Can India get rich before growing old?

India’s demographic dividend has been the subject of much discussion, especially after liberalisation, which promised an economic growth boost from the country’s youthful workforce. However, recent trends indicate that this “dividend” may not be as enduring as expected, and there are concerns that India’s shrinking fertility rate, stagnant manufacturing sector, and insufficient job creation could lead to the country falling into the middle-income trap. With the demographic advantage narrowing, experts warn that India must act quickly to leverage its youth population.

The Demographic Dividend and Its Decline

• Declining Fertility Rate: India’s total fertility rate (TFR) has dropped significantly, from 2.6 in 2010 to 1.99 today, indicating a rapid population ageing. This trend, particularly in southern states like Andhra Pradesh and Karnataka, signals the impending end of India’s demographic dividend, which has been vital for its economic growth.
• Challenges of Low-Productivity Employment: A significant portion of India’s working-age population remains employed in low-productivity agricultural jobs or is unemployed, preparing for competitive exams. Despite liberalisation, only 17% of India’s workforce has shifted out of agriculture, lagging behind China’s progress.
• Middle-Income Trap: With a stagnating manufacturing sector and slow job creation, India risks falling into the middle-income trap, a scenario where the economy grows slowly after reaching middle-income status without achieving high-income levels.

Focus on Manufacturing for Economic Growth

• Importance of Manufacturing: Historically, economic growth has been driven by the transition of workers from agriculture to manufacturing. However, India’s manufacturing sector has stagnated, and addressing this is essential to create more jobs. Sectors like textiles and apparel employ millions and could be a major contributor to employment, especially for women, yet this sector faces several hurdles.
• Challenges in the Manufacturing Sector: Indian manufacturers face significant obstacles, including complex business licensing processes, land acquisition issues, and trade regulations. These issues are limiting the growth of labor-intensive industries, which have a much higher potential for job creation compared to services.
• Policy Reforms for Growth: To stimulate manufacturing, India must improve the business environment by lowering tariffs, finalising free trade agreements, and pushing for labor reforms that provide greater flexibility in hiring and working conditions.

The Way Forward for Leveraging the Demographic Dividend

• Improving the Business Environment: For India to capitalise on its demographic dividend, it must create an enabling environment for businesses, including reforms in land, labor, and regulatory frameworks. This will foster large-scale job creation, especially in manufacturing.
• Learning from China: India can learn from China’s experience in transitioning millions from agriculture to manufacturing, which was pivotal in its rapid economic growth.
• Urgency to Act: The window to fully benefit from the demographic dividend is closing. India must shift from complacency to active policymaking to ensure that its youthful workforce is productively employed in sectors that can sustain long-term growth.

Practice Question:

Q. India's demographic dividend, once seen as a key driver of economic growth, is now facing significant challenges, including a declining fertility rate and stagnation in manufacturing. Discuss the reasons for this trend and suggest policy measures to leverage India’s demographic advantage before it diminishes.