Invest now to encash India’s peaking demographic dividend

The Economic Survey, tabled in Parliament one day before the presentation of the Union Budget, is a report card on the economy and also carries forecasts for the next year. In recent years, it also contains analytical treatment and the basis for economic reforms, both completed and pending. The treatment is very lucid and academically sound. Many observers feel that the Survey often acts as a harbinger of policies to come. This year, too, the Survey does not fail to impress. It contains a solid 25-page chapter on demonetisation, probably the first such definitive account from the government, on the costs and benefits of the big bang measure of November. 

The peculiar thing about India is that the ratio of working age to non-working age people (the dependency ratio) is not as high as other East Asian economies or even China at their peak. So China’s peak at 2.4 was already over by 2010. China is now ageing. India’s peak is at only 1.7 but this will remain for a long time. So India can enjoy the demographic advantage well up to 2040.

The Survey is organised into 14 chapters spread over nearly 400 pages, covering virtually all aspects of the economy and economic policies. One particular segment, which follows the preface of the Survey, is called “Eight Interesting Facts About India” and includes facts, about the demographic dividend.  India’s working age population is increasing; the average age of the country will remain young for a long time, and lead to great advantage for the economy. Having a much higher share of working age people in the population, the so called demographic dividend, is something other countries went through. It is now India’s turn.

This section of the survey is an eye-opener even for seasoned students of the Indian economy. These eight interesting facts are as follows. Firstly the magnitude of internal migration in search of jobs is much greater than is popularly imagined. Second is the fact that India’s ranking by international rating agencies, is rather odd, if not patently unfair. It is not a well-known fact that India’s rating on the eve of its 1991 crisis was actually higher than after ten years of solid economic reforms! The third fact is a stark picture of regional mis-targeting of social spending. The districts accounting for 40 per cent of India’s poorest receive only 29 percent social spending. They should in fact be getting disproportionately more. Fourth is the divergence between voters and taxpayers. In a country like Norway, for every 100 voters, there are 100 people who pay income tax. In India for every 100 voters there are only seven taxpayers.  The fifth interesting fact is about India’s demographic dividend. The sixth is India’s rather remarkable openness, both externally (in its trade to GDP ratio) and internally (trade across state boundaries).

The seventh fact is actually a mystery. Unlike almost all other economies, and sub-economies in the world, the Indian growth and development pattern is showing increasing regional divergence. Poorer states of India are supposed to grow much faster than richer ones, leading eventually to some sort of convergence. This is not seen, and indeed the trend is exactly the opposite. The last interesting fact, also covered in great detail in the last chapter of the Survey, is how poorly the property tax potential is harnessed in cities of India. As the rate of urbanisation is high, we need cities to become increasingly self-reliant for their funding, and underexploiting property tax potential is not the way to go. In large metros like Mumbai and Bengaluru, land is as precious as gold, but the municipalities are poor, since property taxes are miniscule. 

Let’s dwell on the fifth interesting fact, about the demographic dividend. This is a much discussed and celebrated feature. That India’s growing working age population is increasing and the average age of the country will remain young for a long time. Having a much higher share of working age people in the population (the so called demographic dividend) is advantageous because the young tend to be more productive, they save more, adding to investible capital, and they are a source for fiscal support (i.e. taxes). All countries went through this demographic transition, and it is now India’s turn.

Intra-country labour mobility helps reduce the differences caused by the demographic imbalance. So don’t be surprised to find Bihar labour driving the economic growth of Kerala. But local politics might clash if growth and employment opportunities shrink. Anti-migrant feelings surface whenever the economic pie is not expanding.

The peculiar thing about India is that the ratio of working age to non-working age people (the dependency ratio) is not as high as other East Asian economies or even China at their peak. So China’s peak at 2.4 was already over by 2010. China is now ageing. India’s peak is at only 1.7 but this will remain for a long time. So India can enjoy the demographic advantage well up to 2040. But here’s the rub. That peak has already been achieved. So there is no significant upside left, as far as increasing the working age to non-working age ratio is concerned. Secondly India’s 1.7 ratio hides a stark intra-country disparity.

Some states, most notably all four large states in the South, as well as West Bengal, are already ageing rapidly while states like Uttar Pradesh, M.P., Bihar and Rajasthan have higher ratios. The total fertility rate (TFR) varies from 3.5 in the north to barely 2 in the south.  At the peak of the demography dependency ratio, the additional kick to economic growth is about 2.6 percent.  That bonus growth will soon recede, since India already achieved its peak.  But poorer states that still have higher ratios can continue to harness higher growth so long as reform policies allow that. 

There are stark differences across ageing but richer South and still-young, but poorer North.  Intra-country labour mobility helps reduce the differences caused by the demographic imbalance. So don’t be surprised to find Bihar labour driving the economic growth of Kerala. But local politics might clash if growth and employment opportunities shrink. Anti-migrant feelings surface whenever the economic pie is not expanding. And that becomes a fertile catchment for local politics.

 Economic reforms must hence urgently address these twin challenges: that the country’s demographic ratio has peaked and the growth dividend must be quickly encashed. And the stark intra-country divergence in the ratio and demographic imbalance should be addressed by suitable labour policies and reforms. And finally we must remember, the demographic dividend is a promising opportunity. It becomes a reality only if met with preparation in the form of reforms, skilling and investment in human capital. This too is an urgent task ahead of us.  

The writer is a senior economist based in Mumbai.