India – Sterling Demographic Dividend Or Potential Time Bomb?

Demographics favor rapid growth in India as more than half of the population is under age 25.  However, managing sufficient growth to develop this demographic dividend without employment shortfalls that might possibly lead to social unrest could be a challenge.

According to an article by Vikas Bajaj in The New York Times,

“While many developed economies worry increasingly about slowing growth and continued high unemployment, India said Tuesday that its economy was accelerating. Sharp increases in manufacturing, mining and services helped India — still considered a developing economy, along with China — grow at a rate of 8.8 percent in the three months that ended in June, compared with the same period a year earlier. It was its fastest pace in more than two years. The economy grew at a rate of 8.6 percent in the quarter that ended in March.

Economists said the new data reflected the strength of India’s recovery from the global financial crisis, but they added that the economy might not be able to keep up the pace in coming months. The growth rates of industrial production and exports, for instance, have begun to fall.”

My view is that India might do better this year with distinct possibility of overheating (a contrarian view). Monsoons have been good, domestic market has breadth as well as depth, capital spending has jumped up and money supply is not an issue. Contrary to what some analysts want, the Reserve Bank of India (RBI) may push up interest rates to rein in inflation.

Interestingly stock markets after taking a breather might resume their upwards climb though many (including me) believe that valuations are rich and not supported by fundamentals.

The leading indicator for optimism is rising rural demand. Growth seems to be accelerating and was confirmed by an Edelweiss India Research survey which found that the 100 leading businesses were planning for a 20% capital expenditure increase this year and next.

According to a recent Morgan Stanley report India’s growth rate might overtake China’s growth rate in two years, as reported in a recent article in The Economic Times, a publication of The Times of India.  From the article:

“Driven by a sterling demographic dividend, continuing structural reform and globalisation, India is poised to accelerate its growth rate to 9-9.5% over 2013-15, even as China will cool down to a more sedate 9% by 2012 and to 8% by 2015.”

All this looks fine but there are major hurdles down the line.  One is the well documented poor infrastructure in India.  The other is the so called demographic advantage is a two edged sword.   Consider this, technology has always been a people and cost deflator.  Finding meaningful employment to this large population might turn out to be the biggest challenge that India faces down the road and might turn out to be time bomb difficult to diffuse.

And even being the world’s top most economy does not guarantee meaningful employment as US is so painfully discovering.

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