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A lot has been made of India’s demographic divide. In short, the theory is that with a younger working population of approximately 700 million, India has a low dependency ratio of 0.6. By 2030, the ratio will be just 0.4, which means that there will be ten workers for every four dependent on them. The low dependency ratio increases productivity while decreasing expenses such as medical care, retirement expenses, etc of the elderly.

While there is some truth to that theory, there are also plenty of pitfalls. To illustrate the pitfalls, India released the results of its census last week. India added 181 million people over the past decade, a growth rate of 17% . While the growth rate is slowing down, the fact remains that India added the equivalent of the population of Brazil in just 10 years. Are all these people a blessing or a curse?

A lot depends on how the populace is governed, educated, and empowered. This is where India’s demographic divide can be a problem. Just as a Stradivarius does not a virtuoso make, just because India has a young population does not mean it has an advantage. Let’s go over the issues.

1. Food in the land of plenty and starvation. India has only 2.3 % of global land mass, yet has about 17% of global population. Where is India going to find the food to feed its burgeoning population? Though it is a global food exporter, thanks to the original green revolution, India’s antiquated food collection and distribution system means that as much as 40% of food is wasted.

The result is that India has the largest number of malnourished children in the world, even more than sub-Saharan Africa. Worse – only 5 states account for 80% of the cases. All this while obesity is growing in India. So how is India tackling this situation? For now, it is buying land in other countries, though on a smaller scale than China.

For the US investor, If you are a follower of Jim Rogers, you know what is next. Buy land. Especially agricultural land. If that does not appeal to you, try fertilizer companies such as Agrium (NYSE:AGU) or Potash (NYSE:POT) or companies such as Monsanto (NYSE:MON) that develop recombinant agricultural commodities. Of course, you could also play this by buying ETFs such as RJF or DBA.

2. Water, water, but not everywhere. Water is a serious issue in India now, with less than 80% of the population having access to potable water. With agriculture, industry, and a daily needs of people each clamoring for a share, where is the water going to come from to accommodate the rising population? Just a single truant monsoon can wreak havoc to India’s agriculture. It is forecast that by 2030, India will be a water stressed country. At 980 cubic meters per capita, India uses less water than a parched country like Australia. How much lower can it go? Some Indian states, such as Gujarat with its competent Chief Minister Narendra Modi, have started to address this issue head on. Desalination and bore holes to increase water tables have already made a difference.

Unfortunately for the US investor, there is no good way to play this opportunity. Water ETFs such as PHO or CGW have little exposure to India. Neither do companies such as Veolia (NYSE:VE).

3. Energy to tackle energy. Thankfully, India has not only stopped but actually reversed the amount of forest being denuded for firewood and cooking purposes, and forest now occupy 21% of India. But where the forests have increased, so has the demand for oil, coal, and natural gas. India has to make a concerted effort to diversify away from non-renewable sources and to utilize solar and wind power. It has made a decent start but still lags far behind China in such efforts. On nuclear energy, India has barely blinked an eye following the disaster in Japan. Unlike Germany, or even China which has shown jitteriness, no nuclear plants have been cancelled or shut down.

For the US investor, ways to play this is by buying URA or companies such as CCJ. Solar and wind power are picking up, with Suzlon Energy [SUZLON.BO] now the worlds third largest wind turbine maker. ETFs such as FAN and TAN have no exposure to Indian companies.

4. Education, education, education. For a useful and employable population, it is imperative that the population be educated in a meaningful way. The latest census showed that India’s literacy rate had gone up to 74% from 65%. India has 300 universities and 15, 600 colleges, and the total number of graduates number 2.5 million a year.

That is the good part. The bad part is – what is the quality of those graduates? While India has world class institutions such as Indian Institutes of Technology (IIT), the local colleges produce graduates that are largely unemployable by companies. The students are adept at taking exams, but their learning is through rote memorization, with little creativity and practical applicability. Unless India changes the way it educates its students, moving away from rote memorization, it will be hard pressed to utilize its millions effectively.

