At the function to launch the Tata Nano recently, the iconic car was celebrated as a tribute to the creativity of the young people of India, who stand as a beacon of hope for the country. This message is one that is not to be lost on any marketee. Of all the things that make our country unique, perhaps most striking is the unique youthfulness of its demography, a very visible and yet sometimes ignored strength that can help us rise to the ranks of developed nations.
Over 50% of Indians are below the age of 25. This relative youthfulness is in stark contrast to say Hungary where, as the The Wall Street Journal commented recently, a nation of 10 million supports three million pensioners by spending 11% of the gross domestic product (GDP) on pensions. A similar situation exists in many East European countries, thanks to the generous legacy of the communist years. Economists fear the inevitable unsustainable fiscal deficits caused by skewed demographics will act as a drag on the growth in Europe. German companies and Italian banks, for instance, fret about the slowdown in Hungary where their exposures are large.
Across the Atlantic, a smaller group of Reagan babies now have to pay the bill for the large army of baby boomers. Future US governments may not be able to provide for the social safety nets put in by Franklin D. Roosevelt after the Great Depression. In their book, The Coming Generational Storm: What You Need to Know about America’s Economic Future, Lawrence Kotlikoff, professor of economics at Boston University and his co-author Scott Burns argue that social security and medicare, etc., will need more than $50 trillion (Rs2,495 trillion) over the next three decades to fulfil their obligations to the 70 million baby boomers who are easing into retirement. Funding this amount will be difficult given that there are only two workers supporting each pensioner now, a ratio 20 times worse than in 1945. Interested readers may want to peruse Anya Kamenetz’s Pulitzer- nominated book Generation Debt to hear live stories of intergenerational angst in the US. As a greater share of wealth goes to support an ageing workforce, one would expect an inexorable plateauing of growth rates.
India’s story, as always, is materially different. The dependency ratio for India, a reflection of the number of dependants to the growth generating workers, at 0.6 is expected to decline precipitously to 0.4, such that by 2030 the average age of an Indian, at 27, would be much lower than China at 37 or Japan at 48. Given that a nation’s working age population constitutes the majority of savers, the Indian savings rate is anticipated to continue at close to its current level of 34% and, if well utilized, can drive further growth. This situation, where you can have a large number of potentially productive workers (and consumers) who drive higher than normal growth rates, is the so-called demographic dividend (a term made famous by economist David Bloom of Harvard).
Youthful country: A large number of potentially productive workers and consumers can help drive higher than normal growth rates. Harikrishna Katragadda / Mint
There is, unfortunately, a catch to this quick path to growth. If this particular theory is to hold good, it needs not just the accident of demographic change, but also an ability to absorb an increasing large number of young people into the workforce. Yet, the National Sample Survey as early as 2000 found that true employment growth over the past few years is less than 1%. This number ominously suggests that the advantage of the so-called demographic dividend runs the risk of not being exploited. Economists believe that much as the over population argument masked the advantages that accrue from a well employed population, the converse is also true, i.e high levels of young people do not necessarily imply a demographic dividend. The largest contributor to readiness for the decade of the dividend is the creation of opportunities for employment. As there are no parallels to the creation of organized employment for over 500 million people, we will need to open up opportunities to enable Indian youth to generate much of the employment themselves. This will require governments to focus their energies on greater financial and educational inclusion through a variety of measures that ultimately encourage job- creating entrepreneurship.A few of these measures are listed below.
Given the critical status of access to education, as a force for economic mobility, one would suggest that incentives be provided to the private sector to support greater and more meaningful education, at the right price. Could not some form of a subsidy be provided to eligible corporate groups to materially increase the quality of education as opposed to a current government-sponsored system that has not quite worked?
Individuals are also inclined to make entrepreneurial investments only if there are some safety nets, which can offset the greater risks associated with entrepreneurship. These safety nets could be established through greater incentives for insurance or even federal guarantees for those who support certain types of risk-taking.
Credit delivery in India continues to be too low to generate true entrepreneurship. Given the fact many eligible borrowers are turned away to avoid a few undeserving ones, could not the use of retail credit ratings, as done by agencies such as Equifax overseas (Cibil in India), be made mandatory so that almost everyone can become a candidate for some level of organized credit?
Equally, financial institutions are also unlikely to lend if they can not even trace the residence of their borrower, a situation common in India. In most developed countries, the social security number or similar ID is used for this purpose, which makes tracking of an individual easy. The absence of some such identifier has resulted in the vast majority of honest borrowers being denied credit. Ironically, efforts to create such a citizen ID appear to have gotten scrambled due to what appear to be political motivation.
Entrepreneurship also needs tax and other institutional structures that incentivize bond markets and venture capital, thereby increasing these alternate sources of funding to small businesses. Furthermore, given the importance of collateral as a means to secure financing, many studies have shown how lending increases exponentially when courts are seen to be effective in enabling the seizure of collateral. If we were to see special courts that can enable quick repossession of collateral and provide protections, such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, to a wider class of lending situations, there would be much greater willingness to lend.
On a more personal note, as I work for Tata Capital, a non-banking finance company (NBFC), there is a very strong case to encourage non-banking institutions to increase the velocity of credit delivery. NBFCs have been hamstrung by restricted access to various routes of capital raising and all appear to have been tarred with the same brush of scepticism, perhaps owing to a few failures. One hopes that the government will see strong and well capitalized NBFCs as a significant weapon in the war to create faster growth and greater employment through their lending to less financially strong borrowers
As it seems unlikely than any government can actually create 500 million new jobs to tap the demographic dividend, the real onus on the government and businesses is to provide conditions which enable such entrepreneurship, through measures such as the above. Nandan Nilekani in his book, Imagining India, points out that if the animal spirit of entrepreneurship of the large young workforce is truly unleashed, we could see 5-6% growth for nearly half a century, a period of high growth almost unprecedented in the economic history of a giant country.
As we approach an election, all parties would do well to recognize the demographic dividend as one final chance to materially improve Indian economic strength. In this context, it would have been reassuring if there was more noise about access to capital, education and employment on the agenda of major parties, and less discussion about the complicated contortions over different electoral alliances. What citizens can do is elect a government whose policies come closest to helping us grab this one-time only window of opportunity to enfranchize at least a billion people.
Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes on issues related to governance. The views expressed in this column are personal. Write to him at email@example.com