Political leaders, businessmen, and optimistic economic commentators started talking about India’s demographic dividend at least a decade ago, if not earlier. But typically, much of the discussions and commentaries have focused on narrow parameters, specifically the “dependent ratio” or the proportion of the dependent population to the working age population. The term demographic dividend was coined by Dr David E Bloom of Harvard University when he published a paper, The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change, along with co-authors David Canning and Jaypee Sevilla in 2003. The paper had looked at the relationship between age structure of populations and a country’s historical economic growth across the globe. It pointed out that if a large proportion of a country’s population is in the working age group, the added productivity of this group can provide a “demographic dividend” of economic growth—assuming that policies to take advantage of these are in place.
The demographic dividend doesn’t last forever. And countries need to reap the benefits of the demographic dividends before they reverse and the working age population becomes smaller than the dependent population. The dependent population conventionally comprises those below 15 years or above 64 years, though currently, a good proportion of 15-year-olds are still studying while a slice of the population older than 64 may still be working actively.
India’s dependency ratio—or the ratio of dependent population to working age population—fell below 50% by 2020. It is likely to remain so until 2050 or even 2055. Much will depend on the fall in the fertility rate, the mortality rate and finally the life expectancy of the population over the next couple of decades. But at any rate, while we have lost some time, theoretically we still have some time to reap a dividend and grow consistently at more than 8% for at least two and a half decades. At least that is the rosy picture.
The more realistic image comes after considering four other things. The first three are part of what the original paper by Bloom et al pointed out. The authors said that the right policies were particularly needed in four areas—1) public health 2) family planning 3) education and 4) economic policies that promote labour market flexibility, openness to trade, and savings. All these policies need to be in place well before the demographic bulge in working age population takes place. We have faltered in three of these four. The last one is one other factor—technology innovation and its effect on the labour market which other economists are studying.
Too often, India’s demographic dividend conversations have focused too much on the dependency ratio and not enough on the policies and other factors. Some of it was primarily because the benefits of the economic reforms that were initiated in the early 1990s started showing up in the second half of the decade and continued till 2008–10, aided by the global economic boom and economic stimulus.
A high number of reasonably well-educated people joined the workforce at a time when they could take advantage of requirements in the rapid growth of a number of new sectors such as financial services, telecom, IT services, IT-enabled services, etc. At the same time, manufacturing capacities were being set up, rapidly fuelled by rising consumption of goods and general optimism. This created a large number of jobs for less educated labour as well. A construction boom also helped create a huge demand for skilled and semi-skilled manual labour.
However, apart from allowing private sector participation, our healthcare, education, labour and trade policies did not really keep up with what was required. The Union as well as the state governments did not devote the attention or resources that were needed. Nor did we pay enough focused attention to trade or labour flexibility policies, though we are now trying to catch up with lost time. Family planning to an extent worked as can be seen by our recent fertility rate of 2.0%, which is just a tad lower than the 2.1% replacement rate, and is coming down.
Our missteps in the four areas have resulted today in a higher dependent population than would be suggested by the normal dependent ratio calculations.
The dependent ratio has been conventionally seen only through the filter of the working vs non-working population. But that gives a very narrow picture—a more holistic picture is obtained by adding the unemployment rate as well as the Labour Force Participation Rate (LFPR) to the mix. The LFPR looks at the number of people within the working age population who are willing to work. The unemployment rate looks at the people who have failed to find employment despite being willing to work.
In India, the LFPR is far worse than most of our emerging market peers—less than 50% of our working age population is actively looking for work in India. In terms of women in the workforce, the LFPR is particularly bad, hovering just around 25%. Add high unemployment—which has been consistently over 6% since 2019—and you get a better picture of the dependent versus working age population ratio.
Multiple factors have led to the current conditions in LFPR and unemployment in India. Education – Employment opportunity mismatch is one. Many companies, particularly engineering companies, bemoan the lack of candidates who meet their minimum requirements in terms of knowledge even if they have the requisite degrees. Even in manual labour that requires skills, this is sometimes the issue. The revolution in technology—especially digital technology—as well as formalisation taking place in a number of sectors, is another major issue. Technological advances are reducing the labour intensity of most functions. Automation and robotics are reducing the role of manual and even white-collared labour in low knowledge jobs. Formalisation is important but it has also reduced the number of jobs available to the labour pool. Consolidation taking place in sectors also reduces the need for labour in the entire sector.
These trends will only accelerate in the future, so the window of opportunity we have left is rapidly diminishing. And that is why the demographic dividend debate needs to expand.
Prosenjit Datta
Former editor, commentator on economic issues