Youthful Demographics: India's Economic Opportunities and Challenges | Mint

Youthful Demographics: India's Economic Opportunities and Challenges

Photo: HT
Photo: HT

Summary

A huge population is an advantage only if we have enough jobs to convert a demographic fact into an economic opportunity

The United Nations (UN) has said that India will overtake China as the world’s most populous country this year. The statement has naturally attracted a lot of public attention. There can be some debate on whether this demographic event will take place this year or not. India has not had a full census since 2011. All we have right now are estimates. The UN says that there will be 1.43 billion Indians by the middle of 2023. Indian government estimates are lower. The Technical Group on Population Projection of the Indian census office said in July 2020 that it expects a population of 1.39 billion in 2023—or 53 million less than the UN estimate. However, there is little doubt that India will inevitably overtake China on the population front. It is only a matter of time.

The UN report has reignited the old debate whether India can take advantage of its demographic advantage before its labour force peaks and the population begins to age. And especially whether India can catch up with China before the demographic window shuts in the coming decades, especially as that country moves into a slower lane because of factors ranging from a declining labour force, misallocation of capital and perhaps low productivity growth in case the West’s geopolitical thrust to deny it access to new technologies is not countered with domestic innovation. Meanwhile, a fact check: India is currently around 15 years behind China in terms of per capita income at market exchange rates. In other words, our current level of average income is what China had in 2007.

Graphic: Mint
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Graphic: Mint

One useful starting point is to compare contemporary India with some other successful Asian economies when they were at a similar demographic juncture in earlier years. The one number considered here as a broad proxy for the demographic structure in a country is the median age of its population—or the age of the person in the middle in case every citizen is lined up in either ascending or descending order of age. India right now has a median age of around 28 years. Many other Asian peers had a similar median age earlier, from Japan in 1970 to Malaysia in 2017 (see chart). This is broadly the point when most of these countries were in the midst of extraordinary economic booms. Not everything can be ascribed to demographics. For example, China had a median age of 28 in 1999, and the subsequent economic acceleration also coincided with its entry to the World Trade Organization.

Economists usually account for economic growth in terms of its three main drivers: the size of the labour force, the investment rate and productivity growth. A country whose people are mostly of working age tends to have higher domestic savings and investments, since the number of dependents per working person is relatively low. There are some nuances to be considered. For example, the quality of the labour force in terms of education, health and skills also matters. The usual thumb-rule is that countries in their early stages of development tend to drive economic growth using more inputs; typically, they have a higher investment rate as well as an increasing labour force. Productivity tends to play a more important role in the later stages of development.

The data shows how India and six other successful Asian economies fare in terms of average income, the investment rate and labour force participation when their median age was 28. The numbers tell an interesting story. First, each country had a very different level of per capita income when its median age was 28. That also partly reflects initial conditions in the year they had a similar age structure as India’s today. Second, the investment rate in each of these countries at that point of time was broadly in the same range, between 25% to 40% of gross domestic product. Vietnam and Malaysia are on the lower side, Japan was at the higher end, while China maintained a very high investment rate in the two decades after 1999.

The big difference between India and the other six countries is in the labour force participation data, or how many people of working age are in the labour force. India’s labour force participation rate is much lower than what the others reported at that time, and this gap ranges from 15 to 32 percentage points. Much of this wide gap is explained by very low levels of female participation in the labour force, as the table here shows.

The upshot: India has been unable to productively employ its young population, especially females. The result is that Indian economic growth in recent years has been largely powered by the more intensive use of capital as well as productivity growth. Many recent statistical studies have highlighted the same structure. One way to boost potential growth is to create the conditions for higher employment, something that India has been struggling with in recent decades, even though the claims of “jobless growth" may be exaggerated.

Having the world’s largest population is an advantage only if there are enough jobs to convert a demographic fact into an economic opportunity.

Niranjan Rajadhyaksha is CEO and senior fellow at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.

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