Does demography advantage India?

Print edition : January 27, 2006

Newborn babies at a hospital in Agartala. The theory that excess population is bad for the economy is dismissed by its critics on the grounds that every mouth to be fed comes with two hands that can be put to work. - UMASANKAR ROY CHOUDHURY/AP

The window of opportunity provided by a relatively large and young workforce, a result of the demographic dividend, has opened for India. The policy environment, however, is not conducive for exploiting this advantage.

FOR those in search of simplistic explanations of underdevelopment, excess population has always provided an easy way out. Large populations are seen to result in high levels of aggregate consumption at even low levels of per capita income, resulting in small surpluses. Since these surpluses must be spread thin across the population, their effects in terms of growth of employment and income are seen as limited. Moreover, with limited resources thinly spread because of large numbers, the tasks of feeding the population, ensuring universal access to education and health and delivering basic services like water and sanitation are seen as near impossible. The conclusion then is that the growth of population has to be controlled if economic growth has to be triggered and the quality of life improved.

Those critical of the "excess is bad" point of view dismissed it on the grounds that every mouth to be fed comes with two hands that can be put to work. Economists with the latter perception have seen the problem of development as being one of employing more workers in more productive activities that can yield larger surpluses without depriving them of the basket of goods they currently consume. If the larger surpluses thus garnered are invested, growth would accelerate. The economic problem in poor countries was that of identifying and implementing a strategy that can make this happen.

More recently, however, a view has gained ground that what matters is not the size of the population, but its age structure. A population "bulge" in the working age groups, however large the total population, is an inevitable advantage. Thus, India, which is beginning to be characterised by such a bulge is seen as advantaged, despite its large population. This has provided one more argument to those who see it emerging as a regional (or even global) power in the not too distant future, even displacing China as potential world leader.

This demographic advantage or dividend to be derived from the age structure of the population is traced to the fact that India is (and will remain for some time) one of the youngest countries in the world. A third of India's population was below 15 years of age in 2000. In 2020, the average Indian will be only 29 years old, compared with 37 in China and the United States, 45 in Western Europe, and 48 in Japan. The demographic process this implies would create a large and growing labour force, which is expected to deliver unexpected spin-offs in terms of growth and prosperity.

The demographic dividend is expected, in this view, to resolve automatically the problem of garnering the surplus over consumption needed for investment. A nation's population can be divided into those in the labour force (say, the 15-64 age group) and those outside it. Given the availability of work and the resulting employment, the division broadens to include those outside the labour force, those available for work but unemployed and those in the actual workforce. Since those outside the workforce would be consuming part of what is produced by currently employed workers, the ratio of those outside the workforce to those in it (the dependency ratio) would be among the factors influencing the surplus available for investment after current consumption. Hence, everything else remaining the same, the higher the share of workers to non-workers, the larger would be the surplus. And for given unemployment rates, the higher the ratio of those in the labour force to those outside it, the larger would be the surplus.

Observed demographic trends suggest that both the size and age structure of the population (and therefore the dependency ratio) in all countries tend to change over time because of the nature of the demographic transition. The latter is characterised by the fact that death rates tend to decline before declines in the birth rate set in. According to demographers, initially, the death rate tends to decline because of declines in infant and child mortality resulting from improved public health interventions related to water and sanitation, and to medical interventions such as vaccine coverage and the use of antibiotics. Improved knowledge and reduced costs allow for these factors to be exploited even at relatively low levels of per capita income so long as political pressure or the political will to provide basic social services and rudimentary health facilities exist. At a later stage the decline in the death rate and increases in average life expectancy result from reduced death rates in the middle and older age groups because of higher incomes, improved lifestyles and better and more expensive medical technology.

As compared with this, birth rate reductions depend on the age of marriage and the fertility rate. Both of these depend on the level of development to a far greater degree. Development often leads to the dilution of social norms prescribing early marriage and fertility rates within marriage decline as higher child survival rates, female education and labour market opportunities associated with development reduce the desired family size. Though social policy can make a substantial difference to child survival rates and female education, and family planning programmes can influence the desired fertility rate, the decline in birth rates tends to begin well after the decline in death rates sets in.

