The Bear Case on India
The Bear Case on India (Part 1)
Some famous international investors have bought into the India Growth Story (IGS). I feel that the IGS is overhyped, and projections of India becoming an economic superpower are unlikely to happen unless major policy and cultural changes are in place.
When Prime Minister Modi was elected in 2014, there were projections that he would be India’s Thatcher or Deng Xiaoping. These projections have been untrue. Economic growth in the country has slowed down with Q1 real GDP growth being at 5%, compared to 7.1% in 2018, and 8.2% in 2017. Unemployment according to the Center for Monitoring the Indian Economy a private sector company is 7.5% compared to 5.9% in 2018 and 5% in 2017. Worst of all, real consumption appeared to have declined by 3.7%, for the first time in 40 years according to a leaked report from the government.
Optimists like Bill Gates have said that the country has significant potential and can get millions out of poverty in the next few years. I disagree. I think that India is headed for stagnation of growth in the long run and the current slowdown is just the first step in it.
The contents of the IGS:
The history of the IGS can be traced back to a 2003 paper by Goldman Sachs and a 2000 analysis by the Brookings Institution. It said that with the right policies, India would be a country with ~$3500 GDP per capita in 2030 and $8124/capita in 2040.
Most proponents of the IGS believe that in the next 30 years or so India will have high (>8% real economic growth), will be an economic superpower with a billion and more consumers. This amazing country will benefit from a demographic dividend, from the 10 million Indians entering the job market every year who will find jobs, spend, save and invest. Another part of this story is that there will be massive fixed investment in roads, bridges, and others which will lead to more economic growth. I will now take down the first part of the IGS: the labour myth.
The labour myth: Jobs, people (and the lack thereof)
It is no secret that India is having trouble creating jobs now. Over the last year unemployment has shot up to 7.5% from 5.9% a year ago. The government attempted to hide this by stopping the release of the NSSO labour survey before the elections, which was leaked to the media.
A big part of the IGS is this:
Indians will enter the work force
Get jobs
Spend that money.
People? What people? It’s only men here
Indians are not entering the workforce. In most developing countries, labour participation rates are between 60 and 80%. The 75th percentile is 67% LPR, and the median is 62%. But India is at at a low 51% (the 13th percentile) with its neighbors being Gabon and Suriname. None of the GS papers or the Brookings piece anticipated this. In a country full of young bright educated (or so they claim) youngsters over half of them stay at home and chose not to go to work.
Source: WB
The standard objection to this is that India’s young are educating themselves.They are building human capital for their future and so this should be excused. This shall be shown to be untrue later in this post series. The lack of participation of Indians from the workforce is not equal across the genders.
Almost 79% of males in the working age in India chose to look for a job, but only 21% of females do so. The male participation rate is within global norms but the female labour participation rate falls laughably short. In fact the only countries which do worse than India in this are Egypt, Morocco, Somalia, Iran, Algeria, Jordan, Iraq, Syria and Yemen. It is worth noting that 3 of those countries are undergoing wars -Yemen, Syria and Iraq, 2 of them have mass protests against the government – Iran and Egypt and Somalia has a joke of a government. India is among the worst globally here. But why does this indicator matter? After all who cares about this number?*
I think you should, if you care about the health of the Indian economy. If India were to have normal (~40%) labour participation rates with average incomes ($1900) each then there would be at least an approximate 156 billion USD** (6%) boost to the economy. Moreover around 80 million women are sitting at home when if we had better education, and social norms that allowed for it. You don’t have to be a radical feminist to see what a waste this is to the economy. There are 80 million women at home, not working. They would if they were born in the US, Germany or Taiwan.
You should care because the demographic dividend may not even happen if half the country isn’t participating in it. The projected ‘dividend’ isn’t happening if half the country doesn’t work.
67% of India is in the working age (15-64). That is 897 million people. 48% of these are women. That is 430 million women. Only 21% of these chose to participate in the labour market. That means that there are 90 million women in the labour market today. I’m going to assume they get paid the per capita GDP rate which is 1900 USD. Which means if these women earn the average income, they earn 171 billion USD. If more (~40%) of women participated then we’d have 170 million women in the workforce. If they too get paid at the same pay they’d get make 327 billion USD. This is 156 billion USD more than what they are earning now. The India economy is 2.59 trillion USD. 156 billion is 6% of that. And this doesn’t count for the multiplier effect from the spending, the fact that women usually spend more on their children (when given cash transfers) which means a higher long run growth rate, and the social effects of this (lower family violence, lower birth rates).
