The demographic transition of India from the Malthusian bogey of the 1960s to one of ‘shrinkonomics’—a term used by IMF’s Gee Hee Hong and Todd Schneider for an economy with more retirees and a falling labour-based tax pool—has passed variously through stages in different regions. Because the age structure of India’s population exhibits wide heterogeneity, the country’s demography is better understood in its regional settings.
In 2011, Kerala, Tamil Nadu, Karnataka, Andhra Pradesh and Telangana accounted for 20.7 per cent of India’s population. This declined to 19.9 per cent in 2021 and is projected to go down to 18.51 per cent by 2041. In 2041, the population of the southern states is estimated to be lower than in 2031.
In contrast, the population of Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Rajasthan and Uttar Pradesh increased from 41.59 per cent in 2011 to 43.02 per cent in 2021, and is expected to reach 45.58 per cent of the country’s total in 2041.
The economic implications of this demographic disadvantage can be seen through four related lenses: demographic dividend, ageing, change in political equations, and the need to revisit fiscal federalism.
While India can boast of the rich demographic dividend of a high working-age population, the southern states—notably Kerala and Tamil Nadu—have to reflect on a new strategy of shrinkonomics. They are probably paying the price for policy choices of the past.
A window of opportunity opens up during a demographic transition when the working-age population (15-64 years) is higher compared to that of dependents. In a rough reckoning, when the proportion of youth and children falls below 30 per cent and that of the elderly below 15 per cent, a country reaps a high demographic dividend.
This is not manna from heaven. It is dependent on good governance and making the right policy choices on education, health, promotion of savings, microfinance for the poor and pensions, along with progressive socio-economics such as including more women in the labour force.
With the total fertility rate in China around 1.2 and that of Japan below 1.3, their coping strategies need a closer study in India’s federal context. The window of opportunity was open for Kerala for 26 years from 1991 through 2017 and for Tamil Nadu for 30 years (1994-2024); the other states are in the queue, as Abhishek and Kshamanidhi Adabar from the Central University of Gujarat have shown. Interestingly, for most northern states, the demographic dividend has unfolded post 2020.
The growing rural-to-urban and north-to-south migration underway in India need to be closely studied in this context. Hence, it is worth quoting somewhat elaborately from former World Bank demographer K C Zachariah on the losing the window of opportunity in Kerala and migration: “The increase in population during the 10-year period 1991-2001 was about 2.74 million and during 2001-2011, it was about 1.56 million. There was thus a significant decline in the increase in population between the decades. Had there been no ‘replacement migrants’ in the state, the population of Kerala according to the 2011 census would have been less than in 2001. Replacement migrants have offset what Kerala lost through emigration.”
The ‘replacement migrants’ of Kerala have swelled now to over 3 million (largely coming from northern states and West Bengal). They are getting absorbed into the socio-economic environment of the state. Cities such as Bengaluru, Hyderabad and Chennai are also attracting people from the North.
Undoubtedly, the economics of growing remittances by migrants to their homes in the North also needs close investigation by the Centre, probably by NITI Aayog. It would be needed for any effort to redefine India’s fiscal federalism.
Ageing is going to be the major disadvantage for all southern states, which will significantly affect their public finances. Computing an Ageing Index by dividing the population above 60 by that below 14—for the major states, using Census 2011 and estimates for years up to 2036 by the National Commission on Population—we see the changing scenario for the southern states.
The ageing index in 2011 for Andhra Pradesh was 25 per cent, Karnataka 24.4 per cent, Kerala 35.7 per cent and Tamil Nadu 29.2 per cent. They have undergone significant changes with expected values of 84.1 per cent, 69.2 per cent, 94.9 per cent and 94.2 per cent, respectively, in 2036. But the all-India number of 52 per cent for 2036 stands on a secure pedestal. Rapid reductions in infant mortality coupled with higher life expectancy have helped this transformation.
The pension and social security liabilities (in Kerala, this includes health insurance, educational assistance for migrants’ children and pension for agricultural labourers through panchayats) are going to steadily increase. Again, the median age of Tamil Nadu and Kerala projected around 40 for 2036 can be compared only to that of China and Japan. The major challenge is to rebuild a meaningful care industry, including geriatric healthcare and a new employment strategy.
With the delimitation of constituencies after the proposed Census in 2025, states whose population has increased will gain at the expense of those where it has decreased. Assuming the size of population per parliamentary constituency and based on the projected population for 2031, the present seats of 129 for the five southern states may be reduced to 104, whereas those for the six populous northern states will increase from 199 to 240. The biggest gainer will be UP and the biggest loser Tamil Nadu. Mind you, these changes are only indicative.
The need to accommodate the growing disadvantages of the demographic transition into the fiscal federal map of India is loud and clear. Intergovernmental transfer arrangements have to be redrawn on a long-term basis, starting with the 16th Finance Commission.
A recent working paper from National Institute of Public Finance and Policy judiciously incorporating the elderly in the devolution formula showed the inequity of the 15th and earlier finance commissions’ criterions. The paper has calculated elderly population as a percentage of the working-age population for each state and demonstrated, using alternative scenarios, the inequity in the intergovernmental transfer system in our federal polity.
The demographic disadvantages arising out of the heterogeneity in the fiscal federal arrangements demand a new shrinkonomics for the southern states and a radical revision of India’s fiscal federal strategy.
(Views are personal)
M A Oommen | Former Chairman, Fourth State Finance Commission, Kerala, and Distinguished Fellow, Gulati Institute of Finance and Taxation, Thiruvananthapuram