The difference in the relationship between death and birth rates on the one hand and development on the other affects not just the rate of population growth but the age structure of the population. The initial fall in infant mortality and improvement in child survival results in a boom generation, with a larger number of people in the younger ages. After some time, the lagged fall in fertility rates reverses the baby boom, resulting in a bulge in the younger ages. As is to be expected, the bulge created by the baby boom moves up the age structure resulting in the fact that at some point the population in the working age (15-64) is much higher than it was previously and would be subsequently. Finally, the bulge enters the old-age bracket, as is happening in the developed countries and epitomised by Japan currently.

Given our earlier discussion of the implications of the dependency ratio for surpluses available for investment and growth, it should be obvious that this shifting age structure can have significant implications for economic growth. Periods characterised by a low dependency ratio would be characterised by higher growth, if the inducement to invest surpluses exists, whereas periods characterised by a high dependency ratio would be characterised by a slowing of growth, unless productivity increases raise the output of a smaller proportion of workers enough to neutralise the demographic deficit. But if the "window of opportunity" available when the population bulge enters the working age groups is to result in an acceleration in growth, the processes of development which in part created this bulge must have been such as to ensure that the quality of those entering the workforce is of the desired level and that these workers find employment opportunities as and when they enter the labour force.

Despite the demographic determinism that characterises the work of those who emphasise the significance of the demographic dividend, many of them admit that there is no guarantee that the benefits of the "window of opportunity" created by the population bulge may remain underexploited. To quote analysts David Bloom and David Canning, "both empirically and theoretically there is nothing automatic about the link from demographic change to economic growth. Age distribution changes merely create the potential for economic growth. Whether or not this potential is captured depends on the policy environment". Thus while East Asia's macroeconomic performance is seen as being tracked quite closely by its demographic transition, with as much as a third of its "miracle growth" estimated to be on account of the "demographic dividend", Latin America is seen to have "stumbled" during the 1950s and 1960s, when its demographic trends resembled those in East Asia.

The real problem is the use of a notion of the dependency ratio, defined as the ratio of the non-working age to working-age population rather than the ratio of non-workers to workers. The difference between the two is determined by the extent of absorption into work of the available labour force, which must take account of unemployment and underemployment. This difference explains why some countries are able to exploit the demographic advantage while others are not.

INDIA is indeed in the midst of a process where it faces the window of opportunity created by the demographic dividend. During the first two decades of post-Independence development, while infant mortality rates fell significantly, the fertility rate remained more or less stagnant. This would have increased the population of young people significantly, merely because of greater child survival. In the three decades since then, though the fertility rate has been declining, the infant mortality rate has fallen quite sharply, with possibly the same effect.

The effect of these trends on the dependency ratio defined merely in terms of age groups is quite visible. The total dependency ratio began to fall from 79 in 1970 as the child dependency ratio fell with the baby boom generation moving into working-age groups and with old-age dependency rising only marginally because of reduced death rates in older age groups. It is estimated to have fallen to 64 in 2005. Thus India had begun to reap the demographic dividend around 1980. But the process is likely to extend well into this century with the age-based dependency ratio projected to fall to 48 in 2025 because of continued fall in the child dependency ratio and then rise to 50 by 2050 because of an increase in the old-age dependency ratio as the bulge moves forward and the death rate in the older income groups declines. The window of opportunity offered by a population bulge has clearly opened for India.

The problem, however, is that the evidence on the employment of these new workers is disconcerting. Results of the National Sample Survey relating to 1999-2000 and the 2001 Census of India reveal a sharp, and even startling, decrease in the rate of employment generation across both rural and urban areas. Indeed, so dramatic is the slowdown in the rate of employment growth that it calls into serious question the pattern of growth during the years since liberalisation began. This is true of India's young population as well. The rate of growth of employment in the 15-30 age group, which stood at around 2.4 per cent a year between 1987 and 1994 for both rural and urban men, fell to over the 0.7 for rural men and 0.3 per cent for urban men during 1994 to 2004. This deceleration in employment growth suggests that the advantage offered by a young labour force is not being exploited.

The implication is clear. Just as the "excess population" argument failed to recognise the benefits that can be garnered if these excess workers could be put to work, the "demographic dividend" argument ignores the fact that available workers are not automatically absorbed to deliver high growth. Strategies exist to exploit the demographic window of opportunity that India has today. But they need to be adopted and implemented. India's experience during the liberalisation years suggest that markets do not ensure that they would, resulting in the waste of a potential resource that the country's demographic transition temporarily offers.

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