Global think-tanks including the International Monetary Fund (IMF) and the World Bank have been advocating that India is in the midst of a demographic transition and is likely to reap huge demographic dividends in the coming years.
India is experiencing an increase in working-age population offering the opportunity to gather demographic dividend from rising incomes, the IMF has suggested. Way back in 2012, IMF’s ‘Asia Pacific Regional Economic Outlook’ had predicted that the demographic dividend can add about 2% to the annual rate of economic growth of India with the right policy mix. This is in contrast to what the world in general will face. The engines of global growth are aging rapidly and many developed countries are feared to experience outright population contraction alongside dwindling working-age shares affecting growth parameters.
India has one of the youngest populations in an aging world. By 2020, the median age in India will be just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan. Demographics can change the pace and pattern of economic growth. While China’s spectacular growth has already benefited from a demographic dividend, India is set to do so.
What is demographic dividend?
But first; what is demographic dividend? Demographic dividend refers to the growth in an economy that is the result of a change in the age structure of a country’s population. The change in age structure is typically brought on by a decline in fertility and mortality rates.
The United Nations Population Fund (UNPF) defines 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 is larger than the non-working-age share of the population.”
Demographic dividends are occurrences in a country that enjoys accelerated economic growth that comes from the decline in fertility and mortality rates. A country that experiences low birth rates in conjunction with low death rates receives an economic dividend or benefit from the increase in productivity of the working population that ensues.
To receive a demographic dividend, a country must go through a demographic transition where it switches from a largely rural agrarian economy with high fertility and mortality rates to an urban industrial society characterised by low fertility and mortality rates. In the initial stages of this transition, fertility rates fall, leading to a workforce that is temporarily growing faster than the population dependent on it. Everything else being equal, per capita income grows more rapidly during this time. This economic benefit is the first dividend received by a country that has gone through the necessary demographic transition.
The UN Population Fund has pointed out in its report that India may receive demographic dividends because of its increasing working age population. It is noted that 30% of India's population is below 14 years. The working age population (15-59 years) constitutes another 62%. Only 8% of its people are 60 years or older. UNPF estimates that India's working age population will reach a maximum of 65% by 2030 and will start to decline thereafter. The country's demographic dividends will be available for five decades, from 2005 to 2055, longer than any other country of the world.
Theoretically, the extension of working age population has significant impact on country’s savings and investment parameters. The older working population having an extended retirement period has a powerful incentive to accumulate assets to support themselves. These assets help improving the country’s savings rate and in turn, the rate of capital formation adding to a country's national income. This increase in national income is considered as the second dividend which continues to be earned indefinitely.
According to the Economic Survey 2018-19, India’s demographic dividend will peak around 2041, when the share of working-age population (20-59 years) will be about 59%. With increasing life expectancy, even the older population is expected to contribute to national income growth.
To achieve potential demographic dividend, India, however, would need to provide its growing working age population with productive employment at reasonably decent incomes. For this, the country would require to improve its competitiveness in the global sphere, attract more investment and create more jobs to absorb the growing workforce. It would need to pull women into the job market, who are largely left out of paid work currently.
There are some signs that this may occur. India is now among the world's largest growing major economies. In the last two decades all major multinational companies seeking growth have eyed India in one way or another. The country received a record foreign direct investment of
$40 billion in 2018.
According to the World Bank report titled 'South Asia Economic Focus, Spring 2018: Jobless Growth?', India has been creating 7.5 lakh jobs for every 1% growth in GDP. Creating 8.5-9 million jobs would require a GDP growth of 12% per annum – a tall order for India to achieve this as the GDP growth rate has touched a five-year low in the April-June quarter of the current year. Alternatively, India could reach that level of employment creation with a GDP growth rate of 8.5 -9% per annum if it can improve the employment elasticity of growth. If India can create a million jobs for every 1% GDP growth, even 8.5-9% GDP growth would be enough to realise India's demographic dividend. This is an achievable goal over the next 10-15 years even in the difficult global environment.
