged periods of sluggish growth.

Conversely, Britain’s median age, at 39.9 years compared with 25.1 years for India, might be taken to suggest a relatively poor country. But Britain, although growing more slowly, is vastly more productive and wealthier than India.

The key to a nation’s prosperity is its productivity. High levels of productive technology and good infrastructure allow countries to become rich and stay that way. They also tend to lead to older and healthier populations.

Those of working age can produce more, and even the elderly, should they so wish, are in a better position to work, too. The more technology is used, the less need there is for workers to have to draw on sheer physical strength and stamina to perform their tasks.

In contrast, India has a vast population, particularly in rural areas, that is chronically underemployed. Over 60% of the labour force – that is more than 300m people – works in agriculture despite it accounting for only 17.5% of GDP. In this sense it is more closely equivalent to being on the dole in Britain than an efficient form of production.

A key challenge facing India, therefore, is to develop much larger modern industrial and service sectors. Although there is much hype about India’s leading-edge technology, particularly information technology, it only accounts for a tiny proportion of the labour market.

For India to continue its economic growth the proportion of employees in modern sectors will have to be increased enormously. A substantial improvement in infrastructure – airports, communications, roads and utilities – will greatly aid the process.

The continuation of India’s rapid growth depends on broadening economic development rather than the age of its population.