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In India抯 Perennial Problem, a Solution

Friday, December 10, 2010 > 09:31:54

Aussi disponible en français à http://www.edc.ca/french/docs/ereports/commentary/publications_18636.htm
India’s modern-day growth path is the envy of most nations. Annual GDP has vaulted ahead by an average of 6.4% over the past 10 years, and the economy handled the global recession well. Growth this year and next is averaging 8.4%, a little over India’s own speed limit. While the West frets about double-dipping, India is trying to prevent overheating. It may get some unwanted help: key constraints already hinder the economy, and unaddressed, threaten to short-circuit India’s stellar expansion.

The constraints to India’s growth are not new, and they are no secret. Infrastructure is a key inhibitor, and a sclerotic political process has often been blamed for lack of progress. Another less-likely choke-point is labour. Odd, given that India’s vast population is second only to China’s, and will continue to increase well beyond China’s imminent one-child-policy-induced U-turn. While China’s labour force will soon peak, India will still be adding well over 100 million new workers each decade.

Thanks to its strong growth, India’s demand for labour is robust. Trouble is, there is not enough of the kind of labour India needs. Growth in India’s high-tech, service-sector and high-value manufacturing industries has created a voracious demand for highly skilled labour. In the past, thanks to a state-of-the-art education system, India had a surplus of such workers, but these have now largely been soaked up. Worker retention is now a key corporate concern, and wage growth is spiralling.

Where are the rest of the workers? A multitude still work the land. In fact, 60% of India’s labour is in the agriculture sector. Sadly, there’s a great chasm between these workers’ skills and the ample office-tower opportunities that exist. Painfully aware of this mismatch, the government is pulling out all the stops, vastly increasing education funding, expanding the number of educational institutions and partnering with international educators, in a determined race to stay ahead of the economy.

Will the strategy work? At best, today’s efforts yield new highly-skilled graduates in 4-5 years. At worst, it could take 20. And that assumes that enough citizens are prepared to take the leap from the hoe to the high-rise. The efforts are valiant, but they may not be enough to stave off a wage inflation that could quickly erode or even eliminate India’s competitive edge.

India has long strived to increase the welfare of all of its people, not just a privileged few. It would be a shame if India’s new-found prosperity were unreachable for the bulk of the population. The rest of the world may have a remedy. Many nations have a crying need for lower-skilled labour. Most fully-developed nations have aging populations, and face desperate labour shortages in the next growth cycle. Until now, they have been able to rely on China, but it too faces imminent aging problems. India is among a very few nations with the potential to meet this chronic near-term global shortage.

Utilizing this labour efficiently requires much better infrastructure than India has known. But this constraint is also being addressed, with a multi-year, US $1 trillion spending program that among other things may unlock India’s vast, and as-yet largely untapped, manufacturing potential.

The bottom line? India may well be on the verge of expanding in a new direction as the world seeks new means to keep its production machine functioning well. Strategists, pay attention.

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