Realizing India’s Demographic Dividend

Posted in Marketing & Strategy Articles, Total Reads: 954 , Published on 10 March 2016
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The world is undergoing a major demographic transition. Not only is population growth slowing, but the age composition of the population is also changing. The share of the young population is falling and that of the elderly rising. Different countries and regions, however, are at varying stages of this demographic transition. In case of most advanced nations, the aging process is already well under way, and a number of developing countries in east and Southeast Asia will experience significant aging in the years to come. In other developing countries including India, the demographic transition is less advanced, and working-age populations is going to increase in the days to come.

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The correlation between population growth and the economy has always been the subject of debate among scholars and policymakers. Thomas Malthus in his work on the Principle of Population published in 18th century explained that the rate of population growth goes in equilibrium by the pace of economic growth. If population grows rapidly, wages would decrease drastically which will result in famine and will increases the mortality rate which will finally result in decrease in population. Similarly faster economic growth on the other hand would increase fertility and the population would then quickly rise to its new equilibrium. But today the theories of Malthus seem futile in the quickly developing world. As economic prosperity has risen around the world, fertility rates have fallen (there has been significant rise in life expectancy), resulting in slower population growth and aging. The population growth in any economy is accompanied by both benefits and burdens. It is always the responsibility of the nation to design plans to enhance the benefits and alleviate the burdens of carrying an increasing population


Demographics of India – An opportunity

With a population of over 1.2 billion, India is the second most populous country in the world today. The day is not far when India overtakes its neighbor China and becomes the most populous country in the World. The annual population growth in India is however negative but still registers a value of 1.26% which is higher than the World average annual population growth. The higher population can prove to be advantageous if the majority of the population comes in the working age and can contribute to the growth and prosperity of the economy, which is one of the many reasons for a country like India to initiate skill development programs through NSDC and a country like China to end its one child policy from 1st January 2016.


The fertility rates in India have been seen to be reducing at a consistent rate coupled simultaneously with an increase in life expectancy and hence a decrease in death rates. This ensures that an average Indian is born and lives a long life being in the working age population and contributing positively to the economy of the nation. As seen from the graph below, the fertility rates dropped to a minimum of 2.4% in 2013 and the trend is set to continue for the years to come as it is predicted that the fertility rates will drop further to 2.1% in 2020. As the percentage of working age population in a country increases, it leads to a decrease in the dependency ratio, as less number of people are actually dependent on the working age population for their needs and requirements. Fall in dependency ratio is considered as a great marker of economic development in light of the fact that it demonstrates the proportion of consumers i.e. the elderly and children to the producers. This ultimately means that India will have more producers than consumers


The life expectancy at birth which was close to 68 years in 2013 is set to cross the 70 level mark by the end of 2020. These demographic parameters are enough to conclude that the population is set to take an upswing but with a marked increase in the working age population. The decline in the death rate with steep decline in the infant mortality rate is one of the prominent aspect of India’s post-Independence demographic transition. This has also been accompanied by increase in per capita income of the population


Another advantage that India possesses is in the form of sex ratio, the service sector contributes to 52.97% in the GDP of India. It has been seen that the contribution of women in the services sector is relatively higher than that of the other sectors and as the sex ratio is increasing as seen from the graph above, it can be seen that there would be a healthy contribution to the services sector of India and hence giving a boost to the GDP of the country. Also, as the national wages will improve over the years, in manufacturing, services and all the other sectors we can see a healthy contribution of women in such sectors and hence a boost to the economy.

 


Something to worry about

As India looks to overturn its slow economic growth and development and looks to put a large step in the Global economy and establish itself as the fastest developing country of the World there are a few demographic challenges that stand in front of it.

As per a World Bank report, in 2007, 25 percent of all Indians lived below the national poverty line, which increased to 29.8 percent in 2010. While wage and education gaps between rural and urban Indians have declined, rural India is still characterized by agrarian distress, a chronic lack of employment, and farmer suicides. This calls for an infrastructure push in rural India

The Government plan to impart skill development training is a welcome step as we can see where the country stand in the skilled workforce availability in the Formal sector Vis a Vis other developed nation.


