SKILLING INDIA

THE BILLION PEOPLE CHALLENGE

NOVEMBER 2010

Skilling India The Billion People Challenge

A report by CRISIL Centre for Economic Research

CRISIL, Skilling India: The Billion People Challenge, November 2010

CRISIL Centre for Economic Research

Analytical contacts
Dharmakirti Joshi Vidya Mahambare Poonam Munjal djoshi@crisil.com vmahambare@crisil.com pmunjal@crisil.com

Errata - Earlier print run of the report had a data error in the third paragraph of page 11. This error has been rectified in this soft copy

Key messages
With its population forecast to rise from 1.2 billion in 2010 to almost 1.5 billion in the next twenty years, India will become the worlds most populous country by 2030. India is also set to become the largest contributor to the global workforce. Its working-age population (15-59 years) is likely to swell from 749 million to 962 million over 2010 to 2030. If Indias working-age population, its so-called demographic dividend, is productively employed, Indias economic growth prospects will brighten. India can create jobs in the scale required on a sustained basis only with changes in its policy frameworks for education and workforce management. If the current trends in Indias labour participation and unemployment rate continue, about 423 million in Indias working-age population will be unemployed or unable to participate in the job market by 2030. Since the job market is biased towards high-skill labour, the creation of jobs for low-skill labour, who would continue to dominate its workforce, will challenge India. Closing the skill gaps of its qualified workforce will be critical, as India depends more on human capital than its peer countries that have a similar level of economic development. The workforce will increase the most in states that are the poorest and offer the lowest employment opportunity. Creating jobs for the swelling workforce in these states will be a major challenge. Labour skill-mismatch and shortage could adversely impact Indias economic growth and wage costs; India would have to bear a greater fiscal burden to support its unemployed.

CRISIL, Skilling India: The Billion People Challenge, November 2010

CRISIL Centre for Economic Research

Contents
Introduction ........................................................................................ 3 Indias demographic edge in the global context ................................. 4 Indias labour supply ........................................................................... 5 Indias labour demand ........................................................................10 The outcome........................................................................................13 Conclusion...........................................................................................16

Introduction
Quality Quantity

Education Skills

Young and large workforce

Evolving demographics unambiguously point out that India will remain a young nation and the largest contributor to the global workforce over the next few decades - an exceptional strength compared to the rapidly ageing population in the Western countries, and that in China, owing to its one-child policy. Although investment, reforms and infrastructure are likely drivers of Indias economic growth, no growth driver is as certain as the availability of people in Indias working-age group. A young population is Indias demographic dividend. It gives India the potential to become a global production hub as well as a large consumer of goods and services. Further, since the age-group of 45-60 years is the key contributor to household savings, Indias savings rate, which has increased rapidly in the last decade, will get a further boost thereby supporting investment. The rise in its working-age population, however, is necessary but not sufficient for India to sustain its economic growth. If India does not create enough jobs and its workers are not adequately prepared for those jobs, its demographic dividend may turn into a liability. This report examines the pros and cons of the swelling working-age population by taking stock of Indias likely demand for labour. It analyses Indias labourmarket imbalances and highlights how skill mismatch and shortage can impact productivity growth which is critical for India to enhance its long-term growth. And finally, it identifies fiscal implications of Indias population dynamics.

CRISIL, Skilling India: The Billion People Challenge, November 2010

CRISIL Centre for Economic Research

Indian demographics in the global context

India will be the world's most populous country by 2030 Indias share in world population in 2010, at 17.6 per cent, is the largest, after China, according to UN World Population Prospects 2008. With Indias population forecast to grow at 1.0 per cent per year, significantly faster than that of China at 0.4 per cent per year, India will become the most populated country in the world by 2030. Indias population is likely to rise from 1.21 billion in 2010 to 1.48 billion by 2030, and further to 1.6 billion by 2050 (figure 1).
Figure 1 Indias bulging working-age population
million 1,800 60+ years 1,200 15-59 years 600

