Report after glowing report on the long-term prospects for the Indian economy sings hosannas to the country’s demographic dividend. High population growth, earlier feared as a Malthusian curse that would not just pull down economic growth but lead to famines, disease and disaster, is now apparently not bad at all. Here’s what a typical report by a foreign brokerage says, “The combined effect of demographics, structural reforms and globalization will help create a virtuous cycle of productive job creation, income growth, savings, investments, and higher GDP growth.” And why not? At bottom, what the so-called demographic dividend means is that the workforce increases relative to the total population, while the proportion of dependants decreases. That would mean not only higher output, but also more savings and investment, leading to a higher growth rate.
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According to the United Nations data (see chart), India’s dependency ratio or the proportion of those in age groups that are too young or too old to work, peaked in 1965 and has been falling steadily since then. The big changes, however, started happening after 1990, coinciding with the liberalization of the economy. Between 1990 and 2010, the dependency ratio for India, according to UN estimates, has fallen from 72% to 55%. That has been accompanied by high economic growth.
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Writing in 1998, economists David E. Bloom and Jeffrey G. Williamson pointed out that the East Asian miracle “occurred in part because East Asia’s demographic transition resulted in its working-age population growing at a much faster rate than its dependent population during 1965–90, thereby expanding the per capita productive capacity of East Asian economies.” The article went on to say that demographic change in the future would depress growth in the ageing East Asian countries, while it would boost growth in South-east and South Asia.
Stock market analysts, too, have seen a link between the demographic dividend and higher stock prices over the longer term. That would be natural, because if demographic change would lead to higher economic growth, that would be reflected in higher stock prices. That is why reports by foreign brokerages wanting to sell the India story invariably mention its demographics.
For stock market analysts, the ratio that matters most is the MY ratio: the middle-aged to young ratio or the ratio of 40-49 years over the 20-29 years. The idea is that while young people starting out in their careers typically have small incomes and big debts, those in 40-49 age group save and invest, typically in the stock markets. So it’s not just higher growth, but a higher proportion of people investing in stocks, which could result in a higher price-earnings multiple. Last year, a note by Citigroup said Indonesia, Taiwan, India and the Philippines would see the highest growth in MY ratios over the next decade, although it also warned that the correlation between the ratio and stock returns in the region was low.
But, as my colleague Anil Padmanabhan has pointed out in a Page 1 article in this newspaper that has led to a spirited debate on the subject, the most recent National Sample Survey Organisation (NSSO) data showing jobless growth. The chart shows the labour force participation rate (LFPR), or the ratio of labour force to population, according to the so-called usual status classification, or whether they participated in the labour force in the past one year. Simply put, the NSSO numbers show that, between 1993-94 and 2009-10, the ratio of the rural male working force to the population has remained more or less the same, while the ratio of the urban male working force has gone up, although it has declined between 2005 and 2010. The ratio of women’s labour force to the population has declined for both rural and urban areas. In any case, even the magnitude of the increase in male urban labour force participation is far lower than would be warranted by the UN data on dependency ratios.
The point is, whatever happened to the demographic dividend? Some analysts have said that it’s likely that labour participation rates have declined due to better schooling opportunities. The data also sits ill at ease with the rise in wage rates and with anecdotal evidence of labour shortages. But can the overall trend in the NSSO data right from the 1990s be wrong?
And even if it is true that some are withdrawing from work to go to school or because of other factors, that doesn’t alter the fact that, if the data is right, the labour participation rate is lower. That means the much-touted benefits of the demographic dividend for India could turn out to be a myth. Sure, we have had high growth, but it may have nothing to do with better demographics.
Graphic by Paras Jain/Mint
Manas Chakravarty looks at trends and issues in the financial markets. Comment at firstname.lastname@example.org