In line with the forecast for significant requirement of skilled manpower over the next decade, the government has set a target to impart necessary skills to 500 million people by 2022. National skill development Corporation (NSDC) projected an additional requirement of 347 million personnel both skilled and unskilled in 21 growth sectors by 2022. Around 12 million workers are expected to join the workforce over the next decade. By all means it is evident that there is a challenge of skill development. As per the NSDC report out of 0.4 million engineering students graduating every year in the country only 20% are actually employable. In the decade to come there is going to be a huge shortage of medium skilled worker in the labor intensive industries.

Skill gap forecast for 2012-22 for select states (Millions)
  Skilled Semi-skilled Unskilled
State Incremental demand Incremental supply Surplus/Deficit Incremental demand Incremental supply Surplus/Deficit Incremental demand Incremental supply Surplus/Deficit
Delhi 0.85 2.27 1.42 0.53 0.36 -0.17 3 3.41 0.41
Karnataka 2.15 1.44 -0.71 3.6 3.22 -0.38 2.28 3.46 1.18
Maharashtra 5.77 2.41 -3.36 5.36 4.29 -1.07 4.4 3.94 -0.45
Tamil Nadu 4.7 2.2 -2.49 3.95 0.54 -3.42 5.03 4.7 -0.35

India also requires a National Pension Scheme in order to help the ageing population. According to Crisil, the fiscal cost of ageing is 2.2% of GDP at present. If India plans out a universal pension scheme, per-year fiscal burden on the government is higher at 4.1% of GDP by 2030, which declines to 3.9% of GDP by 2050 because the entire population aged 60 and above is covered. The higher fiscal burden will largely have to be funded by higher taxes if fiscal deficit needs to be controlled. In order to keep the fiscal hump under control, government needs to increase share of organized sector development which is currently 7% of total employment to 40-50% by 2030 and develop adequate infrastructure and distribution network


Conclusion

India is poised to garner the economic benefits from the favourable demographics discussed earlier, but this windfall may not be guaranteed. India needs to identify priority sectors for immediate and phased investment to create substantial low skill and medium skill jobs. Failure to provide meaningful employment to the emerging working population will lead to a distressed and failed society.


India’s changing demographics is creating a strong impulse for economic growth, and policymakers need to work very hard for making this potential demographic dividend a reality. To achieve the outcomes on the ground however, we need to go beyond the basic indicators and look to work on more fundamental aspects. The economic fundamentals, the quality of public service delivery, the governance of the country are those fundamental aspects, which will ultimately give us the outcomes on these key indicators.


This article has been authored by Ritesh Kumar & Karishma Jain from IIFT Delhi


References

Ashoka Mody and Shekhar Aiyar, “The Demographic Dividend: Evidence from the Indian States”, International Monetary Fund WP/11/38

Clifford A. Grammich, Harun Dogo and Julie Davanzo, “Demographic Trends, Policy Influences, and Economic Effects in China and India through 2025”, RAND National Security Research Division WR-849 April 2011

David E. Bloom, “Population Dynamics in India and Implications for Economic Growth”, PGDA Program on the Global Demography of Aging Working Paper no. 65 January 2011

Prof. Dora Thompson & Prof. Manish Tongo, “Target of inclusive growth and demographic dividend of India” International Journal of Scientific and Research Publications Volume 2, Issue 8, August 2012 ISSN 2250-3153

M.R. Narayan and Laishram Ladusingh, “Economic Lifecycle and Demographic Dividends: Evidence and Implications for India”

Reaping India’s promised demographic dividend — industry in driving seat, Ernst and Young and FICCI 2011


Skill gap forecast for 2012-22 for select states (Millions)

 

Skilled

Semi-skilled

Unskilled

State

Incremental demand

Incremental supply

Surplus/Deficit

Incremental demand

Incremental supply

Surplus/Deficit

Incremental demand

Incremental supply

Surplus/Deficit

Delhi

0.85

2.27

1.42

0.53

0.36

-0.17

3.00

3.41

0.41

Karnataka

2.15

1.44

-0.71

3.60

3.22

-0.38

2.28

3.46

1.18

Maharashtra

5.77

2.41

-3.36

5.36

4.29

-1.07

4.40

3.94

-0.45

Tamil Nadu

4.70

2.20

-2.49

3.95

0.54

-3.42

5.03

4.70

-0.35


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