0-14 years 0 2010 2020 2030 2040 2050

Source: UN World Population Prospects, 2008 Revision

and have the largest working-age population More significantly, India will have the largest number of people in the working age group of 15-59 years (figure 1). (The working age group, as per the Indian definition, is taken as the age group of 15-59 years throughout this report.) As on 2010, half of Indias population is below 25 years of age, and 62 per cent of its population is in the working-age group. India, thus, accounts for 17.5 per cent of the worlds total working-age population. From 2010 to 2030, Indias total working-age population is poised to rise from 749 million to 962 million, accounting for about 28 per cent of the increase in the worlds total working-age population over the period. In contrast, the working-age population of China will shrink by 45 million (figure 2).
Figure 2 Addition to working age population between 2010 and 2030
million 340

India is set to become the largest contributor to the global workforce.

213

14 -11 Africa India US Japan -45 China

-54 Europe

Source: UN World Population Prospects, 2008 Revision

Indias labour supply

How many?
Only 61 per cent of working-age population is available for work According to the National Sample Survey Organisations (NSSO) latest large-sample survey in 2004-05, Indias labour-force participation rate was a mere 61 per cent for that year. The balance 39 per cent of the working-age population, consisting mostly of women, kept away from the workforce for various reasons such as studying further (9.3 per cent), raising children and managing households (15.9 per cent), or engaging themselves in other household duties (12.1 per cent). Working women are a minority According to the NSSO survey, while only 13.8 per cent of workingage men stayed out of Indias workforce in 2004-05, most of whom did so to study further, about 65.4 per cent of working-age women kept away from work. Hence, of the 282 million working-age women, only around 94 million were employed and another 4.3 million women were looking for work. India has a higher real-dependency ratio Indias real dependency ratio of 1.67 dependents per employed person in 2010 far exceeds the conventional dependency ratio of 0.62. A cause for optimism is, the real and conventional dependency ratios are both set to decline over the next few decades - while the conventional dependency ratio will come down from 0.62 in 2010 to 0.54 in 2030, the real dependency ratio will fall from 1.67 to 1.54 over the period.

In India, the working-age population represents the total number of people in the working-age group of 15-59 years. 'Labourforce participation rate' refers to the share of people in this group, who are working or are willing to work, in total working-age population.

Given India's low rate of labour-force participation, its dependency ratio (DR) - a conventional measure of the number of children and old-aged persons supported by each working-age person - masks the extent of dependency. Real dependency ratio (RDR), measured as the proportion of nonworking population - children, old-age and working-age people who are not working to working population, would be a more appropriate measure of the dependency.

CRISIL, Skilling India: The Billion People Challenge, November 2010

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Regional demographic diversity will be unfavourable According to Census of Indias population projections, Uttar Pradesh, Bihar, Madhya Pradesh and Rajasthan will account for more than 50 per cent of the increase in Indias working age population over 2011 to 2021. These states, also the poorest four states among the 15 major states, based on per capita income (Net Domestic Product), would add 54 million to Indias workforce, whereas the four most affluent states - Haryana, Maharashtra, Punjab and Gujarat would together add only 21.6 million to the workforce (figure 3). The maximum increase in working-age population will therefore take place in states that are the poorest and offer the lowest employment opportunity.
Figure 3 State-wise incremental workingage population over 2011 to 2021
Uttar Pradesh Bihar Maharashtra Madhya Pradesh Rajasthan West Bengal Gujarat Andhra Pradesh Karnataka Jharkhand Haryana Orissa Chhattisgarh Tamil Nadu Punjab Kerala Jammu & Kashmir Uttarakhand Himachal Pradesh 0 5 10 15 20 25 million

The working-age population will increase the most in states that are the poorest and offer the lowest employment opportunity.

Source: Population Projections, Census of India

How good?
High levels of illiteracy About 23.7 per cent of Indian men were illiterate in 2006-07 whereas almost 46.6 per cent of women were illiterate. Although Indias literacy has improved over the past four decades, the proportion of its illiterate population, over 15 years of age continues to be much more than in most other developing countries (figure 4).

Due to neglect of basic education, a large proportion of working-age people are not equipped to compete in the job market.

