What answers would you expect to the question – what would define the next few years of the quicksilver world landscape? The Chinese would probably bet on their recent devaluation of yuan to work wonders for them in the next few years to shift from an investment-led growth to a consumption-led growth. The Russians will fear the falling crude oil prices might wipe off their economy. But for India, it is the demographic tarot that will decide its fate and its chances of becoming the next behemoth that it is often touted to be.
What is the demographic dividend?
A lot has been said about India’s next era of growth predicted on its demographic dividends. A cursory look at the population pyramid reveals how India’s bell-shaped population curve has transformed into a thick bryophyte over the years. According to a United Nations report of 2009, in the year 1950, male population in the age bracket of 0 – 4 years roughly constituted seven percent of the total population. The number was nearly the same for the female population. The number for the age bracket of 15 – 60 years for male and female combined was 56 percent. In 1970, the number crossed eight percent for male population and improved slightly for the female population while the combined number for the 15 – 60 age group was 54 percent. But according to estimates, the number in 2030 for the 0 – 4 bracket would be less than four percent of both male and female population. Interestingly, the number is almost the same for the population in the age bracket of 15 – 60 years, that is 60 percent. What it means is that India is set to become the youngest country in the world.
So, what does this mean to India’s growth prospects? According to an International Monetary Fund report of 2004, history reveals that whenever a nation has had a high working population, its GDP growth per capita has been positively correlated with changes in the relative size of the working-age population. This is primarily due to the greater contribution of the highly productive young labour force. This is also due to the fact that more the number of people that work in a nation, the smaller is the dependency ratio that takes a huge burden off the government’s shoulders as it has now to spend lesser on the maintenance and pensions of the economically dependent. In addition, smaller dependency ratios imply a rise in savings, which helps in boosting investment and growth. To India’s advantage, its dependency ratio is expected to be around two only by 2026 (Reaping India’s promised demographic dividend – industry in driving seat, EY and FICCI, 2015).
Another natural offshoot of this population is likely to show its impact on the equity markets. The young population, being risk taking, is likely to amass corporate stocks and assets for its future and hence drive the financial markets positively. Though the baby boomers are likely to pull their assets from the market, but given their size, the spending by the next generation is likely to overpower the dip in the market.
A positive trend observed is the projected increase in the sex ratio of India from 932 in the year 2000 to 952 in the year 2025 (Planning Commission). Currently, women constitute 24 percent of labour force in India. These women contribute only 17 percent to the GDP. But according to a McKinsey report, if women are allowed to participate on an equal basis, India can expect an additional boost of US$ 2.9 trillion in GDP by 2025. Even Christine Lagarde, Managing Director of IMF, believes that India’s GDP would expand by 27 percent if the number of female workers was to increase to the same level as the number of men.
Also, going by the trends, the Make In India push seems to be coming at just the right time as India looks set to not just provide labour for its own requirements but also for the rest of the world. Standing at a current share of 37 percent in the global outsourcing market, amounting to US$18 billion, India is set to be the next hub for both global labour needs and manufacturing (Reaping India’s promised demographic dividend – industry in driving seat, EY and FICCI, 2015).
But just like anything else that exists under the sun, the repercussions have to be understood in entirety. The demographics are strong enough to turn the growth tide on its head. Factors such as skill deficit in the amount of labour that would be required by the industry in 2022 serve as a timely reminder of what a growing population can lead to in the labour market. Over the next decade, for every 12 million people expected to join the workforce every year, India has the capacity to train only 4.3 million people (Twelfth Five Year Plan, Planning Commission, 2012-17 and Bloomberg website). We are also likely to suffer from serious gaps in our educational systems wherein we are producing only a handful of employable individuals. Of 0.4 million engineering graduates in India every year, only 20 percent are readily employable (NSDC website). In addition, our enrollment in vocational courses too is very low (5.5 million) in comparison to China’s 90 million.
What this underutilization also means is that this is the same population that India has to serve fifty years down the line. Since the population won’t be able to sustain itself owing to lack of skill sets, the government would likely be under immense pressure to fund these people’s social expenses through various public spending measures leading to high fiscal pressures.
Moreover, the increased working population is going to further put the resources under duress because of increased consumption of resources, viz., transportation, power, water, building stocks, etc. For instance, total vehicle fleet in the country is expected to increase by 600 percent to about 380 million by 2030 from the 51 million in the year 2005. To fulfill the demand for building stocks in the country, approximately six to sevenfold increase in the production of cement and steel has to be undertaken which are considered to be heavy environmental pollutants. Adding further to environmental woes, oil consumption will likely increase fivefold from current levels to satisfy the transportation and power needs of the country. No wonder, the environment seems to be a major loser in the bargain.
The Way Forward
So, how should India deal with its demographics in the next few years to harness its strengths and become the next superpower? To begin with, India needs to plug the gaps in its skill chain. This can be achieved by developing a framework providing training and development services to the people entering the workforce. A number of these should be backed by the required level of quality. Industrial Technical institutes, certification standards should meet the requirement of the global level of employability.
New entrants should be welcomed to share their technical know-how and simultaneously generate employment. A case in point is the recent reconsideration of Foreign Direct Investment (FDI) by the government in various sectors, focusing on the import of future technology to lead to accelerated growth. A good start would be to put the greater impetus on sectors like insurance that currently has 49 percent FDI. Greater FDI would reduce the future burden of government spending and also result in a decrease in health care spending.
The traditional methods of learning have to give way to the application based forms of learning. Since the next wave of growth is being driven by technology-based companies under the likes of Tesla and Future Faraday, it becomes imperative for the set to be the youngest nation to equip its population with the required arsenal. This can only be achieved if the push for digital literacy transforms into on-ground action in the short term itself.
Another important domain that demands attention is the inclusion of women in the workforce. This will require a radical shift in the way companies are currently operating. This will entail provision for extension of maternity leave, enforcing stricter work laws, addressing the problem of women having to work in night shifts and acknowledging global unpaid work, roughly valued at 10 trillion US dollars, which is 13 percent of global GDP, as a part of GDP calculation.
In summation, India stands at a juncture where it can choose to finally leverage all its strengths and channelize its resources to leap into the next generation of growth or let its advantage go waste and face yet another century of struggle. All it has to do is to be slightly prudent in what it chooses to pursue.
This article has been co-authored Prakhar Agarwal, Bhanu Madan, Ayushi Kumar & Bharat Agarwal (CFA Level 3 candidate and FRM part 2 candidate) student of MBA(IB) program Indian Institute of Foreign Trade Delhi 2015-17 Batch
http://www.bloomberg.com/news/2013-03-14/india-s-economy-leaves-job-growth-in-html, accessed 12 August 2013
http://www.ey.com/Publication/vwLUAssets/EY-Government-and-Public-Sector-Reaping- Indias-demographic-dividend/$FILE/EY-Reaping-Indias-promised-demographic-dividend- industry-in-driving-seat.pdf