Demographic Dividend & Fiscal Policy
The world observed World Population Day on 11th July. With 1.2 billion people, India has the second highest population in the world, following China and that will change by 2030 when it will overtake China. According to International Monetary Fund (IMF), India is in the middle of a major demographic transition where the working age ratio is set to rise from about 64% currently to 69% in 2040, which means an addition of over 300 million working age adults. This would make India the largest single positive contributor to the global workforce over the next three decades and confer what is called a “demographic dividend”. Demographic dividend is the benefit a country gets due to increase in the working age population compared with dependants such as children and old people. This stage of a country’s growth begins with a demographic transition. It means a shift from a rural agrarian society with high fertility and mortality rates to an urban industrial society with low fertility and mortality rates. What happens here is the labour force temporarily grows more rapidly than the dependant population, resulting in a growth in per capita income. This phase normally lasts for at least five decades. During this period, a country generates higher income that leads to higher savings and growth.
An increase in working age ratio can raise the rate of economic growth conferring a demographic
dividend — the working age population on an average is more productive than those outside this age group. One of the reasons for slowing economic growth in Europe is rise in the ageing population and
decline in the working age population. A bulge in the working age ratio contributes to higher savings
rates and increasing domestic resources available for productive investment. IMF states the demographic dividend could add about 2 percentage points per annum to India’s per capita growth domestic product over the next two decades. When a country arrives at a more stable and slow population growth rate, it makes easier for the economy to grow. For instance, if a country’s population growth rate is 4%, the economy needs to grow at the same rate to keep up with the population. Now consider that a country’s population grows at 2% per year, the same economic growth of 4% suddenly becomes a real positive economic growth.
Role of Policymakers:
The dividend period can only be considered as a window of opportunity rather than a guarantee of improved standards of living. Only when a country capitalizes on resources released and uses them effectively will the economy benefit. If right policies are not in place, a demographic dividend can turn into a demographic disaster. This is because once this window of opportunity closes, countries that did not find a way to take ample advantage of the dividend would find it hard to make the necessary leap.
India’s 12th Five Year Plan’s (2012-2017) & Approach to Demographic Dividend:
The contemporary focus on skill building or skill development in India is derived from the changing demographic profiles in India vis-à-vis China, Western Europe, and North America. These changing demographic profiles indicate that India has a unique 20 to 25 years’ window of opportunity called “demographic dividend”. The demographic dividend is essentially due to two factors (a) declining birth rates and (b) improvement in life expectancy. The declining birth rate changes the age distribution and makes for a smaller proportion of population in the dependent ages and for relatively larger share in the productive labour force. The result is low dependency ratio which can provide comparative cost advantage and competitiveness to the economy. The “demographic dividend” accounts for India having world’s youngest work force with a median age way below that of China and OECD Countries. Alongside this window of opportunity for India, the global economy is expected to witness a skilled man power shortage to the extent of around 56 million by 2020. Thus, the “demographic dividend” in India needs to be exploited not only to expand the production possibility frontier but also to meet the skilled manpower requirements of in India and abroad.
To reap the benefits of “demographic dividend”, the Eleventh Five Year Plan had favoured the creation of a comprehensive National Skill Development Mission. As a result, a “Coordinated Action on Skill Development” with three-tier institutional structure consisting of (i) PM’s National Council (ii) National Skill Development Coordination Board (NSDCB), (iii) National Skill Development Corporation (NSDC) was created in early 2008. Whereas, Prime Minister’s National Council on Skill Development has spelt out policy advice, and direction in the form of “Core Principles” and has given a Vision to create 500 million skilled people by 2022 through skill systems (which must have high degree of inclusivity), NSDCB has taken upon itself the task of coordinating the skill development efforts of a large number of Central Ministries/Departments and States. The NSDC has geared itself for preparing comprehensive action plans and activities which would promote PPP models of financing skill development.
Improving Financial and Regulatory Ecosystem for the Growth of Enterprises:
A vibrant manufacturing, especially, Small and Medium Enterprises sector can play a key role in creating jobs and high economic growth. It has the potential to provide employment for the exceptionally large labour force that is still working in agriculture. Achieving and sustaining such growth and higher employment will require a boost in industrial and services growth, spurred by SMEs.
Several factors constrain the growth and competitiveness of Indian SMEs. Lack of access to adequate and timely financing is especially critical. Without it, borrowing becomes more expensive and profit margins are reduced, holding back the establishment of new units and the consequent increase in job creation.
The financing constraints can be attributed to a combination of factors that include policy, legal and regulatory framework (bankruptcy and contract enforcement), institutional weaknesses (absence of good credit appraisal), and lack of reliable credit information on SMEs.
It is, therefore, essential that regulations be made stable, predictable, and promotes competition and investment. Excessive regulation can have the unintended effect of discouraging employment.
While the country’s massive youth population has been positioned as a great “demographic dividend” – a view that links the potential workforce to great economic benefits – unemployment and underemployment statistics reveal an ominous reality: if India’s youth are not given opportunities for a meaningful future, they could become an economic burden rather than an asset.
Favourable demographics, rising per capita income and strong services sector are likely to help India continue on the growth path for the next few years. However, one should note that India will not achieve its full potential on a ‘sustained’ basis if it does not invest more in infrastructure, tackle inflation and cut subsidies to balance its fiscal situation.
Indian policymakers will need to recognise that the realisation of the demographic dividend depends on an economy’s capacity to absorb workers into productive employment.
This capacity would be strengthened by:
- Good governance – effective citizen input, well-functioning institutions, respect for the rule of law, low level of corruption, respect for property rights, sanctity of contracts
- Efficient infrastructure – reliable roads, railways, telecommunications, water supply, sanitation, and agricultural needs
- Prudent fiscal and macroeconomic management – policies that keep inflation reasonable, promote inclusive economic growth, avoid severe trade imbalances
- Well-developed and competitive financial markets – institutions that facilitate mobilisation of savings, safeguards to ensure that banks and other financial institutions serve the public interest) and labour markets
- Investments in education and training – strength in all levels of schooling for females and males of all income levels and castes, job training for workers to keep up with new types of services and industries