India And The Fallacy Of The Demographic Dividend
At times it is very difficult to make sense of a country as complicated as India is. What complicates the situation further is the fact that we have very little data going around in many cases. But then there are broader trends, which one can comment on.
One such thing is the demographic dividend or to put it more precisely India’s demographic dividend. India will do well in the decades to come because of its demographic dividend, they said. In fact, some of them are still talking about it.
So what is the demographic dividend? As country progresses it moves from being a largely rural agrarian society to a predominantly urban society. Along the way it changes from being a society with high fertility and mortality rates to a society which has low fertility and mortality rates.
As Ronald Lee and Andrew Mason write in an article titled What is the demographic dividend in the Finance and Development magazine of the International Monetary Fund:
At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labour force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly too.
The infant mortality rate in India was 75 in 1996. It has come down to 38 in 2015, data from World Bank shows. The infant mortality rate is essentially defined as the number of infants who die before reaching one year of age, for every 1000 live births during the course of a given year.
Along with the infant mortality rate declining, the general technological advances as well as access to medical facilities have improved. This essentially means that in the coming years there will be a huge bulge in the number of young people in the country. In this stage, the workforce of the country will increase dramatically.
There are multiple estimates of what India’s workforce will look like in the years to come. Most of these estimates essentially suggest that India’s workforce is increasing at the rate of one million workers per month and will continue increasing at this rate in the years to come.
The Planning Commission, before it was disbanded had made an estimate on India’s workforce in the years to come.
As the 12th Five Year Plan (2012-2017) document pointed out: “One hundred and eighty-three million additional income seekers are expected to join the workforce over the next 15 years.” This essentially means that a little over 12 million individuals will keep joining the workforce every year, in the years to come. This works out to around one million a month. And at this rate, the Indian workforce is expected to be larger than that of China by 2030.
And this is India’s demographic dividend. As these individuals enter the workforce, find work, earn money and spend it, the Indian economy is expected to do well. When economists and politicians talk about an economic growth of close to 10 per cent per year, they are essentially hoping that India’s demographic dividend will play out as it is expected.
But the question is how likely is this? How have things with other countries been in the past? Have countries which were expected to benefit from the demographic dividend benefitted from it?
As Ruchir Sharma writes in his new book The Rise and Fall of Nations-Ten Rules of Change in the Post-Crisis World:
The trick is to avoid falling for the fallacy of the “demographic dividend,” the idea that population growth pays off automatically in rapid economic growth. It pays off only if political leaders create the economic conditions necessary to attract investment and generate jobs. In the 1960s and ‘70s, rapid population growth in Africa, China, and India led to famines, high unemployment and civil strife. Rapid population growth is often a precondition for fast economic growth, but it never guarantees fast growth.
Sharma then talks about the Arab world which despite being poised to, did not benefit from a demographic dividend. As Sharma writes:
The Arab world provides a cautionary tale. There between 1985 and 2005 the working age population grew by an average annual rate of more than 3 percent, or nearly twice as fast as the rest of the world. But no economic dividend resulted. In the early 2010s many Arab countries suffered from cripplingly high youth unemployment rates; more than 40 percent in Iraq and more than 30 percent in Saudi Arabia, Egypt, and Tunisia, where the violence and chaos of the Arab Spring began.
This is something that India and Indians need to be aware of. The demographic dividend benefits a country if the government of the day is able to create the right environment in which jobs are created. As Sharma writes:
In India, where hopes for the demographic dividend have also been sky high, ten million young people will enter the workforce each year over the next decade, but the lately the economy has been creating less than five million jobs annually.
If this were to continue, there will be no demographic dividend for India.Balancing of supply and demand is the critical need of the hour.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.