The Bear Case on India (Part 2)
Amartya Sen
In the previous part I had shown that the demographic dividend is actually a demographic dud. We will have no “dividend” if half the country does not participate in the workforce. But what happens to those enter the workforce? Are they skilled enough? And will they get jobs? I’ll answer these questions in this post. I am going to argue that the Indian workforce has a large skill problem with university degrees being close to worthless, and a rapidly growing share of the educated unemployed.
Such is the state of education in India today. We have two distinct phenomena: a group of young Indians, who will grow up know know how to do basic arithmetic, along with an educated group who cannot find jobs.
Unemployment by education level. Source : CMIE
This graph shows unemployment rates by education level in India. The striking part of this graph is that graduates have an unemployment rate of around 15% right now, while those with no education have unemployment rates of close to zero. This shows the main challenge in India: we have low quality graduates and this will make the demographic dividend (which isn’t all that great as shown in the previous post), less effective and unlikely to drive economic growth at all. In fact we will be seeing the exact opposite of the conventional prediction that India’s demographic dividend is its greatest benefit.
Millions of “educated” Indians (though fewer than expected by the UN) will enter the workforce with degrees of poor quality, face unemployment or at best underemployment.
How we got here- The abysmal state of primary education
ASER reports that only 43% of 14 year olds in India could divide in 2018. This was 44% in 2017, similar in 2016 and has been declining since the peak of 75% in 2006. What is happening is India is facing the results of decades of underinvestment in education. The World Bank estimates that the average Indian gets only 5 years of education adjusted for learning. In comparison the average Chinese gets 9.7, Brazilian gets 7.6, Russian gets 11.9, American gets 11.1, British gets 11.5 and South Africa is lower at 5.1. Clearly if we want to be in likes of China, the US or the UK, we have to get the primary education system in order. India has the highest ambition to education ratio in that list.
For a country that is supposed to be the next economic superpower, India is doing an extremely poor job at educating its young minds. This isn’t a one off that happens at one level. The rot in the education system is reducing GDP growth in the long run.
Secondary education has its problems too
Just like their younger siblings in the primary education system, secondary students have poor learning outcomes. In the latest National Achievement Survey the NCERT found that in only 7 educational boards (out of 36) more than 20% of students could pass a basic mathematics test. Those 7 were the CBSE a central government curriculum, the ICSE a curriculum made by the Council for Secondary Education in India, Andhra Pradesh, Assam, Odisha and Rajasthan. Let that sink in for a moment. In only 7 education boards out of 36, more than 20% of students could pass a mathematics test for their age level (class 10/15 years old). How can India become an economic superpower when its human capital formation is so poor? How can a country where the majority of students cannot do basic math become a developed country?
The rot spreads to the tertiary level
The thesis of most India Growth Story enthusiasts is that there are many smart people who will get jobs, and contribute to society. It is evident that few of the people who will enter the job market are skilled given that ~56% of 14 years olds in India could not divide in 2018, and the majority of 15 year olds (87%) could not pass a math test for their grade level. India do not have a skilled workforce. To make things far far worse, tertiary institutions are doing a poor job of moving the workforce from unskilled to skilled. The blame does not fall on them though. Given the input quality they can be cut some slack.
But even with what they have, they are doing very poorly. A survey by the consulting firm AspiringMinds revealed that only 3.84% of engineers can write compilable code, only 36% of them do an internship and only 7% of them do more than one internship. Even for jobs that require low skills compared to the others like a BPO associate 60% of students are unqualified. For a country that has a mission of Digital India, these are pathetic statistics. Colleges emphasize theoretical skills over practical ones, are not incentivized on quantifiable learning outcomes like jobs and incomes and therefore are close to useless in skilling the country
Conclusion
The India Growth Story is falling apart job by job, step by step. While economists predict a rebound in FY20, don’t let that fool you that long term GDP growth in the country is severely constrained by these factors.
All the data that is not linked in the post is here: https://docs.google.com/spreadsheets/d/1AZbEyeeKN39C7INkiD9WEbBhpGshCReTCzfiMx0GTyY/edit?usp=sharing