Figure 4 Share of population more than 15 years of age, without schooling

70 56 42 28 14 0 2010 1980 2010 1980 2010 1980 2010 1980 2010 India Malaysia Korea Thailand China Source: Barro-Lee Dataset 2010 1980

Persistent drop-out rates and lack of teachers plague Indias education system Indias school drop-out rate continues to be alarming. As on 2006-07, only 17 of 100 children who entered 1st grade completed 10th grade (figure 5). Drop-out rates have, however, marginally declined over the past two decades.
Figure 5 Share of children dropping out of schools
%

Indias drop-out rates are declining, but not fast enough.

Boys

Girls

100 75 50 25 0
1980-81 2006-07P 1980-81 2006-07P

1980-81

2006-07P

Primary (Grade I-IV)

Middle (Grade V-VII)

High (Grade VII-X)

Source: Selected Socio-Economic Statistics, India, 2008

One-fifth of Indias primary schools are single-teacher schools. India, similar to sub-Sahara African countries, has a pupil-teacher ratio of 45, which lags behind most Asian countries. According to the Global Education Digest 2010, China and Japan have a pupil-teacher ratio of 18, whereas Indonesia and Malaysia have a pupil-teacher ratio of 17 and 15. Indias pupil-teacher ratio in primary schools has been rising over a period of time, which is worrisome (figure 6). The lack of a sufficient number of teachers has adversely affected the quality of learning in Indias schools (figure 7).

High pupil-teacher ratio impacts quality of schooling.

CRISIL, Skilling India: The Billion People Challenge, November 2010

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Figure 6 Pupils per teacher

nos 50 45 40 35 30 25 1980-81 1990-91 2000-01 2006-07P Middle Secondary Primary

Source: Selected Socio-Economic Statistics, India, 2008

Figure 7 Percentage of students with learning achievement

%
70

Poor quality of schooling affects skill competency of Indias labour force.

Language

45 Environmental studies/Science Mathematics 20 Class V Class VII

Source: Selected Socio-Economic Statistics, India, 2008

Lack of vocational training is a hurdle for Indias youth In 2004-05, only 28 million of Indias 257 million job-seeking population in the age group of 15-29 received any form of vocational training. And, only 9 million of these 28 million received formal vocational training from training institutes; the others acquired skills informally from their preceding generation or other household members (figure 8).
Figure 8 Percentage of youth population with vocational training
% 86.2 91.1

Lack of vocational training diminishes employability.

4.3 Formally skilled

9.5

3.0 Unskilled Formally skilled

5.9 Non-formally Skilled

Female

Non-formally skilled
Male

Unskilled

Source: National Sample Survey Organisation, 61st Round, 2004-05

Inadequate education and skills make a large proportion of educated youth unemployable As on 2004-05, only 78 million of the 257 million youth were qualified in the secondary level - 10th grade or above. Only 23 per cent of these qualified youth held at least a diploma or a graduate degree. Even within this minority of graduate youth, a large proportion remained unemployed (figure 9). During the economic upturn in the past decade, unemployment was the highest for diploma and certificate holders, followed closely by graduates and postgraduates. More than 30 per cent of Indias engineering postgraduate diploma holders were unemployed (figure 9). This implies that, despite sufficient educational qualification, the workforce does not have skills that are required by the job market.
Figure 9 Unemployment rates among educated youth
%
36.5 30.2 21.4 22.6 25.7 19.7 15.9 25.7

Only a minority of Indian youth receive education up to degree or diploma level and a significant proportion of these youth are unemployed. An employable individual is one who has the necessary skill sets to undertake a job, requiring minimal additional training.

Technical degree

Agri

Engg/Tech Medicine

Agri

Engg/Tech Medicine

Diploma - Undergraduate

Diploma - Graduate and above

Total Educated youth

Source: National Sample Survey Organisation, 61st Round, 2004-05

Looking ahead
Although India will have the worlds largest pool of working-age people by 2030, if the current trend in labour participation continues, only 539 million out of 962 million people of working age would be working by 2030. In the absence of any significant reforms in school and higher education, the quality of Indias labour force would remain below par. CRISIL Researchs study on Indias education services industry, August 2010, points out, rather disturbingly, that although engineer turnout from Indias institutes will almost double over 2011 to 2015 from 0.37 million to 0.65 million engineers, their employability will diminish further. As a result, most industries, including IT services, will face a talent bottleneck.