FICCI’s recent report ‘Envisioning India 2030’ suggests, “Improving India's competitiveness and creating more employment, the precondition to reap the potential demographic dividend is not a 'rocket science', but it will
require disciplined and coordi-nated actions on a variety of fronts. As India's competitiveness and job surveys show, a water-front of issues must be covered. These can be summarised into a shared prosperity quadrilateral for India with four broad areas of emphasis: build human capital, expand infrastructure, reform factor markets and strengthen institutions.”
The services sector has been the largest contributor to India's GDP growth over the years and is among the biggest employment generator in the country. Information technology, banking and financial services have been classic examples of high employment intensity service sectors for India. Given our demographic profile as we continue to add millions to the workforce every year, job creation persists to be one of the biggest challenges for the country.
Disconnect between GDP growth and employment generation and a shift straight from agriculture to services led growth, by-passing manufacturing, have been a distinct feature of India’s structural transformation. This is unlike most developed countries and more recently the East Asian countries which entered the phase of predominance of services in their economies after going through a phase of manufacturing-led industrialisation. Such sectoral composition of growth and employment points towards India’s inability to create a balanced mix of ‘employment’ and ‘quality employment’, where quality signifies productivity contribution. The Economic Survey, 2014-15 had observed that a major impediment to the pace of quality employment generation in India is the small share of manufacturing in total employment. The major challenge India has been facing is to raise the share of manufacturing in both income and employment. This is a major roadblock to garner demographic dividend.
Structural transformation of the economy leads to large scale migration of workforce from primary to secondary and tertiary sectors. In India, the bulk of labour force moving out of agriculture has been absorbed in construction and low end segments of the service sector within the informal economy such as hotel, restaurant, wholesale and retail trading and personnel services. In other words, structural changes of the Indian economy have led to a shift of labour from the informal sector of agriculture to low paid jobs in the informal market of the non-agricultural sector, largely due to lack of skill, limiting the potential gains from demographic changes.
Demographic dividend a boon or bane
India’s much publicised demographic dividend may run out in just a decade, a report from SBI Research has warned. If India fails to take advantage of this huge, young workforce by then, it may well turn into a disadvantage, the report added.
The State Bank of India (SBI) in its monthly publication Ecowrap in June 2018 reportedly, warned policymakers of the possible threat of India losing its demographic dividend. The report cited the case of Karnataka, which is witnessing population ageing amid declining fertility rates, and cautioned about the declining enrolment in primary public schools in the state. The report said, “We believe this is a problem across other states too and India’s strength of demographic dividend could actually turn into India’s disadvantage by 2030.”
A UNDP report said that India will need 280 million jobs by 2050, the year when India's working age population is expected to peak. But since 1991, when India liberalised its economy, close to 300 million Indians sought employment but less than half were employed, according to the same report. Today, even though India's GDP has grown consistently, the country is struggling to create jobs for its ever increasing workforce.
According to conventional economic theory, a country which doesn't have a substantial young population would have a serious impact on the macro parameters because young people have higher capacity to generate output and have greater propensity to spend more, enhancing demand. But although India has a young population, it is "low-leveraged". If the skilling of the labour force is not methodically perceived and the skilled workforce is not utilised to its potential, India will be unable to realise its demographic advantage which it is endowed with right now.
India's problem today is a huge labour force. The problem is not only lack of jobs, but lack of quality jobs also that
pay well. It is unlikely to push the consumption of an economy toward a higher trajectory unless jobs are created and sustained.
There is growing concern that India’s future growth could turn out to be jobless due to the falling employment elasticity of output caused largely by technological progress. As per the NSSO Periodic Labour Force Survey 2017-18, India’s labour force participation rate for the age-group 15-59 years is around 53%, that is, around half of the working age population is jobless. This figure is enough of an indication that the benefits of demographic transition currently is not accruing into growth variables and to do so, New Delhi would need to re-define its policy priorities.