On one side, as the population grows, there will be increased demand for goods and services. Over the last decade, the size of India’s consumer market nearly doubled to US$2.1 trillion, and it has progressed from being the tenth-largest consumer market to the fourth-largest one in the world today. By 2047, India’s consumer market has the potential to be nine times its current size, at US$18.5 trillion, behind only the U.S. and China.
Conversely, population growth creates enormous pressure on the labor market. By 2047, India will have 1.1 billion people in the working age group (15-64), which equates to 1.6 times the entire population of Europe. Despite steady economic growth, India will not be able to provide employment opportunities to all the young people entering its workforce.
The Jobs Imperative
India needs to generate 231 million jobs over the next 25 years to:
Support its growing population: Latest available data from the International Labour Organization (ILO) shows that Labour Force Participation Rate (LFPR) stands at 52% in India compared to 73% in the U.S., 76% in China and 78% in the UK. Even if India were to increase its LFPR by one percentage point every year until it reaches a LFPR of 70%, around 95 million non-agricultural jobs will have to be created over the next 25 years considering the rate at which the total population is estimated to increase.
Redress historical inequalities: While the male LFPR for India is on par with these countries, the female LFPR stands at 22% in India compared to an average of 70% in these three countries. Female LFPR declined from an average of 32% before the Global Financial Crisis to an average of 24% after the Global Financial Crisis. India must redress at least a portion of these historical inequities by creating at least 43 million jobs for its female population over the next 10 years.
Transition from the agriculture sector: India also needs to reduce its share of population that is dependent on agriculture. The share of employment concentrated in the agriculture sector stands at 43% in India compared to 25% in China and typically less than 2% in developed countries. If India were to reduce its share of agricultural employment to 15%, around 93 million new jobs will have to be created over the next 25 years just to transition a portion of the workforce from the agriculture to the non-agriculture sector.
The Growth Imperative
Between 1992 and 2019, India created 1.3 million jobs per percentage point of growth in its Gross Domestic Product (GDP). If India can maintain the same level of employment elasticity, its real GDP needs to grow at an average rate of 10.8% annually until 2030, 6.5% between 2031 and 2040, and 4.2% between 2041 and 2047 to support the creation of 231 million jobs. These growth rates will likely catapult India into a US$10 trillion economy by 2032 and a US$31 trillion economy by 2047. Subsequently, India’s per capita GDP will increase to around US$ 18,600 by 2047, almost eight times the 2022 level.
The Capital Imperative
India should have a Gross Fixed Capital Formation (GFCF) of 33% of GDP in order to meet its growth and job creation goals. This translates to a cumulative capital requirement of around US$120 trillion over the next 25 years.
Domestic savings constitute a significant portion of the investments in an economy. The average savings-to-investment ratio post the 2008 Global Financial Crisis has been at 1.02 in India, indicating a high level of domestic savings that is available for investment. However, this has been a result of a faster pace of decline in the investment rate than the decline in savings rate. Between 2009 and 2021, investment rate declined 5.4 percentage points while savings rate declined 3.3 percentage points. Given India’s need to expand its investment rate to approximately 33% from its present rate of 28%, domestic savings will fall short of investment requirements.
Foreign capital must play a critical role in bridging this investment gap. Assuming that net capital inflows to India continues to remain at its decadal average of 3% of the GDP, a cumulative net capital inflow of US$11 trillion will be channeled to India over the next 25 years. This implies that domestic savings will then have to remain at 30% until 2047. However, with a rise in GDP per capita and subsequent increase in social mobility, the savings rate may decline in the coming years as consumer spending goes up. In a scenario where savings rate declines to 28% of GDP, India will then need a cumulative net capital inflow of US$18 trillion to fund its GFCF. This is a huge requirement given that India’s gross foreign capital as of 2021 stood at US$1.3 trillion.
The role of foreign capital in India’s economic development has been relatively less than other countries. External liabilities as a percentage of GDP as of 2021 stood at 41% in India compared to an average of 178% in rapid reformers. India needs to augment foreign capital inflows by creating more pockets of opportunities that generate higher returns. Dun & Bradstreet’s analysis shows that all foreign investments in India between 2000 and 2021 yielded an average return of 4.3%. While this is higher than the average returns provided by the G7 countries, it is pale in comparison to the average returns of 5.2% offered by its peers.
ET OnlineOne of the reasons for lower returns in India is the high level of valuations. Investors are fishing in a small pond as India faces an acute challenge of the missing middle in its business distribution. Dun & Bradstreet research suggests that there are over 105 million entities in India. Of these, 95.5% are micro, 4.1% are small, 0.3% are medium and only 0.1% are large. By contrast, developed markets have 55% micro entities, 39% small, 4% medium and 2% large entities. The preponderance of businesses in the micro category creates pricing pressures as too much private money chases too few investable opportunities, driving up valuations.
Globally, private debt has emerged as one of the fastest growing alternate asset classes. On one hand, the demand for private debt is growing because of the apparent advantages such as speed and certainty of loan execution. On the other hand, there is a huge whitespace left by traditional financial institutions in the MSME space. MSMEs’ financing issues can be solved profitably. Dun & Bradstreet research finds that the minority of Indian micro enterprises that do have access to external finance report 19% Return on Capital Employed compared to only 2% for micro enterprises that do not have access.
This is a huge opportunity for lenders: the higher profitability can be shared with lenders to serve debt, which in turn can be at higher interest rates. India is one of the few markets with the ability to provide much higher returns while absorbing capital inflows comparable to those of developed countries. This is a difficult chance for private debt funds to pass up.
(Neeraj Sahai is President, Dun & Bradstreet International; Dr. Arun Singh is Global Chief Economist, Dun & Bradstreet)