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Indias labour demand

Economic cycles create mismatch between labour demand and supply During an economic upturn, when demand in an economy rapidly grows, demand for labour exceeds the supply of employable workforce. The reverse of this happens during a downturn. The consequent mismatch between labour demand and supply is normal, and not a cause of concern. Indias unconventional economic development has led to excess employment in agriculture When an economy is in the initial stages of development, the share of the agriculture sector tends to be high. Then, the share of industry increases, and eventually, services account for a dominant share of the GDP. In this pattern of economic development, labour is transferred from agriculture to industry and finally to services. Indias pattern of economic development has, however, been quite unconventional. The share of agriculture in Indias GDP came down sharply from 30 per cent in 1993-94 to 18.9 per cent in 2004-05 (figure 10). Agricultures contribution to total employment, however, reduced narrowly from 62.3 per cent to 56.1 per cent. In contrast, the share of industry and services in GDP together rose by just over 11 percentage points to 81.1 per cent whereas the share of employment in these sectors grew only by 6 percentage points. Thus, more than half of Indias total employed population remains occupied in agriculture even though the sector currently contributes less than 20 per cent to GDP.
Figure 10 Share of major sectors in GDP and employment
% 62.3 56.1 44.8 30.0 18.9 28.0 18.8 22.4 53.1 GDP Employment

Economic cycles and India's development pattern, which is governed by economic policies, determine the nature of India's labour demand.

A disproportionately large share of population continues to depend on agriculture for employment.

25.2 15.4

25.1

1993-94

2004-05

1993-94 Industry

2004-05

1993-94 Services

2004-05

Agriculture

Source: Central Statistical Organisation, National Sample Survey Organisation

Policy barriers curtail labour demand in industry In 2004-05, industry contributed 28 per cent to GDP and employed 19 per cent of Indias workforce Even as far back as 1983-84, industrys share in GDP and employment was about 24 and 14 per cent. Indias restrictive labour laws are partly responsible for discouraging growth in industry and employment. For instance, labour laws restrict units that employ more than 100 workers from firing employees. The restrictive labour laws impact employment in three ways - i) entrepreneurs get discouraged from entering the industrial sector; ii) industry tries to substitute labour with capital, thereby reducing the employment intensity of industrial production, an undesirable outcome in a labour-surplus economy; iii) smaller-than-optimal-size firms proliferate in the formal sector as industry tries to go around labour laws by outsourcing work to the informal sector. It is therefore of little surprise that despite an accelerated GDP growth, employment by the organised sector has decreased during the past few years. Unanticipated growth in services increases demand for skilled labour The expansion of service industries such as IT/ITeS and financial services over the past decade created a major discontinuity in Indias pattern of economic development. A sudden and sharp rise in labour demand in these industries sparked a scarcity of skilled manpower, and pushed up wages of skilled manpower beyond the growth in their productivity. Employment in the IT/ITeS export industry alone increased from 0.38 million in 2002-03 to 1.77 million in 2009-10.

Neither has industry expanded fast enough nor has it been able to absorb labour to its fullest potential, owing partly to India's rigid labour laws that discourage employment by the organised sector.

Owing to advances in technology and differences in regulations, the high-skilled services sector has expanded rapidly relative to industry, creating a demand for a specific type of skill-set, which, in turn, has resulted in skill mismatch.

Looking ahead
If the current pattern of employment distribution across agriculture, industry and services continues, employment in services would rise from 135.5 million in 2010 to around 177.4 million in 2030, whereas labour demand in the industrial sector would only increase from 91 million to 119 million over the period.

