INDIA'S REDUCING DEMOGRAPHIC DIVIDEND AND IMPERATIVES FOR LEVERAGING IT - Sarthak Desai

 

I have always believed that India would be the next superpower after China. In retrospect, I have understood that my belief was on the rising working-age population of India that could earn money and spend accordingly on their needs and desires, resulting in robust domestic demand for goods and services. It is a good recipe for long-term economic growth. However, I have realized that advantages for India by having a large working population, compared to other young developing countries, would diminish after a decade. I wonder whether we would generate a good number of jobs for swathes of adolescents entering the workforce each year.

United Nations Population Fund defines a demographic dividend as “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older)". India reached this stage in 2005. Its associated benefits can be reaped till 2055 if there are correct policies. So, what are those benefits on which India depends very much? Let me talk about them.

First is the better economic growth created by increased economic activities due to a higher working-age population and less dependent population (kids and parents). It happens due to four conditions working in tandem. There would be a larger workforce arising due to a low birth rate (India achieved this in 2020 as per NFHS-5), which would boost productivity. As the number of children and older people would be less, the government can divert its resources to other areas which spur economic growth. Because of the reduced birth rate, women would be more participative in the workforce, creating more economic growth. More savings due to fewer dependents for each working couple would increase the available investment for GDP expansion.

The second benefit would be the rapid industrialization of the country. It would happen due to more people entering the workforce. Many foreign companies would be willing to take advantage of the low unit labor costs because of a large force compared to the jobs available. They would try to shift their manufacturing base to India, provided there is sufficient government support. The third benefit would be rapid urbanization as more people would start living near urban areas to seek employment. People working in industries would save enough money to shift to cities to find better education and health facilities for their dependents. They would further increase the domestic consumption required for economic growth.

India is already near the halfway mark of the period, in which one can reap these benefits. It aims to build a $5 trillion economy by 2025. Even if it achieves this goal by 2027-28, would this growth be equally distributed? Current statistics say otherwise. The top 1% and the top 10% respectively hold 33% and 64.6% of India's wealth. So, we should avoid a situation where India grows rich without Indians getting rich.

The demographic dividend is also getting shorter every year. The size of our working population would decline after peaking in 2031. Currently, our country is young, with a median age of 28.3. This number will rise to 30 by 2026 and 34.5 by 2036. If a sizable chunk of the working-age population remains unemployed, there would be long-lasting implications. We would be creating a young and angry population and with-it conditions for social unrest and economic disaster. We would not want our demographic dividend to transform into a demographic disaster. The policymakers can avoid this by focusing on the following areas that were neglected for a long time.

First of all, they should be focusing on increasing the expenditure on education. Along with it, they should improve the employability of young people entering the job market every year. Currently, only 50% of the male workforce have at least ten years of schooling. The expenditure of India on education as a percentage of GDP is a paltry 2.9% compared to the required 6% for better human capital development. Collaboration between academia and industry should be enhanced to design a curriculum suited to industry needs. Our education policies should also be changed, considering the loss of jobs the fourth industrial revolution would bring for the workforce.

The second focus area should be improving the health facilities in the country. An unhealthy workforce would reduce the number of productive days and thus productivity. Our government currently spends only 1.1% of GDP on healthcare which is less than the required 6% for improving health care facilities. It is imperative to spend more on healthcare considering the devastating impact the pandemic had on our country. The scope of two schemes, namely the Ayushman Bharat and Integrated Child Development Services, should be broadened to reach more people.

Policymakers need to realize that the number of jobs created each year has to increase many times. Historically, the government has been inept at achieving this through its enterprises. So, in recent times it has started relying more on the private sector to do the job. However, the private sector can’t do much, if the laws and the economic policy adopted by the country don't favor them. We all know that since the advent of the industrial revolution, the job market has skewed in favor of businesses as the number of people requiring jobs is too large. India has designed its labor codes the other way around, tilting too much on the side of workers. It disincentivizes any factory owner to hire more people due to fear of falling under the factory category where obligations for the owner are more. Reforms on these laws have been passed in the parliament (the four new labor codes), but guess what, they aren't implemented due to fear of labor unions and upcoming state elections. The protest by farmers and the eventual repeal of 3 farm laws have put the government on backfoot. I doubt any government would dare to bring heavy-impact reforms soon. And you thought democracy is free of any drawbacks.

The government should also try to increase the productive capacity of the country. It would increase the number of jobs, albeit the low-skilled ones. The share of manufacturing in GDP has remained in the range of 16-18% GDP, which is very low compared to other developing countries. Productive Linked Incentive (PLI) schemes announced for multiple sectors are a step towards increasing this share. Along with this, the quality and price of Indian products should be made competitive by focusing on domestic infrastructure building, strengthening resolution mechanisms, reducing import and export costs.

We failed to reap benefits from the manufacturing sector as India strangely skipped it. It moved directly from the agriculture sector to the services sector. We should avoid the same in the case of the demographic dividend. Our government and private sector should incorporate the above methods as fast as possible because the fourth industrial revolution and associated automation have already begun. No one would want India to achieve jobless growth that might turn us old without becoming rich. Let us hope that this decade, having the potential of serious long-term consequences, turns out to be a good one.