The Hindu Business Line : India's potential `demographic dividend'

India is and will remain for some time one of the youngest countries in the world. This "demographic dividend" is seen as offering a window of opportunity to accelerate the country's rate of growth. In this edition of Macroscan, C. P. Chand rasekhar and Jayati Ghosh assess this potential and discuss the prerequisites needed to realise it.

CONSISTENT and moderately high GDP growth rates during most years since 1980 have encouraged optimistic projections about India's future growth potential.

The argument is as follows: just as India transited from the "Hindu rate of growth" of around 3.5 per cent during the first three decades of planned development to a higher growth trajectory of close to 6 per cent over the last 25 years, it can now move on to a new growth trajectory along which growth could average as much as 9 per cent per annum.

Needless to say, such projections must be based on an assessment identifying potential sources of the new dynamism. One such assessment turns on the demographic advantages that India currently has relative to the developed countries and also countries such as China.

India is and will remain for some time one of the youngest countries in the world. A third of India's population was below 15 years of age in 2000 and close to 20 per cent were young people in the 15-24 age group.

The population in the 15-24 age group grew from around 175 million in 1995 to 190 million in 2000 and 210 million in 2005, increasing by an average of 3.1 million a year between 1995 and 2000 and 5 million between 2000 and 2005. In 2020, the average Indian will be only 29 years old, compared with 37 in China and the US, 45 in West Europe and 48 in Japan.

This trend is seen as significant on the grounds that what matters is not the size of the population, but its age structure.

A population "bulge" in the working age groups, however large the total population, is seen as an inevitable advantage characterised as a "demographic dividend". A nation's population can be divided into those in the labour force (say, the 15-64 age group) and those outside it.

Given the availability of work and the resulting employment, the division broadens to include those outside the labour force, those available for work but unemployed and those in the actual workforce. Since those outside the workforce would be consuming part of what is produced by currently employed workers, the ratio of those outside the workforce to those in it (the dependency ratio) would be among the factors influencing the surplus available for investment after current consumption.

Hence, everything else remaining the same, the higher the share of workers to non-workers, the larger would be the surplus. And for given unemployment rates, the higher the ratio of those in the labour force to those outside it, the larger would be the surplus. If this larger surplus is mobilised for investment, growth would accelerate.

Observed demographic trends suggest that both the size and age structure of the population (and, therefore, the dependency ratio) in all countries tend to change over time because of the nature of the demographic transition. The latter is characterised by the fact that death rates tend to decline before declines in the birth rate set in.

According to demographers David Bloom and David Canning, initially, the death rate tends to decline because of declines in infant and child mortality resulting from improved "public health interventions related to water and sanitation, and to medical interventions such as vaccine coverage and the use of antibiotics."

Improved knowledge and reduced costs allow for these factors to be exploited even at relatively low levels of per capita income so long as political pressure or the political will to provide basic social services and rudimentary health facilities exist. At a later stage the decline in the death rate and increases in average life expectancy result from reduced death rates in the middle and older age groups because of higher incomes, improved lifestyles and better and more expensive medical technology.

As compared with this, birth rate reductions depend on the age of marriage and the fertility rate. Both of these depend on the level of development to a far greater degree. Development often leads to the dilution of social norms prescribing early marriage, and fertility rates within marriage decline as higher child survival rates, female education and labour market opportunities associated with development reduce the desired family size. Though social policy can make a substantial difference to child survival rates and female education, and family planning programmes can influence the desired fertility rate, the observed decline in birth rates tends to begin well after the decline in death rates sets in.

The difference in the relationship between death and birth rates, on the one hand, and development, on the other, affects not just the rate of population growth but the age structure of the population.

The initial fall in infant mortality and improvement in child survival results in a boom generation, with a larger number of people in the younger ages. After some time, the lagged fall in fertility rates reverses the baby boom, resulting in a "bulge" in the younger ages.

As is to be expected, the bulge created by the baby boom moves up the age structure resulting in the fact that at some point the population in the working age (15-64) is much higher than it was previously and would be subsequently.

Finally, the bulge enters the old age bracket, as is happening in the developed countries and epitomised by Japan currently.

Implications for growth

Given our earlier discussion of the implications of the dependency ratio for surpluses available for investment and growth, it should be obvious that this shifting age structure can have significant implications for economic growth.

Periods characterised by a low dependency ratio would be characterised by higher growth, if the inducement to invest surpluses exists, whereas periods characterised by a high dependency ratio would be characterised by a slowing of growth, unless productivity increases raise the output of a smaller proportion of workers enough to neutralise the demographic deficit.

But if the "window of opportunity" available when the population bulge enters the working age groups is to result in an acceleration in growth, the processes of development which in part created this bulge must have been such as to ensure that the quality of those entering the workforce is of the desired level and that these workers find employment opportunities as and when they enter the labour force.

To understand what kinds of policies can help exploit the window of opportunity created by a demographic bulge in the working age groups, it is necessary to recognise that the dependency ratio must be defined not as the ratio of the non-working age to working age population but the ratio of actual non-workers to workers. The difference between the two is determined by the extent of absorption into work of the available labour force, which must take account of underemployment besides unemployment.

Since unemployment and underemployment are typically the outcome of demand-side constraints, even if the presumption that increased longevity would be accompanied by higher savings rates is right, there could be scenarios in which investment rates fall short of savings rates and result in deflation rather than growth. What is more, even in periods when the population bulge is not in the working age groups we may have large-scale unemployment and inadequate expenditure on education both by the government and by households. This would only erode the ability of countries to exploit the demographic dividend as and when it emerges.