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With sectors that require a highly-skilled workforce - financial services, IT/ITeS, biotechnology and pharmaceuticals - set to expand briskly over the next decade, Indias transition to a knowledge-based economy would require a new generation of educated and skilled workforce. CRISIL Researchs report on Education services, August 2010, forecasts that demand for labour is set to grow rapidly over the next five years in knowledge-based industries such as IT/ITeS and financial services as well as in industries such as infrastructure, construction, mining and healthcare that require people with vocational skills such as technicians, welders, fitters and paramedics. The report estimates that the IT industry will generate 0.62 million jobs, and public and private sector banks will add 0.25 million and 0.09 million employees, over 2011 to 2015. Most of the jobs in public-sector banks are likely to require managerial skills; almost onethird of public sector banks current workforce is expected to retire over the period, of which 50 per cent would be officers. Although the service sector would continue to be Indias growth engine, it would, given its relatively low labour-intensity of production, nevertheless be unable to generate sufficient employment to reduce the disguised unemployment in agriculture. India will need to create jobs in labour-intensive industries to absorb the sizeable workforce from agriculture in industry. In order to reduce the share of employment in agriculture from about 50 per cent to 25 per cent by 2030, industry would have to double its labour demand from 119 million in 2010 to 274 million in 2030 (figure 11).
Figure 11 Employment in major sectors of the economy
million 306.2 274.6 234.0 177.4 177.4 150.7 119.1 91.0 135.5

Removing constraints to expansion of labour-intensive industries would be the key to absorb excess labour in agriculture.

Agriculture 2010 Estimated

Industry 2030 Status quo

Services 2030 Desired

Source: National Sample Survey Organisation, CRISIL estimates

The outcome
The potential trends in labour supply and demand indicate the nature of imbalances in the labour market. The imbalances are likely to have the following effects on the labour market. The challenge of skill mismatch The mismatch in Indias workforce demand and supply is as much in jobs that require basic vocational skills like welding, plumbing and paramedics as it is in jobs that require well-qualified manpower. If the current trends in the nature of labour demand and supply continue, skill mismatch would continue to plague the Indian labour market. The mismatch would continue to stem from skill shortages, where there are not enough people with a specific type of skill to meet demand. For example, even at present, knowledge-based industries such as IT/ITeS have trouble recruiting the kind of information technology specialists they need. A new generation of educated and skilled people, who are in short supply, will be required to spearhead Indias transition to a knowledge-based economy. Consequently, wages and attrition rates would continue to rise in industries that face the skill mismatch. At the same time, a vast number of qualified workers, who are a correct fit, on paper, for knowledge-based jobs, would continue to remain unemployed. This suggests that skill shortage relates, in part, to a scarcity of people with the required skills, experience and quality of education. Skill shortage would also persist in jobs requiring vocational skills. Opportunities in infrastructure, construction, mining and healthcare have increased the demand for vocationally-trained workers. As formal vocational training has not been widespread, skilled workers to meet the rising demand from these sectors are likely to remain in short supply.

Skill shortage in knowledge-based jobs relates, in part, to a scarcity of people with the required skills, experience and quality of education.

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Shortage of high-skill labour can constrain productivity and economic growth If India is to achieve and sustain double-digit economic growth in the near future, the key would be to raise the supply potential of the economy. The number of hours of work and the productivity of workforce, measured as output per unit of workforce, affect the supply of goods and services. Keeping the number of working hours unchanged, India will need to increase employment or productivity to maintain its current growth rate. Growth in labour productivity would be especially critical in high-end service sectors. Three factors determine growth in labour productivity - more capital per unit of workforce, advances in technology, and quality of workforce. Notwithstanding a rise in investment rate and advances in technology, India is likely to fall short of skilled workers, which would adversely affect the rate at which its labour productivity rises. As the demand for skilled workers increases, if relatively low-quality workers are added to the workforce, they would drag down overall workforce quality and impact productivity growth. Further, skilled workers would have to put in longer hours for sustaining the current growth rate, which, in turn, would adversely affect their productivity. Thus, given its shortage of skilled workers, the growth in productivity of Indias workforce could slow down in future. Skill shortage could raise inequality and inflation The bargaining power of companies with their skilled employees is severely restricted during phases of skill shortage. Wages hence increase at a greater rate than productivity growth. Excessive wage growth for a section of population would impact income inequality and inflation. Also, if shortages in skills are significant, companies would avoid investing in new technologies which may require a specific type of skilled labour. The companies would thus produce relatively less-differentiated and lower-quality products.

