India’s Demographic Dividend
31st Dec, 2019
India has a big advantage of demographic dividend, which will be key driver for its future growth. But as savings and incomes are down and economy is sluggish, India is losing out on its Demographic advantage.
- Demographic transition theory: The demographic transition theory is a generalised description of the changing pattern of mortality, fertility and growth rates, as society moves from one demographic phase to another.
- Four phases of demographic transition model: There are four stages to the classical demographic transition model.
- Stage 1: This pre-transition phase is characterised by high birth rates and high death This phase marks an underdeveloped society which is characterised with non-advanced or no modern medical facilities. Deaths caused by epidemics, diseases, famines and war are high, to people produce more children to compensate for high death numbers. This is a low population phase, where economic growth and development is also low. Example; pre-industrial age societies.
- Stage 2: This is an early phase of transition where death rate begins to fall. This fall is mostly caused by development of medical facilities. But since reproductive decisions are often lagged, birth rates continue to remain high. In this phase, population starts to grow rapidly. This is also the phase of early development of industries, and where growth begins to pick up. Example; industrial-age Europe.
- Stage 3: In this later phase of transition, reproductive adjustments are made to the falling death rate. Birth rate starts to decline and the rate of population growth decelerates. Example; current situation in China.
- Stage 4: This phase marks post-transitional societies and is characterised by low birth and low death rates. Here, population growth is negligible, or even becomes negative. Example; current situation in many developed countries of Europe.
Case of other countries:
- Many Asian economies — Japan, China, South Korea — were able to use their demographic dividend.
- Japan was among the first major economies to experience rapid growth because of changing population structure.
- China entered this stage in 1994. Although its growth accelerated immediately after Deng Xiaoping’s economic reforms of 1978, the years of demographic dividend helped sustain this rate for a very long period.
- The dividend years in Singapore started in 1979, and in the next 10 years there were only two years when its economy grew at less than 7%.
- South Korea entered this phase in 1987.
- In Hong Kong the dividend years kicked-in in 1979.
- Case of Latin America: A change in population structure alone cannot push growth. There are many other factors. While demographic dividend resulted in a seven-fold increase in GDP of many Asian countries. In Latin America, the growth was only two-fold.
- According to UNFPA, countries can only harness the economic potential of youth bulge if they are able to provide good health, quality education and decent employment to its entire population.
India’s demographic transition
- Large workforce: India has entered into the phase of demographic transition where workforce of the country is growing at a very fast pace. Nearly 12 million Indians enter the workforce each a year, i.e. one million a month.
- At present close to 30% of India’s population is in age group 0-14 years.
- The elderly in 60-plus age group are still a small proportion (8%).
- The working age group (15-59 years) accounts for 62.5% of India’s population. It is estimated to reach its highest proportion of approximately 65% in 2036.
- Small window of utilisation: India’s phase of demographic dividend started in 2005-06 and will last till 2055-56, longer than any other country in the world. India must utilise this bulge in working-age population before it slips into the next phase of demographic transition.
Demographic Disaster: If unutilised, the demographic dividend can turn into a demographic disaster. A situation of demographic disaster is when the unutilised working age population becomes a burden on country’s resources and does not contribute to any economic activity.
When a working-age population is left unemployed, it will not be able to secure its old age; in terms of pension or other guarantees, hence creating additional burden on the government.
- State wise differences: The demographic window of opportunity is available to different states at different times, because of differing population parameters. Fertility decline across states and regions has been different.
- Kerala, Tamil Nadu, Delhi, Andhra Pradesh, Telangana, Gujarat, Punjab and West Bengal, have low total fertility rates (around 1.6 children per woman). Their window of demographic opportunity will close in next five years.
- Karnataka, Odisha, Himachal Pradesh, Maharashtra, Jammu and Kashmir, Assam, Uttarakhand and Haryana have replacement level of around 2.1. Their window of opportunity will remain open for another 10-15 years.
- The states of hinterland India—Chhattisgarh, Jharkhand, Madhya Pradesh, Rajasthan, Uttar Pradesh and Bihar, have high-fertility rates (around 3 children per woman). Their window of opportunity is yet to open and will continue even in 2050s and 2060s.
- Growth potential: According to IMF, India’s continuing demographic dividend, if harnessed properly, can add about 2% to the annual rate of economic growth.
Is India headed to a demographic disaster?
- India’s growth story: India saw unprecedented growth during 2000s. It was expected that the rapid economic growth would pull millions of Indians out of poverty. But since 2011, growth has started to slow down. Indian economy is currently witnessing a sordid state of affairs.
- Rise of debt and fall in income: GDP is obtained by adding private consumption expenditure, investment, government expenditure and net exports (exports minus imports). Among those four categories, except for government spending, the situation is dire.
- Private consumption expenditure, which constitutes bulk of the economy (59.4% in 2018-19), was at peak of its growth in 2011-12 at 17.53%. Today it has fallen to single digits and stands at 7.02%.
- Net financial savings of households (their fixed deposits, insurance policies, mutual funds, small savings, etc., minus their financial liabilities) peaked between 2008-09 and 2010-11 (greater than 10% of the gross national disposable income (GNDI)). Since then it has been falling, and in 2017-18 stood at 6.52% of GNDI.
