Demographics can change the pace and pattern of economic growth. While China’s spectacular growth has already benefited from a demographic dividend, India is yet to do so.
What is Demographic Dividend?
- Demographic dividend, as defined by the United Nations Population Fund (UNFPA) means, “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).”
- In other words, it is “a boost in economic productivity that occurs when there are growing numbers of people in the workforce relative to the number of dependents.”
Demographic dividend POSITIVES- Demographic dividend can increase economic growth through six channels.
- The first channel is through the swelling of the labour force, as more people reach working age.
- The second channel is the increased fiscal space created by the demographic dividend to divert resources from spending on children to investing in physical and human infrastructure.
- The third channel is the rise in women’s workforce that naturally accompanies a decline in fertility, and which can be a new source of growth.
- The fourth is the increase in savings rate, as the working age also happens to be the prime period for saving.
- The fifth channel is an additional boost to savings that occurs as the incentive to save for longer periods of retirement increases with greater longevity.
- The sixth channel is a massive shift towards a middle-class society that is already in the making. Growth, education, home ownership, better economic security, and a desire for more durable goods are the cause and consequence of young demographics.
What is the labour force scenario?
- 12 million young people enter the labour force each year.
- Millions transfer out of low productivity agricultural jobs to better paying alternatives.
- There is hence a need to create a large number of jobs to accommodate these people and drive productivity up.
- But even the most liberal estimates of employment generation do not suggest that the increase is commensurate with the requirement.
- Inability to deliver as many good jobs as required is partly responsible for India’s labour participation rate falling to around 50%.
- Labour force participation is the ratio of working age population that is employed to that of those not employed.
- India has one of the lowest labour force participations (world average is 63).
- Women have been dropping out of the labour force in large numbers.
Dividend or curse?
India’s human capital base may not be adequate for the future or in a position to benefit from the demographic dividend. India is home to the world’s largest concentration of illiterate people in the world.
It has made gains in human development, but challenges remain, including big barriers to secondary schooling, low-quality public services, and gender discrimination.
- The growth benefit of a demographic dividend is not automatic. A lot depends on whether the bulge in working population can be trained, and enough jobs created to employ the 10 million more people who will join the labour force every year.
- There is mounting concern that future growth could turn out to be jobless due to de-industrialization, de-globalization, and the fourth industrial revolution and technological progress.
- While digital technologies may enable the creation of new products and more productive jobs, they may also substitute existing jobs.
- India may not be able to take advantage of these opportunities, due to a low human capital base and lack of skills.
- Lack of jobs combined with a demographic dividend will increase the share of the population that is dependent on the working population. This will increase the economic insecurity of the elderly, as there will be fewer people generating wealth.
- Whether the demographic dividend promotes growth or transforms into a curse depends on how prepared the states that should benefit from a young population are.
- Bihar, Uttar Pradesh and other lagging states will experience a much bigger bulge in working population than more developed states like Tamil Nadu. Unfortunately, the less-developed states are also the least prepared to take advantage of the demographic change they will undergo.
What are the ways for enhancing productivity?
- Demographic dividend is a time-limited opportunity, and policymakers should have a greater incentive to redouble their efforts to promote human capital so that it can contribute to economic growth and job creation.
Short term measures – Addressing skills shortages, and ensuring flexible adaptability to industry requirements for the immediate needs.
- Three-month training can equip first-generation literate rural school-leavers with skills for working in retail malls and related services.
- Also, similar three-month nano degrees can also re-train and equip industry workers with new skills that enhance their adaptability.
- Ensuring timely delivery of completion, certificated to the concerned workers is key to this initiative.
- This is mainly because, coordinating with multiple private agencies that are involved in the skilling programmes is proving difficult.
- There are also other issues to be addressed like lack of common standards, which is making in-house training in one industry irrelevant in another.
Medium term – Employment elasticity in Indian manufacturing sector is estimated to be only 0.09, as compared to a world average of 0.3.
- This point to the need for encouraging relatively low-skill labour-intensive industries like textiles, chemicals and food processing.
- Construction already has high employment elasticity of 0.19 and hence stimulus to low income housing is needed to improve job creation.
- The service industry will continue to be a major employer.
- Health and education services are currently severely under-provided.
- While their expansion at all levels will generate a lot of jobs, there is a dire need for capability enhancement of the workforce to fit the sector.
- The Indian Medical Council that creates entry barriers and chokes the expansion in the supply of doctors and nurses needs to be reformed.
- New teaching facilities should be judged on the basis of accreditation, and outcomes and structures for the same need to be strengthened.
Long-term measures – The quality of primary education needs to improve.
- This requires government schools to be freed from state control, and allowed to compete and innovate in response to community needs.
- It is feared that automation will destroy jobs (especially low-skill ones), and the role of robotic is slated to increase drastically in manufacturing.
- Even in the services sector, answering robots are already replacing workers in call centres and even IT sector is seeing some automation.
- But historically, although technological change makes some occupations obsolete, it also creates new jobs, and raises income levels.
- Hence, rising levels and quality of education are essential for seamlessly adapting to the new highly productive jobs of tomorrow.
- No country can achieve its potential and meet the challenges of the 21st century without the full participation of working population, both women and men.
- High-quality education is one of the strongest ways for countries to reduce poverty, achieve gender equality, and create more jobs. Building human capital translates into higher rates of economic growth and job creation.
- Demographic dividend without investments in human capital will be a wasted development opportunity, and it will further widen economic and social gaps, instead of narrowing them.