Given its shortage of skilled workers, the growth in productivity of Indias workforce could slow down in future.

Disguised employment will continue in agriculture A large army of undereducated, unskilled and hence unemployable labour is unable to meaningfully plug into the fast-growing service sector. Without deliberate policy efforts to expand the labourintensive industrial sector, a majority of Indias workforce would remain trapped in the agricultural sector. Fiscal burden of a young and unemployed population The fiscal burden of an ageing population is a phenomenon that will plague Western economies in the coming years. As their working-age population shrinks and their ageing population expands, the Western governments would have to spend more on social security, health care and welfare programmes. Although India, in contrast, has a relatively younger population, the youth-dominated population will yield an economic dividend only if it finds gainful employment. If it does not, the economy will be fraught with social tensions and instability. India is currently addressing the issue of unemployment through social security schemes such as Mahatma Gandhi NREGA (National Rural Employment Guarantee Act), which is at best a stop-gap solution. If the Indian economy is unable to generate employment for its swelling working-age population over the next decade, the government will need to transfer more funds through social security schemes to provide income to the unemployed and underemployed. The likely increased transfers to employment-generating schemes would create a permanent fiscal burden and crowd out expenditures on education, healthcare and infrastructure.

Indias likely increased transfers to employment-generating schemes would create a permanent fiscal burden and crowd out expenditures on education, healthcare and infrastructure.

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Conclusion

Higher education relevance, quality and quantity

Challenge of a knowledge based economy Alleviating shortage of skilled labour supply... ...to enable skillintensive industries to continue to drive Indias growth success

Vocational training and skills

Schooling quality and drop-out rates

Challenge of basic employment With low education levels resulting in excess supply of relatively unskilled labour... ...the challenge is to create sufficient employment for the labour largely trapped in agriculture

Favourable demographics position India to fill the void created by countries with an ageing population, and become a major player in global business. The manner in which India uses this opportunity will determine whether it will reap its demographic dividend. Apart from tackling spatial challenges arising from a remarkable disparity in the demographics of its states, India will have to address the critical issues of creating jobs and preparing its youth to participate in its economic growth. India will need to alter its policy framework and give incentives for creating sufficient jobs and alleviating workforce skill-mismatch. If status quo persists in Indias policy frameworks for education and

Apart from tackling spatial challenges arising from a remarkable disparity in the demographics of its states, India will have to address the critical issues of creating jobs and preparing its youth to participate in its economic growth.

training, and workforce management, economic growth will soon hit a speed breaker. If labour and industrial policies are not reformed, people with different education and skill levels, or from different states, would have unequal economic prospects. Indias industrial sector may not be able to scale up to absorb the excess workforce in agriculture. This could, in turn, block efforts to reduce income inequality in India. In addition to government initiatives, corporate investment in employee education and training would continue to play a critical role to meet the rising demand for high-skilled workers. A number of Indian corporates, especially from IT/ITeS, already provide focused training to improve their peoples skills. Also, some corporates, like CRISIL, have a study-work programme that equips a graduate with analytical and financial skills, and then absorb the trained candidate in their operations. Although an increased rate of savings and investment, which India has achieved and sustained since the early 2000s, is essential for ensuring a rapid pace of economic growth, an educated workforce and job opportunities are critical for sustaining the growth over a long period, and for realising the demographic dividend. This would be especially true for India since it depends more on its human capital than its peer countries that are at a similar level of economic development.
In addition to government initiatives, corporate investment in employee education and training would continue to play a critical role to meet the rising demand for high-skilled workers.

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CRISIL Centre for Economic Research (C-CER)

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Dharmakirti Joshi Sunil K. Sinha Vidya Mahambare Poonam Munjal Parul Bhardwaj Dipti Saletore

Chief Economist Senior Economist Senior Economist Economist Economist Economist

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