How Can India Benefit From Its Demographic Dividend?
India’s demographic is changing, with the increase in the ratio of working-age people to dependent and it is very different compared to China and the USA, where the ratio of working people to dependent population is declining, due to its ageing population.
India is at a point in its demographic transition where a policy environment needs to be created to maximise the chance of capturing the demographic dividend.
It is important to recognise that the demographic dividend does not arise automatically when the demographic transition takes place and the policies chosen can have a large effect on the outcome.
A high share of working-age people is beneficial only if those people are employed. If they are unemployed, the outcome will be problematic.
As the ratio of working-age people to dependents is rising, now is the time when the dividend is on offer. A key priority is to take action to create an environment in which the youth bulge can be productively employed.
The “low road” for achieving high employment, characterised by a focus on expanding low-wage jobs, has not worked in all countries and often led to continued poverty traps. A “high-road” approach, characterised by seeking to build up types of employment that reward workers’ skills with higher wages are attractive, but it has also proven difficult for many countries.
As there is no single pathway that works, India needs to explore different options to strengthen the role of labour in growth. When India was primarily agricultural and especially when agriculture depended primarily on unskilled manual labour, it was possible to suggest that education was not a major factor affecting a country’s productivity.
As agriculture gets mechanised and as industry and services have come to have considerably larger roles, the need for an educated workforce has grown. As high-value-added industries come increasingly to the fore (think, for example, of information and communications companies), the demand for educated workers will grow.
However, even in a wide range of services and industries that do not rely on cutting-edge technologies, having well-educated workers who are easy to train for ever-evolving positions is important to benefit from the demographic transition.
Policymakers will also need to improve the quality of government institutions to capture demographic dividends. If they choose to design and implement policies that facilitate the absorption of labour into productive employment, it will need to have programs, policies and well-trained people in place to reach this objective.
A policy regime that ensures respect for property rights, the sanctity of contracts and the rule of law are more likely to be able to construct an economic environment that will facilitate the realisation of the demographic dividend.
If policymaking is ineffective, the role it could play in bringing about stronger economic growth by building on the opportunities inherent in the demographic transition may fail.
The efforts to capture demographic transition will need to be supported by appropriate macroeconomic management and an enabling trade environment. High inflation stifles growth, as the uncertainty of the value of future cash flows dampens savings and hinders investment.
Trade policy impacts the ability to capture a demographic dividend, as evidence suggests that neither autarky nor a fully open economy is the most likely route to achieving sustained economic growth. A stable macroeconomic environment will need to be supported by smart trade policies.
Shaping the future
Although the demographic transition can lead to a demographic dividend, the transition can also bring significant challenges with it. The most likely major effect of inaction will be that many young working-age people will be unemployed or underemployed.
This is already the case, but this situation could easily become much worse than it is now. Large numbers of unemployed workers (of any age, but perhaps especially of relatively young working-age people) can lead to increased internal conflict.
In addition, unemployed young people will effectively increase the share of the population that is dependent on workers, slowing economic growth.
The economic insecurity of the elderly will increase because there will be fewer productively employed workers to generate the wealth on which both government and families rely to support the elderly.
Investment in access to healthcare and education and quality improvement in these areas is crucial for ensuring that working-age people are prepared for the demands of the economy.
Advances in these areas are of course important independent of demographic change and the potential for reaping a demographic dividend is an extra spur to policymakers.
Contrary to longstanding development theory, new evidence suggests that services, rather than manufacturing, are particularly effective in leading to sustainable growth. This finding has implications for the type of education that should be offered to students and young adults entering the workforce.
Government institutions face a wide array of challenges. If governments are not up to the tasks they face – of providing infrastructure and other public goods and a legitimate and efficient policy environment and addressing income and social inequality, a potential demographic dividend may be squandered.
India’s economic growth has been improving and to some extent, this change has been impelled by a rising share of working-age people in the population. But full realisation of the demographic dividend depends on policies chosen to capture the demographic dividend.