Maany US universities have established or are establishing campuses in India, but since they are private, there is little chance for the investor in US to participate in this opportunity. For profit universities such as DeVry (NYSE:DV) also have no presence in India.

5. No sex please. The most horrible aspect of India’s demographic is its sex ratio. By nature, more males are born than females, but males die faster. Consequently, the sex ratio at birth is in favor of males, but that changes with time, which is why nursing homes have more females than males.

In India, due to selective sex abortion, the ratio is horribly skewed. The latest census showed that there are 940 females to every 1000 males (and that is, believe it or not, an improvement) with child gender ration of 914 girls to 1000 boys. That means that fewer girls are being born due to selective abortion, but fewer are dying, thanks to better maternal health. Any country that constraints half its population by definition is running on half capacity.

India is quite strange in this respect – it has had women prime ministers and presidents, and numerous female goddesses, long before the West did, but on a societal level, an average female has less chance than an average male. Apart from the unfortunate effect on females, the effect on males in the coming years is going to be horrendous. India had better find a way to satisfy tens of millions of unsatisfied men, or face a violent revolution.

6. The role of Islam. Approximately 13% of India’s population are followers of Islam. They occupy a social strata that is now even below the untouchables in every respect. The reason is that they are considered suspect, a legacy of the creation of Pakistan and Bangladesh, with a little help from Pakistan and Al-Queda sponsored terror groups. Worse, with their appeasement by the Congress and other liberal parties, there is now a strong reaction against them. Many Muslims pretend to be Hindus while applying for jobs. This in a country where many of the top actors, cricket players and musicians are Muslim. But India has to find a way to bring Muslims into the mainstream without resorting to appeasement. Education has to be the key so that radicalism and alienation are replaced by a sense of productive belonging.

7. Politics of demographics. I often discuss with my father which country has worse politicians – the US or India. We agree - India has the edge. The Indian electorate is smarter – a poor person in India who sells his vote for a hundred rupees at least gets to keep the change, whereas in the US all we get is hope and no change. The politicians in India are, however, much worse. A significant number of them are criminals. Corruption has reached epidemic proportions. Indians like to point out that India is a democracy when comparing themselves to China, but India is a immature democracy, somewhere in between dictators and mature democracies such as in Switzerland. Most Indian politics is caste, religion or personality based. The root cause of this lies with the Congress Party, which learned well from the British, using a divide and rule strategy to win elections. Adding insult to injury, the Congress forgot about democracy and enforced nepotism and sycophancy - as a result, all Congress Party heads have been Gandhis.

As I said, the electorate is smart, and they soon realized how to game the system. Now Congress barely survives, thanks to the kindness of strangers, and various caste and regional parties with egotistical leaders rule the roost. In some parts of India, the poor have felt so betrayed that they have become Maoists to challenge the authority of the Indian State. So, in a well of corruption, nepotism, and pseudo-democracy, where is the leadership going to come from to address India’s challenges, and harness its opportunities? How is India going to make sure the demographic bulge becomes a dividend and not a dilemma? India needs a Lee Kuan Yu, but will probably get another Gandhi.

8. Industrial policy, or lack thereof. In order to create jobs for the coming millions, India needs to create jobs. Industries. But India's "license raj" is so antiquated, that the India is only 49th in the global competitive scale. It takes long to start a company or even longer to dissolve one. US labor ain't seen nothing yet. Unless India emulates countries such as Singapore, where it is easy to start a company, and just as easy to dissolve one, not enough companies will be created to absorb the millions of new job applicants.

A story told about Nehru, India's first PM, and JRD Tata, the doyen of Indian industrialist, is revealing. Tata advised Nehru to address India's huge population, which in 1947 was a quarter of what it is today. Nehru scoffed at the warning, saying that population was India's strength, not its weakness. The story may be apocryphal, but the players were true to form. Tata is India's leading industrial house with ethical businesses, innovative spirit, and visionary thinking. Sadly, Tata did not become the prime minister of India, or India's story would have been different.

Disclamer: This is for informational purposes only and should not be constructed as advice to buy or sell any company or stock mentioned.

Source: How Investors Should Play India's Troubling Demographics