How India can harness its demographic dividend for maximum gains in the next 25 years.

Over the next 25 years, India's population is expected to grow by about 240 million people. There are many ways in which this population increase will affect the economy.

On one hand, there will be more demand for products and services as the population increases. India's consumer market nearly quadrupled in size during the past 10 years to reach US$2.1 trillion, moving it up to the fourth-largest consumer market in the world as of today. India's consumer market might grow to US$18.5 trillion by 2047, nine times its current size, making it the third-largest in the world behind the US and China.

Population increase, on the other hand, puts a tremendous amount of strain on the labour market. India will have 1.1 billion individuals in the working age range (15–64) by 2047, or 1.6 times the population of the entire continent of Europe. India's economy is expanding steadily, but it will not be able to accommodate all of the new workers who are young.

For the next 25 years, India must create 231 million jobs in order to:-

1. Support its expanding population: According to the most recent data from the International Labour Organization (ILO), India's labour force participation rate (LFPR) is 52%, while it is 73% in the United States, 76% in China, and 78% in the United Kingdom. With the expected rate of population growth over the next 25 years, even if India were to enhance its LFPR by one percentage point year until it reaches an LFPR of 70%, 95 million non-agricultural jobs would still need to be generated.
2. Redress historical injustices: While India's male LFPR is comparable to those of these nations, it is only 22% for women, compared to an average of 70% in the same nations. Before the Global Financial Crisis, the average female LFPR was 32%; after the Crisis, it was 24% on average. India has to create at least 43 million jobs for its female population over the next ten years in order to at least partially address these past injustices.
3. India must decrease the proportion of its population that is dependent on agriculture and transition away from it. In India, 43% of all jobs are concentrated in the agricultural sector, compared to 25% in China and typically less than 2% in affluent nations. To shift a portion of the workforce from the agricultural sector to the non-agricultural sector, India would need to create some 93 million new jobs over the next 25 years or drop its percentage of agricultural employment to 15%.

India generated 1.3 million jobs for every percentage point of GDP growth between 1992 and 2019 (GDP). To sustain the creation of 231 million jobs if India can retain the current level of employment elasticity, its real GDP must increase at an average rate of 10.8% annually until 2030, 6.5% between 2031 and 2040, and 4.2% between 2041 and 2047. By 2032 and 2047, respectively, India's economy is projected to rise by US$10 trillion and US$31 trillion at these rates. India's per capita GDP will consequently rise to around US$ 18,600 by 2047, over eight times the 2022 level.

In order to achieve its economic and job-creation objectives, India needs have a Gross Fixed Capital Formation (GFCF) of 33% of GDP. During the following 25 years, this corresponds to a total capital requirement of almost US$120 trillion.

A large share of an economy's investments are made from domestic savings. In India, the average savings-to-investment ratio has stood around 1.02 since the 2008 Global Financial Crisis, showing a strong level of domestic funds that are accessible for investment. This, however, is a result of the investment rate declining more quickly than the savings rate.

The investment rate fell by 5.4 percentage points and the savings rate by 3.3 percentage points between 2009 and 2021. India needs to increase its investment rate from its current rate of 28% to around 33%; else, domestic savings won't be enough to cover investment needs. To close this investment gap, foreign funding must be crucial.

Over the next 25 years, India will receive a cumulative net capital inflow of US$11 trillion, assuming that net capital inflows stay at their current decadal average of 3% of GDP. According to this, domestic savings must then stay at 30% until 2047. However, the savings rate may fall in the upcoming years as consumer expenditure rises due to an increase in GDP per capita and the ensuing growth in social mobility. India would require a cumulative net capital inflow of US$18 trillion to cover the GFCF in the event that savings rates fell to 28% of GDP. Given that India's gross foreign capital as of 2021 was US$1.3 trillion, this is a significant necessity.

In comparison to other nations, foreign capital has played a relatively smaller part in India's economic development. As of 2021, India's external liabilities as a proportion of GDP were 41%, while the average for quick reformers was 178%. India has to increase the amount of foreign capital coming in by developing new areas where there are prospects to earn more money. According to Dun & Bradstreet's data, 4.3% on average was earned on all foreign investments made in India between 2000 and 2021. Despite being greater than the G7 countries' average returns, this is still insignificant when compared to the 5.2% that its peers' average returns are.

The high level of valuations is one of the factors contributing to India's inferior returns. While India struggles acutely with the "missing middle" in its business distribution, investors are casting their lines into a very small pond. According to Dun & Bradstreet research, India has more than 105 million entities. There are 95.5% micro, 4.1% tiny, 0.3% medium, and barely 0.1% giant among these. Developed economies, in comparison, have 55% micro firms, 39% small, 4% medium, and 2% giant entities. Since too much private capital pursues too few investable possibilities, the prevalence of microbusinesses leads to pricing pressures and higher valuations.

Private debt has become one of the alternative asset classes with the greatest rate of growth on a global scale. One the one hand, the market for private debt is expanding due to the ostensible benefits including speed and assurance of loan execution. On the other side, established financial institutions have left a sizable gap in the MSME area. Financing problems for MSMEs can be effectively resolved. According to data by Dun & Bradstreet, only 2% of Indian microenterprises have access to external financing, whereas the few that do report a 19% Return on Capital Employed.

Private debt has become one of the alternative asset classes with the greatest rate of growth on a global scale. One the one hand, the market for private debt is expanding due to the ostensible benefits including speed and assurance of loan execution. On the other side, established financial institutions have left a sizable gap in the MSME area. Financing problems for MSMEs can be effectively resolved. According to data by Dun & Bradstreet, only 2% of Indian microenterprises have access to external financing, whereas the few that do report a 19% Return on Capital Employed.

Lenders have a great chance to profit from this situation since they may use the increased profitability to service debt at higher interest rates. One of the few markets is India, which can absorb capital flows similar to those in rich nations while still offering far greater returns. It would be difficult for private debt funds to pass up this opportunity.