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Executive Summary #2274 on Asia

May 15, 2009

Executive Summary: U.S.-India Relations: Ensuring Indian Prosperity in the Coming Demographic Boom

By and

India may be in the midst of an expansion that would position it as one of the three largest economies in the world. The challenges to sustained, rapid Indian growth are being broadly understated, though, especially during the national election season. India's young population is a clear long-term economic strength and projected population growth over the next two decades will all but guarantee a decent rate of economic growth. "Decent," however, does not translate into a meteoric rise up world rankings, nor will it satisfy voters' very high expectations.

To meet these expectations, India must use its burgeoning labor force properly. This makes basic education and training needs even more pressing. There is already a pronounced shortage of adequately skilled workers. In addition, constant state interference curbs property rights and places firms and industries at a competitive disadvantage, suppressing employment.

The new Indian government, and the next several governments, should, therefore, make education and liberalization the highest economic priorities, even above infrastructure development. Otherwise, the oncoming demographic wave will lead to large-scale underemployment, rather than innovation and rapid growth. Political parties will be blamed for a flawed development agenda rather than credited for leading India to the economic pinnacle.

A strong India is important to America for many reasons. First, a vibrant Indian economy would benefit the U.S. and all of Asia. Second, India is an indispensable partner in security issues in South Asia. Third, its political example is a model for the universality of democratic values--an appeal that constitutes America's greatest foreign policy strength. India's rise is a new dynamic factor in a geostrategic equation most prominently featuring China.

Although the U.S. has played only a small role in the Indian economy, it can do more to help India fulfill its promise, benefiting the U.S. in the process. The Bush Administration established a firm diplomatic and institutional basis for strengthening and extending the U.S.-India partnership. The Obama Administration should build on it.

Two Possible Futures. One quarter of India's 1.1 billion people are under the age of 15, more than half are under age 25, and more than two-thirds are under age 35. Almost 90 million people--more than the combined labor forces of Britain, France, and Italy--are expected to join the workforce by 2013. By 2025, India's population is projected to overtake China's population, and the expansion will be concentrated among people of working age. In less than 20 years, the population could increase by as many as 370 million, with four-fifths of the increase between 15 and 59 years old. This will give India the largest national workforce on the planet and by far the youngest age profile among the large economies.

The explosion in the Indian workforce is typically presented as marvelously good news, all but guaranteeing rapid growth for a full generation. To some extent, this is true. More workers inevitably add to production, consumption, saving, and GDP. However, in the not too distant past, the challenge of productively employing that many people would have been viewed as frightening.

Demographic expansion will not automatically bring large net benefits. Many tens of millions of jobs that genuinely contribute to the economy will need to be created. One assessment estimates that a successful year for the economy requires 7 percent real growth and creation of a staggering 15 million new positions. If job creation is impeded or workers are ill-prepared, the demographic blessing will become a curse, leaving tens of millions underemployed and reducing to a crawl improvement in per capita measurements of economic well-being.

What the U.S. Should Do. The Obama Administration should use the U.S.-India Education Foundation--or a new organization--to assist India with basic education and training for its expanding labor force. In addition, U.S. government agencies should offer to assist their Indian counterparts in identifying the elements of market-oriented reform most effective for unleashing the Indian economy. The private sectors in both countries should be core participants in these discussions, which should focus on efficient use of capital and other resources to complement labor abundance to achieve sustained rapid growth.

The U.S. and India already have more than 20 bilateral dialogues, of which about one-third deal primarily with economic issues. The changes in the leadership of both countries can be an opportunity to build on previous successes.The existing U.S. role, what America has to offer, and the important opportunity to maximize India's economic potential argue for policy initiatives in education and market reform.

Conclusion. There is a mismatch between the general assessment of India's economic strengths and weaknesses and generally prescribed policies. Better infrastructure is certainly a priority, but touting the advantages of a very young and rapidly growing workforce immediately points to the primacy of basic education. In addition, state intervention in the economy often directly or indirectly discourages employment. In contrast, most market reforms would cost federal and local governments almost nothing, while producing significant benefits.

While these are sensitive areas, they are also areas in which the U.S. can be quite helpful. The improved U.S.-India relationship has created a conducive setting for America to reach out to an important and rising nation.

Derek Scissors, Ph.D., is Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation. Michelle Kaffenberger is former Production Coordinator and Administrative Assistant in the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.

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