Economic reforms and welfare schemes are key if India is to make fullest use of its demography

DNA Delhi Aug 01, 2019, 10.10 AM(IST) Written By: Minhaz Merchant

Economy Photograph:( Reuters )

Story highlights

To reflate the economy, Finance Minister Nirmala Sitharaman must focus on structural reforms — tax, foreign investment, privatisation, labour and land. 

JRD Tata famously said population was one of India’s biggest liabilities. Ironically, it may turn out to be one of India’s biggest assets. 

The fabled demographic dividend is already upon us. The dividend kicks in when the total number of Indians in the “productive” age group of 15-65 years surpasses the number of Indians above the age of 65 and below the age of 15. 

India entered this zone in 2018. The productivity dividend is estimated to last till 2055 when the population of over-65s and under-15s will once again overtake the total number of working-age Indians between 15 and 65. The window of India’s demographic dividend will thus remain open for another 36 years. 

The United Nations Population Fund (UNFPA), formerly known as the United Nations Fund for Population Activities, says economic growth peaks during the period when a country’s working-age population of 15-65 is greater than the very old and the very young. 

Japan’s demographic dividend began in 1964, leading to 25 years of high economic growth and the “Japanese miracle”. Though it technically lasted till 2004, Japan’s growth petered out from the 1990s. 

China’s own demographic dividend began in 1996, coinciding with its surging economy and double-digit annual GDP growth, but is expected to last for an even shorter period than Japan’s demographic dividend. The key reason is former leader Mao Zedong’s one-child policy in the 1960s that 50 years later has progressively reduced the number of young Chinese. 

The “greying” of China is one of the keys, but relatively unheralded causes of Beijing’s current economic slowdown just 23 years into its demographic dividend. 

While the trade war with the United States has contributed to a dip in China’s economic growth, the steep fall in the productive population aged 15-65 constitutes a long-term structural economic weakness for China. 

A young productive workforce spurs economic growth, but as a country becomes wealthier, women tend to have fewer children. Lower fertility rates lead to a gradual shift towards an ageing population. Moreover, as people grow richer, they live longer, increasing the ratio of over-65s relative to those in the working-age group of 15-65. 

India’s female fertility rate has fallen dramatically since Independence. It was 5.9 children per woman in 1950, 3.8 in 1994 and 2.2 in 2018. The replacement rate, when births and deaths are roughly equal, is around 2.1. Thus India’s population is likely to start plateauing at approximately 1.55 billion within the next two decades. By then India’s total population would have surpassed China’s population, which will have begun to decline as its fertility rates fall further. 

The other key metric is the dependency ratio — the percentage of the very old and very young who are supported by those in the productive 15-65 age group of the population. For India, this dependency ratio was as high as 81.5% in 1966. It fell to 60% in 2005 and to 49.8 per cent in 2018 when India formally entered its demographic dividend zone. Thus for the first time since Independence, India has fewer dependents than workers. 

The demographic dividend though comes with a health warning: it can quite easily be squandered if education, health and skill development don’t keep pace. 

Pessimists speak ominously of a demographic disaster if young workers in the productive age group are not given the skill sets needed in a rapidly changing economy. Poverty is a big handicap. Malnutrition is another. When nearly a quarter of the working-age population lacks education, healthcare and skills, the demographic dividend can be wasted. It is therefore critical to get India’s health and education parameters up to scratch. 

Prime Minister Narendra Modi is right to focus on delivering welfare benefits to the poorest Indians — sanitation, health insurance, LPG cylinders, electricity and water. The focus on skill development and vocational training is crucial too. But such micro measures need to be supplemented with macroeconomic initiatives. 

Unless the economy returns to an 8 per cent growth trajectory, providing jobs and investment opportunities, India might miss the demographic dividend bus. The window is narrow. Of the 36 years India has, the first 20 years are critical. As China and Japan witnessed, the effects of the demographic dividend taper off after an initial burst. 

To reflate the economy, Finance Minister Nirmala Sitharaman must focus on structural reforms — tax, foreign investment, privatisation, labour and land. 

Some of these are works in progress (labour and the direct tax code) while others (foreign investment and privatisation) are hostage to politics or ideology. The new direct tax code, to be announced shortly, should rationalise India’s complex and bloated tax regime. 

Sitharaman’s most positive remark since her disappointing Union Budget holds promise. Speaking in the Rajya Sabha last week, Sitharaman said: “Reduction in the corporate tax rate is done with an intention. We will bring the corporate tax from the high rate that it was, from 30 per cent down to 25 per cent (for all companies). It was a commitment given in the first Budget in 2014. I have to honour it.”

It is important such intent translates into action. Structural economic reforms — alongside welfare schemes — are imperative if India is to make the fullest use of its once-in-a-generation demographic dividend. 

(This article was originally published on The DNA. Read the original article)

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.)