Demographic dividend; Only when society mobilises capital are jobs created

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Published: February 21, 2017 5:03:23 AM

Jobs are created when industry grows and that is possible only when the society mobilises capital

A large young workforce could mean more people earning income, and hence higher GDP—that, however, cannot be taken for granted.

The rise of India, writes the World Bank, has been on one of the most significant achievements of our times. It is the fourth largest economy in terms of GDP and the second largest in terms of its 1.3 billion population. Ever since FY50-51, per capita income and GDP have increased by 10 and 36 times in real terms. A child born today has a 74% chance of being literate and can hope to live up to 69 years. Compare this with FY51, when he could expect to live only up to the age of 41, and the chance of his becoming literate was only 18%. All this while, food grain production at 264.2 million tonnes has increased much faster than the increase in population — 5.21 times as compared to 3.67 times.

Optimists cite these facts to convince us that a burgeoning population is not a liability. The best, they argue, is yet to come—India has the largest and the youngest workforce comprising 64% of the population. Deftly handled, this could be an enormous strength. If it acquires necessary skills and finds employment, it could help India find the sweet spot of 8-10% growth which the CEA Arvind Subramanian has often talked about. If the economy cannot absorb the million people who enter the workforce every month, rising unemployment will give rise to huge frustration and demands for reservations and quotas. India finds itself at an important inflexion point in its economic history.

A large young workforce could mean more people earning income, and hence higher GDP—that, however, cannot be taken for granted. A well-crafted strategy needs to be devised to deal with this situation. This could begin with taking cognisance of some basic facts: 49.7%, 21.5% and 28.7% of the labour force engaged in agriculture, industry and services generates 17%, 30% and 53% of GDP. Since the size of holdings is small, agriculture cannot absorb the addition to the labour force. In the UK, the US and France, it employs 1-3% of the workforce and accounts for almost the same percentage of GDP. Because it is difficult to make it profitable for small farmers, most developed countries have, at some time or the other, experienced mass migration from rural to urban areas; that is precisely what is happening in India. Lakhs of people migrate from rural to urban every month in search of greener pastures, badly straining urban infrastructure. Even so, agriculture will remain important in the years to come, because even after a decade from now, 40% of the population will depend on it for its livelihood. The emphasis in the Budget for FY18 on agriculture (R35,984 crore) and rural development (R87,765 crore) is appropriate, because agricultural and other allied activities have to be made profitable for those who stay back.

For the rest, the government has to focus on other aspects of the problem. The experience of economies that witnessed similar demographic transitions suggests that large-scale productive employment results only when capital per worker increases along four dimensions: physical capital (better machines, tools) infrastructural or overhead capital (better connectivity, railways, roads, bridges, drainage, sanitation) social capital (reduced corruption, increased trust) and human capital (skills for the workforce, better education). The Budget scores well on two out of the four: The FM announced an outlay of R3,96,135 crore for infrastructure, and R4,000 crore for skilling 3.5 crore youth, in addition to the launch of 600 skill development centres and 350 online courses.

All this, however, is not enough. Jobs are created when industry grows and that is possible only when the society mobilises capital through enhanced savings and investment rates. Labour productivity rises when better machines and tools become available to a worker. A few East and Southeast Asian nations adopted this time-tested method to industrialise. Unfortunately, chances of a worker finding productive employment in our country when he migrates to a town are rare—85% of our workforce and 45% of our GDP are still accounted for by the informal sector, where the size of the firm is typically small, methods of production are archaic, and dependence on cash is high. These firms have little incentive to enter the formal economy as they lose many advantages when they do so. They find tax and labour laws complicated and onerous. One need then relates the government taking steps towards ease of doing business, so that small firms can be incentivised to enter the formal economy.

Demonetisation and GST may help in the medium and long run to achieve this objective, but the recent amendments to tax laws which empower officials to carry out searches and surveys without disclosing reasons are bound to dampen the spirit of many small entrepreneurs.

The government also appears to have missed an opportunity to spur private investment by reducing tax rates at the upper end of the tax band. Productive jobs may well increase if more money is placed in the hands of larger firms that have the capacity to take risks and invest on expansion of their operations. At the moment, they are hamstrung by their own excess capacity and inability of the banks to lend to them because of high NPAs. Reducing tax rates was one comparatively easy way to improve the investment climate in the economy.

In this country, Red Queen tells Alice in Alice Through the Looking Glass: “It takes all the running you can do, to keep in the same place.” She might have added that in a demographic struggle, if you’re looking for the sweet spot that may generate double-digit growth, “you must run at least twice as fast as that!”

The author was chief commissioner, income-tax, and Ombudsman to the Income-Tax Department, Mumbai

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