Irrational exuberance about India?

Noah Seelam/AFP McKinsey Global Institute (MGI) recently released a report finding that by 2025, India will become the fifth largest consumer market in the world, ahead of Germany. McKinsey expects India’s aggregate consumption to quadruple over the next 20 years as more than 291 million people move out of poverty and India’s middle class grows ...

Noah Seelam/AFP

McKinsey Global Institute (MGI) recently released a report finding that by 2025, India will become the fifth largest consumer market in the world, ahead of Germany. McKinsey expects India's aggregate consumption to quadruple over the next 20 years as more than 291 million people move out of poverty and India's middle class grows to an astonishing 583 million people. To get to these figures, MGI assumes that India's real compound annual growth rate will average 7.3 percent per year until 2025 because of the "substantial scope for continued productivity increases in Indian businesses, the growing openness and competitiveness of the Indian economy, and favorable demographic trends." 

But how realistic is this assessment? I'm skeptical. There is no shortage of articles documenting India's looming skills shortage, which is already hampering India's productivity growth. Which brings us to India's lousy educational infrastructure. As Barbara Crossette points out, a quarter of India's primary school age children are not in school (in China this figure is near zero), and India's literacy rate is a meager 61 percent.

Noah Seelam/AFP

McKinsey Global Institute (MGI) recently released a report finding that by 2025, India will become the fifth largest consumer market in the world, ahead of Germany. McKinsey expects India’s aggregate consumption to quadruple over the next 20 years as more than 291 million people move out of poverty and India’s middle class grows to an astonishing 583 million people. To get to these figures, MGI assumes that India’s real compound annual growth rate will average 7.3 percent per year until 2025 because of the “substantial scope for continued productivity increases in Indian businesses, the growing openness and competitiveness of the Indian economy, and favorable demographic trends.” 

But how realistic is this assessment? I’m skeptical. There is no shortage of articles documenting India’s looming skills shortage, which is already hampering India’s productivity growth. Which brings us to India’s lousy educational infrastructure. As Barbara Crossette points out, a quarter of India’s primary school age children are not in school (in China this figure is near zero), and India’s literacy rate is a meager 61 percent.

Further, while India’s youthful demographics may prove to be a boon, they could also create greater problems (pdf). Restless youth need fulfilling jobs to keep them occupied and out of trouble—something that an education-deficient economy is unlikely to provide on a large scale. Finally, as the MGI report itself stresses, “[I]n order for India to achieve these positive results, the country must continue to reform and modernize its economy, as well as address significant shortfalls in its infrastructure and education system”—no small task. A little humility in forecasting India’s economic future seems to be in order.

Prerna Mankad is a researcher at Foreign Policy.

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