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With a population of over 1.3 billion people, there are many challenges facing India, including coping with the current public health emergency, creating more jobs, managing macro-economic shocks, and mitigating climate change. But India also has a hidden asset: its young demographic profile.

India has the potential to achieve a much faster pace of economic growth than both China and the US. Its demographic profile should increase growth through five distinct forces. The first is the swelling of India’s labour force as its baby boomers reach working age. The second is the potential to divert resources from spending on children to investing in physical and human infrastructure. The third is a rise in women’s workforce activity that naturally accompanies a decline in fertility. The fourth is that working ages also happen to be the prime years for savings, which is key to the accumulation of capital and technological innovation. And the fifth is the further boost to savings that occurs as the incentive to save for longer periods of retirement increases with greater longevity.

India’s least economically developed states (Bihar, Uttar Pradesh, Madhya Pradesh and West Bengal) will benefit the most from that demographic dividend. India is at a point in its demographic transition where a focus on the policy environment will maximize the chance of capturing the benefits.

The economic benefits of a demographic transition do not arise automatically. They require policies that capture the dividend thereof. There are several policies that can capture it. Let’s examine these.

First, investments in human and physical infrastructure will need to be scaled up dramatically to promote entrepreneurship and create jobs. Investment in education is crucial for ensuring that working-age people are prepared for the demands of the economy. As industry and services have come to have considerably larger roles, the need for an educated workforce has grown.

Second, promote entrepreneurship and job creation. With a historically large share of the population being of working age, this task becomes particularly important. Although there is no single pathway that works for all countries, there is broad agreement about the relative power and role of entrepreneurship in capturing a demographic dividend. India needs to facilitate the absorption of labour into productive employment, promote relevant programmes and policies, and have well-trained people in place to reach these objectives. Governments that ensure respect for property rights, the sanctity of contracts and the rule of law are more likely to be able to create an economic environment that will facilitate realization of the dividend sought.

Third, it is now time to implement the next generation of economic reforms to deliver efficient public services, particularly focused on long-neglected social needs related to nutrition and health services, primary and secondary schooling, quality enhancement of tertiary education, water supply and sanitation, and urban development.

We must avoid pitfalls. What will happen if India fails to capture its demographic dividend? The most likely effect will be that a large number of young working-age people will be left unemployed or underemployed. This is already a rising concern, with the covid pandemic having impacted an estimated 300 million people so far. This situation could become much worse than it is now. A large number of jobless people will increase the share of the population that is dependent on workers, further slowing growth. The economic insecurity of the elderly will increase, because there will be fewer productively employed workers to generate the wealth on which both governments and families rely to support their elderly and unwell.

India already faces a jobs crisis as investments in human infrastructure have not kept up with its demographic transition. Women workers have been hit the hardest, with their labour force participation rate in India being one of the world’s lowest. While overall labour force participation is declining globally, on average, women’s participation has increased in high-income countries that have instituted gender-sensitive policies like parental leave, subsidized childcare and increased job flexibility. There is a lesson in this for India.

To get the desired demographic dividend, Indian policymakers need to identify which skills are in demand, and also the strongest growing sectors of the economy, both in manufacturing and modern services. Skill enhancement and training for the acquisition of these skills should be the focus of educational and employment programmes. India needs to increase the supply of a large and highly educated labour force. Schooling policies need to deliver higher quality and also greater educational opportunities for young men and women.

Right now, however, India faces a critical challenge in dealing with its public health emergency of a huge second wave of covid infections. Policymakers need to urgently scale up levels of testing, reduce implementation failures in containing the spread of coronavirus, and minimize its impact on other health services.

The country must also do more to help the numerous families impacted by the covid pandemic, especially low-wage workers displaced from their jobs by lockdown curbs and a weakening economy.

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