By its own estimate, the Indian government expects the economy to close 2024-25 with an expansion of 6.4%. That would make India one of the fastest-growing economies, but it’s still some way from maximising its unique demographic moment.
The perils of not being able to do this were highlighted in a recent research report by Saurabh Mukherjea of Marcellus Investment Managers, who pointed to growing indebtedness in the middle class amid flat incomes and the prospect of job losses due to automation.
India’s unique demographics hold the prospect of a ‘demographic dividend’ –economic growth potential that can result from shifts in a population’s age structure. This is measured as the dependency ratio—a country’s dependents (those below 15 years and those above 64 years) as a proportion of its working-age population (15-64 years). When this figure falls below 50%, as it did for India in 2019 as per the United Nation’s World Population Prospects 2024, the potential for a demographic dividend is said to have kicked in.
Over the past 60 years or so, several countries have benefitted from a demographic dividend. Of the eight countries considered here, four posted double-digit economic growth (in nominal terms) over their demographic-dividend period. Of these four, China, Vietnam and Ireland grew faster than in their previous 10-year period. So far, India has managed neither.
India faces the additional challenge of having the lowest per-capita income in this set. What’s clear is that countries with favourable demographics don’t automatically experience higher economic growth. Building blocks such as investments in education and healthcare, coupled with ease of doing business and job creation at scale matter immensely.
Creating the dividend
Several factors contribute to a demographic dividend. One way it happens is that families have fewer children. That means fewer dependents to take care of. This gives parents more time to focus on employment, the economic benefits of which allow them to invest more in their children. These effects are amplified if a family has several working members. Such a scenario can happen naturally with changing social attitudes, or it can be artificially created, as China did with its one-child policy between 1979 and 2015.
India’s demographic-dividend period started in 2019. According to the Indian government’s Economic Survey for 2018-19, it’s expected to peak around 2041, when the share of the working-age population (which it defines as 20-59 years) is expected to hit 59%. It adds: “With changing demographic composition, India’s age-structure by 2041 will resemble that of China and Thailand as seen during the current decade.” In other words, India’s demographic-dividend period is expected to last 22 years.
China’s meanwhile has been underway for the past 27 years. Before China, Japan’s lasted 40 years, from 1963 to 2003. Japan was the earliest such success story, increasing its per-capita income from less than $700 in 1962 to more than $10,000 (in purchasing-power-parity terms) in 1981, when it emerged as the world’s second-largest economy. Post-war reconstruction, industrialisation and investment in education helped Japan.
In recent years, China has emerged as the clear winner, with its per-capita income multiplying by 2.7 times since 1996. The economic reforms it embarked on in 1978 helped Asia’s largest economy to grow faster in the 1980s. The demographic dividend was a big factor in not only sustaining this growth but bettering it over the next three decades.
Leveraging the dividend
Of the eight countries in our set, only three—China, South Korea and Thailand—experienced a dependency ratio of below 40%. China’s was from 2005 to 2015. In 2005, China’s poverty rate was 30.2% and per-capita income was $1,508. By the time its dependency rate crossed 40% again in 2015, its poverty rate had declined to 5.7% and per-capita income was at $8,016. Its average annual GDP growth rate during this period was 17% in nominal terms.
India needs a similar growth spurt and can’t take favourable demographics for granted. For example Thailand, which experienced a dependency rate of less than 40% for five years between 2011 and 2016, had a different experience than China. Its per-capita income increased on average by just 2% a year during this period. Political uncertainty (a military coup in 2014) and export slowdown were among the reasons.
Investments in education have been critical to unlock the demographic dividend. Thailand and China increased enrolment in secondary schools – the base level for better job prospects – during this period, while South Korea and Japan had already achieved good levels. People with better skills help increase labour productivity and give companies the confidence to invest. The alternative scenario, currently playing out in India, is a workforce trapped in low-skill and low-wage jobs.
India should thus focus on increasing labour productivity. Among the set of eight countries, India’s labour productivity is the lowest, even below Vietnam’s. Training the workforce in employable skills to spur employment – even as the government creates a favourable environment for investments (both foreign and domestic) – will be key to success. Does India have the political will and the economic strategy to enable labour productivity growth?