Invest to get demographic dividend

By: and |
Updated: Sep 12, 2015 12:39 AM

India will not be able to reap its full benefits unless the Make-in-India and Skill India campaigns are successfully implemented.

The UN Population Division recently released its revised World Population Prospects report, according to which the global population is growing at 1.18% annually compared to 1.24% a decade ago. In the next 15 years, an additional 1 billion people will be added to the current population of 7.3 billion, which is expected to reach 8.5 billion by 2030 and 9.7 billion by 2050.

Currently, 60% of the population lives in Asia. China and India remain the most populated, accounting for 19% and 18% of the population, respectively. The report states India will surpass China sooner than expected, in 2022 (previously it was suggested 2028). By 2022, both countries are expected to be home to 1.4 billion people each. However, post-2022, while India’s population will continue to grow to 1.5 billion by 2030 and 1.7 billion by 2050, China’s will stagnate till 2030s—its population is expected to decrease slightly post-2030.

An attractive demographic dividend


Much is spoken of India’s demographic dividend. According to latest UN estimates, India is home to the largest population of young people. With 835 million people under the age of 35, the young comprise almost 66% of India’s population (compared to China’s 47%). Despite being young, India is ageing nonetheless. The share of population under the age of 35 is expected to go down to 47% in 2050. China will have only 33% of its population under 35 in 2050. Moreover, India’s median age by 2050 will be 37 years compared to 27 currently.

The ratio of working-age population to old-age dependent population—also called the potential support ratio (PSR)—is a reflection of a country’s window of opportunity or its demographic dividend. India’s PSR is 11.7, which means there are around 12 working-age people for every elderly aged above 65. This ratio is expected to reduce to five in 2050. In comparison, it will be two for China, 4.7 for Indonesia and 2.7 for Brazil.

Low labour force participation rate

A relatively high ratio of working-to-dependent population can contribute to higher GDP growth only if accompanied by policies that result in the absorption of this working-age population into the labour force, leading to higher labour force participation rate (LFPR), which is the proportion of the population aged 15 and older that is economically active—all people who are working and looking for work.

According to ILO data, in 2012, LFPR in India was 55.5. For males, LFPR was close to 81, while for females it was around 29. Compare this with China, whose LFPR was close to 74—while male LFPR was in line with India at 81, what is starkly different is the female LFPR at 67.5. Hence, women contribute more to Chinese growth.

Fast-forward to 2020. India will have a labour force of 568.4 million, an additional 42.9 million people as compared to 2015. This presents a unique challenge in front of policy-makers—that of providing more jobs to the youth.

Lower productivity of labour force

While India stands to have a huge young population and huge labour force in the coming years, it also needs to focus on productive use of this valuable resource. According to Conference Board estimates, India’s labour productivity (output per unit of labour employed in a year) is $13,637, compared to China’s $23,809. India’s average growth in labour productivity for the five years ending 2015 was 3.8% per annum, almost of half of China’s 7.4%. This low level of labour productivity will negate some of the positive impact of India’s demographic dividend.

One of the major reasons for this low level of productivity is the low level of skill and skill mismatch. According to 2012 FICCI estimates, only 2% of the existing workforce has undergone formal skills training. A McKinsey report pointed out that, by 2020, India will face a shortage of skilled labour and a surplus of unskilled labour. According to NSSO reports, only 10% of India’s non-farm workforce is formally trained and skilled. NR Narayana Murthy, co-founder and chairman emeritus of Infosys, recently highlighted the issue of lack of skill. He said: “Infosys hired about 25,000 engineers last year. The quality of education they have received is not what we would like them to have … we have to train them to make them relevant to the firm.”

Skill India and Make-in-India

The National Manufacturing Policy, announced in 2011, envisaged the creation of additional 100 million manufacturing jobs, along with raising the share of manufacturing sector in GDP to 25% by 2022. It said: “Every job created in manufacturing has a multiplier effect of creating two to three additional jobs in related activities. Thus, a thrust on manufacturing is integral to the inclusive growth agenda of the government.” Now the Modi government has launched the Make-in-India drive to promote manufacturing.

A CRISIL report in 2012 pointed that for manufacturing to absorb the huge amount of incremental labour force, manufacturing will have to grow at double digits. At the same time, the declining employment intensity of manufacturing has to be checked. Employment elasticity in the industrial sector has fallen from 0.78 during 1999-2000 to 2004-05 to 0.57 during 2004-05 to 2011-12. Policy measures that focus on raising the attractiveness of labour vis-a-vis capital are needed. The emphasis has to be on appropriate skill development, labour-intensive sectors (within and outside manufacturing) and implementation of flexible labour laws. The government has initiated reforms to the archaic labour laws. Small changes in the same will go a long way in giving a boost the manufacturing sector.

CRISIL estimates that 70% of graduating engineers are not employable (they need intensive training) because of lack of technical or soft skills. Around 65% do not complete graduation after finishing K12, but they can be made employable through vocational training. Such figures make us realise the dire need for skill development in the country. With Skill India, PM Modi seeks to promote the same. He rightly said: “The demographic dividend India is proud of, its guarantee lies with skill and trained manpower.” He also remarked that “if China has this identity of being the world’s manufacturing factory, then India can become the world’s human resource capital.” While we agree that human capital development is necessary, its benefits will accrue only if we create opportunities to utilise it fully. Else brain-drain is inevitable.

Not to forget, the contribution of women in India’s growth story needs to be stepped up. By 2020, India will have 493 million females above the age of 15. Of this, only 145.2 million will enter the workforce. While India’s female LFPR is expected to be 29.2 by 2020, China’s is estimated at 66.1. Empowering women to join the labour force and make an equal contribution as men will be crucial in deriving growth out of India’s demographic dividend. The government should endeavour to set a target of increasing female LFPR to the global norm of 50-60% by the next decade.

Taking all these factors into account, India will not be able to reap the full benefits of its demographic dividend unless Make in India and Skill India campaigns are successfully implemented.

The authors are corporate economists based in Mumbai

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