India’s Secret Weapon: Its Young Population

The average age of employees at India's top software services exporter — Tata Consultancy Services (TCS), one of the country's largest private sector employers — is 28.

India’s Secret Weapon: Its Young Population
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This is 10 years less than the median age at American technology giant Oracle, according to data from PayScale, an online provider of employee compensation data.

The composition of TCS employees is a reflection of India's young and burgeoning working-age population — a competitive edge that sets Asia's third-largest economy apart from countries across the world, many of which are aging fast.

"A young workforce means having more innovative minds. It also means we are able to better leverage technology and increase efficiency," said Ranjan Bandyopadhyay, global HR head of business process outsourcing for TCS.

Like TCS, the median age of India's population as a whole is 28, significantly lower than that of regional peers China and Japan, at 37.6 and 44.4, respectively, according to data from global market research firm Euromonitor.

India's workforce, those between 15 and 64, is expected to rise from almost 64 percent of its population in 2009 to 67 percent in 2020. Meanwhile, China's is expected to start declining from 2014 resulting in a labor shortfall by 2050, according to some estimates.

"India has close to ideal demographics. It's in a sweet spot," said Robert Prior-Wandesforde, director, Asian economics research at Credit Suisse. "As the population's working age expands, savings increase — and that turns into a source of funding for investment. This will be beneficial for the country's competitiveness as other countries age,"

India's "demographic dividend" — the window of opportunity that a large workforce creates to strengthen an economy — could add 2 percentage points to the country's annual growth rate over the next two decades, the International Monetary Fund said in 2011.

While growth in India has been slowing this year, the economy has on average grown close to 8 percent annually over the last five years, helped in large part by this demographic dividend.

"A growing workforce is an advantage for both the manufacturing and services sectors in India. Not only do businesses have access to people that are young and physically fit, it means less cost pressures, particularly on the wage front, because of the availability of labor," said Arvind Singhal, chairman of consultancy firm Technopak Advisors.

Compelling Consumption Story

India's youthful population is also contributing to India's consumption boom.

Between 2006 and 2011, consumer spending in the country almost doubled, from $549 billion to $1.06 trillion. Sunil Devmurari, country manager for India at Euromonitor, said this is just the beginning.

(Read more: What the Powerful Indian Consumer Is Buying)

"Two hundred and fifty million people are set to join India's workforce by 2030. As a big chunk of the population shifts into the working age group, the offshoot of that is an increase in disposable incomes and conspicuous consumption. This is the most exciting aspect of India's demographic dividend," Devmurari said.

The country's favorable dynamics, accompanied by the population's growing propensity to spend, have lured investors. For example, New Silk Route, a $1.4-billion global private equity firm headquartered in the U.S., has invested in a vegetarian fast food chain in South India called Adigas and Café Coffee Day, India's equivalent of Starbucks .

India’s Secret Weapon: Its Young Population
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Its founder Parag Saxena thinks India's favorable demographics present huge opportunities for marketers. Discussing the motivation behind the firm's investments in two restaurant chains, he said, "A crucial part of the long-term demand comes from the constantly growing younger population."

As more young Indians enter the labor force, they will begin to play a bigger part in determining marketing campaigns, said Dheeraj Sinha, chief strategy officer, South and Southeast Asia at Grey Worldwide.

"Demographics play an increasingly important role — all the people featured in the advertisements must look young and appeal to the younger crowd," Sinha said.

There are 200 million people between the age of 18 and 25 in India, and manufacturers of fashion wear to motorcycles are all targeting this group, he added.

"It's a market that has been ignored for some time. There was a certain myopia that the middle class, and the middle-aged were the ones to go after. But people are now waking up to the younger consumer," Sinha said.

Demographics Are Not Destiny

While the country's young demographic base is beneficial for India's growth, harnessing its full potential is a major challenge, said Siddhartha Sanyal, chief India economist at Barclays.

"As far as the headlines are concerned, it's a big advantage, but we have to be careful about the finer details. This huge young population is coming from areas where economic development is not of the highest level," Sanyal said.

(Read more: Can Japan's Elderly Become Its Growth Engine?)

It is crucial for the country to scale up the potential of its people entering the workforce by enhancing education and employability, he added.

The male adult literacy rate stands at 75 percent, while female literacy is significantly lower at 51 percent, according to World Bank data. This compares to levels above 90 percent for both male and female literacy in China.

Mohit Hira, former chief marketing officer at NIIT, a talent development institute specializing in training for the IT sector, said, "A lot of kids face challenges getting hired because their communication skills aren't good enough."

Plus, India has to ensure that there are enough jobs to accommodate its growing working age population. But this is proving to be difficult, as India largely skipped the manufacturing phase of growth that has accompanied the economic development of countries such as China, and jumped straight into developing its services sector, said Gareth Leather, economist at Capital Economics, a global macroeconomics research firm.

"Although India has been able to develop a world class services sectors, they will not provide nearly enough jobs in the coming decades," he said.

While the official unemployment rate in India stands at a low 3.8 percent, economists argue this is not a fair reflection of employment conditions. The employment data only cover the so-called "official sector" such as public-sector jobs and large companies — a fraction of the entire job market — while leaving out those in the "unofficial sector" including small-to-medium sized enterprises or the agricultural sector, where under-employment is widespread.

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  • "The demographic dividend is not a dividend if people aren't educated and trained, and if there aren't enough jobs for them," said Prior-Wandesforde of Credit Suisse.

    Leather warns that this could turn the dividend into a burden. One of the big risks that could emerge from a lack of jobs is social unrest, said Leather, pointing to the Arab Spring — protests and demonstrations across the Middle East triggered in large part by frustration over high levels of unemployment.

    The extent to which India reaps the benefits of its demographic gift in the future hinges on whether the country can turn its large working-age population into an employable force.

    - By CNBC's Ansuya Harjani.