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Business News/ Opinion / Online-views/  An advantage in danger of vanishing

An advantage in danger of vanishing

The Economic Survey highlights problems in encashing India's most important asset: its demographic dividend

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

Policymakers are usually focused on short-run economic management issues. But, the short run has to be a bridge to the long run." The most important chapter in this year’s Economic Survey—the chapter on India’s demographic advantage, chapter 2—begins with these wise words. The natural question that arises then is: what is that long-run issue that should keep policymakers awake at night and busy in the day? Realizing India’s demographic dividend and ensuring that it does not wither away into a demographic liability surely has to rank as the most important long-run policy concern. Nearly half the additions to the Indian labour force over the period 2011-30 will be in the age group of 30-49, even while the share of this group in China, South Korea, and the US will be decreasing.

That we will be expanding our most productive cohorts even as most developed countries and some developing ones will be contracting theirs presents a significant opportunity as well as a threat. If harnessed well, the demographic dividend can bring about inclusive growth not only because productive jobs are essential to foster economic growth but also because a good job is the best form of inclusion. Moreover, realizing the demographic dividend can pull the Indian economy into a virtuous cycle of growth with meaningful job creation, which would put purchasing power in a large number of hands and increase demand in the bargain. At the same time, since on-the-job training represents the easiest and most viable means to build and enhance human capital, meaningful job creation can increase aggregate productivity by increasing skill levels, on the one hand, and bringing physical capital to match skilled labour, on the other.

However, the danger at the moment is if adequate steps are not taken to harness the demographic advantage, the wasted opportunity could become a potent threat. Unemployed youth can contribute to social unrest such as ultra-left movements. Moreover, unemployed and marginally employed youth are more likely to indulge in crime. It is in India’s interest to lay out a long-term plan to generate enough jobs to maintain peace and social harmony in both India and Bharat.

The second chapter of the survey compares India’s growth path after liberalization with those of other Asian economies—China, Indonesia, South Korea—and concludes that the effects of the demographic dividend would be channelled through increases in labour productivity. It argues that an effective way of increasing labour productivity will be to move workers dependent on low productivity agriculture to higher productivity jobs in organized manufacturing and services. This will also allow those who remain in agriculture to farm larger, more viable plots, employing more mechanized equipment to improve productivity in agriculture as well.

The cross-country comparison leads to a key insight: Contrary to conventional wisdom, India does not employ a greater percentage of its population in agriculture than other Asian countries at similar stages of development after they began liberalizing their economies. Moreover, the share of workers dependent on agriculture has been shrinking at a similar pace as in these countries. Therefore, if India was to follow China’s or Indonesia’s path over the next decade, about 10% of overall employment will be moved out of agriculture into organized manufacturing and services. For this to happen, however, the productivity of jobs in organized manufacturing and services needs to be ramped up significantly. In this context, alarmingly, the survey concludes that India faces a twin problem. On the one hand, while workers are being added to the manufacturing sector, the productivity of the jobs they’re going into has not been high. On the other hand, while the services sector produces highly productive jobs, job creation in this sector has not kept pace with its share of value-added. Thus, collectively between the manufacturing and services sectors, the pace of productive jobs being created is not enough. By assuming that the labour force participation rate, i.e., the ratio of the labour force to the population above 15 years (table 2.1, chapter 2) and the unemployment rate remain the same over the next 10 years, the survey projects that 2.8 million jobs need to be created by 2020. More importantly, small changes in the labour participation rate and unemployment rate can mean that close to 17 million jobs will have to be created by 2020. Thus, both the quality and quantity of jobs require close attention from the policymakers.

By analysing the reasons for the lack of enough productive jobs, the survey details: (i) the disincentives that exist for small and medium enterprises to grow into large firms, which create a substantial number of jobs; (ii) the absence of financial and physical infrastructure; (iii) labour laws that provide India the dubious distinction of having the most comprehensive rules on this in the world even while the largest fraction of the working population lacks elementary protection against exploitation by employers.

Given the gravity of the problem confronting India, it is important that the message of demographic advantage or demographic peril—depending on how one views the situation—should be disseminated and debated widely.

Krishnamurthy Subramanian is an assistant professor of finance at the Indian School of Business, Hyderabad.

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Published: 27 Feb 2013, 07:27 PM IST
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