‘Demographic dividend’ is not a given

Browsing Indian economic news on the internet and watching it on the television can be a surreal experience. Economic news in India is dominated by ups and downs in the share market, minutiae about winners and losers of changes in taxation rates and subsidy policies, visionary statements of people in power about India’s potential growth rate, to name some. Discussions about unemployment, which shapes debates about the state of the economy in the UK, my country of residence, are remarkably low-key.

There could be good reason for that. Perhaps — to quote Baba Ramdas of Three Idiots fame — “all is well”. After all, according to the World Bank, India’s 2010-14 unemployment rate is 3.6 per cent, much below the corresponding figures for the UK and most developed countries. Scratch the surface, however, and problems emerge.

India’s labour force participation rate is around 60 per cent. A joint publication of the US Bureau of Labor Statistics and the ILO suggests that, in 2010, among 35 major economies of the world, India’s labour force participation rate was ranked fifth from the bottom. China and Brazil, two of India’s Brics competitors, recorded the highest labour force participation rates. At less than 30 per cent, India had the lowest women’s labour force participation rate, less than half the corresponding rates for China and Brazil. An OECD publication confirms this: in 2012, in the Asia-Pacific region, labour force participation rate in India was higher than those of just three countries, namely, Timor-Leste, Sri Lanka and Pakistan.

Dig further, and an even more disturbing picture emerges. A 2012 Gallup poll indicated that only about one in four adults is in full-time employment. This survey, which takes into consideration all adults and not just the labour force participants, found that unemployment and underemployment are particularly high among the 15- to 30-year-olds. Further, nearly half the full-time workers had blue collar jobs in the agricultural sector. In other words, not only has India not been able to utilise a very significant proportion of its labour force, especially women and younger citizens, it is yet to move a very large proportion of workers from the agricultural sector to higher value added occupations in the manufacturing and services sectors.

Would a manufacturing sector boom, led by the ‘Make in India’ initiative, and a more flexible labour market be a panacea? Whether or not India becomes a manufacturing hub, it is unlikely to resolve the problem of underutilisation of India’s most abundant resource, its people, and the attendant problems of poverty and deprivation. Estimates of employment elasticity reported by Reserve Bank of India economists suggest that the impact of economic growth on employment from 1999-2000 to 2009-10 was high only for three sectors, namely, construction, finance and real estate, and mining and quarrying. It is very unlikely that labour market flexibility alone explains these low employment elasticity rates.

Three challenges stare Indian policymakers in the face. First, technological change is making labour partially or wholly redundant in a number of sectors, across the world. Second, where labour is still necessary, increasing complexity of production requires labourers to have a minimum skill level that is much higher than the skill level required during the labour-intensive output boom in China and South-East Asia in the past decades. Third, displacing China as the global manufacturing hub requires the creation of a comparable ecosystem that can successfully compete with the agglomeration economies enjoyed by the Chinese manufacturing industries. In the best of times, that is a very tall order.

Whatever the future of India’s manufacturing sector, therefore, the future of India’s labourers is likely to be in construction, mining and other services. While ‘Make in India’ can be justified by its own right, policymakers have to simultaneously provide an ecosystem to sustain greater labour force participation through sectors that are more likely to create jobs, and ensure that labourers are protected from the impact of temporary and the cyclical nature of jobs in those industries.

That, in turn, calls for more and better schools, especially in rural areas, not new IITs and IIMs. It also calls for better transportation links between rural areas and regional urban hubs, alongside high-speed rails. It calls for emphasis on a welfare state infrastructure with the same intensity as the emphasis on four-lane highways and larger ports and airports.

There has long been glib talk in India about its demographic dividend. Like most good things, this dividend has to be earned. It’s not the proverbial manna from heaven. Indeed, not earning it is not an option given the gap between the rising aspiration of the people and their economic status. Time perhaps for a little less focus on Dalal Street and tax exemptions, and a little more focus on the people.

The writer is chair in finance at Sheffield University Management School, UK

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