- Financial liabilities peaked at 4.28% of GNDI in 2017-19. This indicates that a large part of growth in private consumption expenditure has been financed through borrowings by the household sector.
- Growth in per capita GNDI has also been on a downward trend. Adjusting for inflation, the income in real terms for the salaried class has barely grown. Growth in rural income has also slowed rapidly.
- Fall in Investment: Investment is the key driver of growth and consumption. Investment creates jobs. Jobs provide income to people. People spend this money, and it boosts consumption, and further helps other people to earn income. These earners spend their money, and provide further impetus to consumption.
- Investment to GDP ratio peaked at 35.81% in 2007-08, the year before financial crisis. It fell over the next few years only to rise again to 34.31% in 2011-12. This happened primarily because of an increase in government expenditure in the aftermath of financial crisis (e.g. MGNREGA spending), along with inducements that encouraged public sector banks to lend more to industry. Today this ratio is less than 30%.
- The NPA crisis of today goes back to the above time, when public sector banks ended up disbursing loans to many projects, which eventually turned into bad loans.
- Like consumers, corporate sector confidence is low, and it is not interested in investing at this point of time.
- No gains on manufacturing or exports front: Lately, India’s export capability has crashed. Exports of goods and services peaked at 25.43% of GDP in 2013-14. In 2018-19, exports fell to 19.74% of GDP. Manufacturing output has also shrinked to record low levels.
- While over 80% of India’s 520 million workforces are engaged in informal economy.
- Low employment: Unemployment rate among the youth has risen significantly. According to the National Sample Survey Office’s Periodic Labour Force Survey, the rate of unemployment among 15-29 year olds jumped from 5% in 2011-12 to 17.4% in 2017-18.
- There is high female unemployment. Socio-economic conditions are forcing more educated women to stay out of workforce. There is growing feminisation of agriculture.
- India’s demographic dividend is collapsing: Give job creation is not happening, what will the million individuals entering India’s workforce every month (our demographic dividend) do? Hence, it is safe to say that, if the situation is not immediately corrected, India’s demographic dividend is collapsing.
Utilising India’s demographic advantage: Way Forward
- Reforms: For Indian manufacturers to be able to compete internationally, reforms are required on the land, labour, and tax fronts.
- Electricity and freight benefit to entrepreneurs: The government has recently reduced corporate income-tax rates. But to compete within the country, Indian entrepreneur should get benefits for basic inputs like electricity and freight.
- Currently, the cost of cheap electricity for farmers is being borne by industry.
- Similarly, railway passengers are subsidized at the cost of freight.
- Taxes on aviation fuel make air cargo rates in India among the highest in world.
- Simplify GST: The goods and services tax (GST) system is multi-rate and complicated, and must be rationalised for the benefit of industry.
- Lowering taxes: Tax structure should be brought down from excess of 33% to around 20% (like in the US). This will ensure that retained capital does not go back to paying taxes, and funds are available to finance future growth.
- Retrospective taxation should be avoided.
- Time lag in tax refund should also be checked.
- Improve manufacturing and export growth: Government must adopt measures to improve business sentiments in the market. It must adopt the right mix of monetary and fiscal policy to spur economic activity. Exports must be incentivised.
- Skill workforce: As highlighted in ASER reports, our primary education system continues to produce children with poor competence in reading, writing and basic math. 48% of India employers report difficulty in filling job vacancies due to talent shortages. There is urgent need to ensure that the workforce which enters job market is skilled and meets industry requirements.
- Health and Education: We need to increase productivity and ensure that per person contribution to GDP goes up. Hence, there is need for higher public spending on health and education. Given India’s high burden of Non-communicable diseases, adequate lifestyle checks should be imposed. Quality of air and water should be checked and improved. Preventive healthcare should also be adopted.
- Women-friendly work environment: Women’s access to various services is indirectly related to the demographic opportunity. If women do not have access to good health services, and have higher number of children, they might not join workforce, reducing 50% of working population.
- Women friendly work environment should be encouraged.
- Women should have wider access to jobs, without any gender stereotypes to which occupations they can be a part of.
- Women should gain more economic and political rights.
- Gender wage gap should be closed.
- Reduce inequalities: India will also need to reduce caste-based and urban-rural inequality, especially in access to reproductive care, health, education and jobs.
- Institutional checks: Both justice and police systems also need rapid reform in order to ensure sustained and easy growth path.
- Differential approach to socio-economic policy: The differing windows of demographic dividend in various state, call for a differential approach to socio-economic policy planning.
- In states where the window is closing soon, the focus has to be on ageing and migrant-friendly policies and programmes. For example, Policies to attract high quality labour from younger states, even re-training them to match needs of the states with low workforce.
- In states where the window is open and will close in next 10-15 years, the focus should be on empowering girls and women, provisioning of health, education and skill development for young people, and employment generation.
- In states where the window is yet to open the focus should be threefold—addressing harmful practices such as child marriage, access to quality sexual and reproductive health services and family planning services to all, and provisioning of health, education, life and vocational skills to young people; in order to prepare future workforce.