The Indian case

India is indeed in the midst of a process where it faces the window of opportunity created by the demographic dividend. As Chart 1 shows, during the first two decades of post-Independence development, while infant mortality rates fell significantly, the fertility rate was more or less stagnant. This would have increased the population of young people significantly, merely because of greater child survival.

In the three decades since then, though the fertility rate has been declining, the infant mortality rate has fallen quite sharply, with possibly the same effect.

One consequence of these trends is the sharper fall in the crude death rate than the birth rate (Chart 2), though declining mortality in the higher age groups would have influenced this as well.

The effect of these trends on the dependency ratio has been along expected lines. The total dependency rose initially because of a rise in the child dependency ratio and stagnation in the old-age dependency ratio.

Subsequently, it began to fall (from 79) in 1970 as the child dependency ratio fell with the baby boomer generation moving into working age groups and with old-age dependency rising only marginally because of reduced death rates in older age groups. It is estimated to have fallen to 64 in 2005. Thus India had begun to reap the demographic dividend around 1980. But the process is likely to extend well into this century with the dependency ratio projected to fall to 48 in 2025 because of continued fall in the child dependency ratio and then rise to 50 by 2050 because of an increase in the old-age dependency ratio as the bulge moves forward and the death rate in the older income groups declines.

Official Indian projections based on the 2001 Census and the SRS (Sample Registration System) show that India's youth population stood at 195.1 million in 2001 and was expected to increase by an annual average figure of 5.4 million during 2001-06 and 3.5 million during 2006-11, before beginning to decline (Table 1).

Demographic dividend and employment

It must be noted that the beginnings of the population bulge in the younger age groups in India did coincide with the shift to a new growth trajectory noted earlier. However, what is of relevance is that even to the extent that growth occurred, it was not capable of absorbing the rapidly rising workforce being generated by the demographic dividend.

The key results of the National Sample Survey's 55th Round (over 1999-2000) reveal a sharp, and even startling, decrease in the rate of employment generation across both rural and urban areas. Indeed, so dramatic is the slowdown in the rate of employment growth that it calls into serious question the pattern of growth over this decade. The annual rate of growth of rural employment fell to as low as two-thirds of one per cent over the period 1993-94 to 1999-2000.

This was not only less than one-third the rate of the previous period 1987-88 to 1993-94, it was also less than half the rate of growth of the labour force in the same period. In fact, it turns out that this was the lowest rate of growth of rural employment in post-Independence history. Even in urban areas, the rate of growth of employment was significantly lower than the previous periods since the early 1980s.

Impact on the youth

This is true of India's young population as well. The rate of growth of employment in the 15-30 age group, which stood at around 2.4 per cent a year between 1987 and 1994 for both rural and urban males, fell to the 0.7 for rural males and 0.3 per cent for urban males during 1994 to 2004. This deceleration in employment growth suggests that the advantage offered by a young labour force has not been exploited.

However, it has been argued that the deceleration in employment growth among the youth is a result of their delayed entry into the workforce, partly because they are extending their years of education. Labour force participation rates, which include those available for but unable to find work, have indeed fallen quite sharply in the 15-19 age group. Simultaneously, those in the 15-19 age group reporting themselves as studying has increased significantly over the 1990s, especially in rural areas and including among young women.

It is indeed true that the annual average increment in the number of young people declaring themselves as studying is overwhelming in the 15-19 age group and substantial even in the 15-24 age group (Table 2).

Given the relative size of these increments vis-à-vis the increase in the youth population, it must be true that there is a substantial decline in those reporting themselves as being involved in other activities such as housework or as being unemployed.

The question is whether those reporting themselves as studying are doing so because they are unable to find employment, or whether the decline in employment is because they are choosing to study. This is indeed a difficult question to answer.

But what is interesting is that the unemployment rate reported by those included in the labour force, especially on a weekly and daily status basis, has risen quite sharply. This suggests that what may be driving rural and female individuals to report themselves as being occupied with education maybe the inability to find employment, resulting in the declaration of education as principal activity.

Even if this were not true, the evidence has significant implications. In particular, it suggests that the shortfall in youth employment relative to the youth population is not as much of a problem because it partly reflects a restructuring of the labour force in the direction of greater education.

Second, it suggests that the challenge set by the demographic dividend is that of meeting the aspirations for education of a generation that is currently rapidly expanding. Finally, it implies that the system must readjust itself so as to offer a greater number of jobs for an educated workforce that is now bound to make new demands.

Therefore, as of now, the expectation that the demographic dividend would itself trigger processes that would help exploit its benefits does not seem to be warranted in the Indian case.

Thus far, the task of absorbing an increasingly youthful workforce has been postponed rather than undertaken. If the challenge is not met soon, the dividend can prove a liability.

The implication is clear. Just as the "excess population" argument failed to recognise the benefits that can be garnered if these excess workers could be put to work, the "demographic dividend" argument ignores the fact that available workers are not automatically absorbed to deliver high growth. Strategies exist to exploit the demographic window of opportunity that India has today. But they need to be adopted and implemented.

India's experience during the liberalisation years suggest that markets do not ensure that they would, resulting in the waste of a potential resource that the country's demographic transition temporarily offers.