Demographic Dividend or Demographic Disaster?

Bharat Jhunjhunwala

The population of a country can be divided into “working” and “dependent” categories. Those in the age of 15 to 65 are considered to be in the working category. They are generally able to earn their own livelihood and support some dependents. Children below 15 years age and elders above 65 years age are considered to be dependent. The ratio of the dependent persons to working persons is called “dependency ratio.” High dependency ratio means dependents are more than working persons and vice versa.

Advances in medical sciences and better nutrition and living conditions led to an expansion of population in the previous century. Children stopped dying of diseases and malnutrition. The result was that the population of those below 15 increased rapidly. The same working population had to support larger number of dependents. The dependency ratio increased. The working persons could not make savings because most of the income was used in supporting the young dependents. They could not invest much in education of the young either because their income was used in arranging for the food and clothing of the larger numbers of children. These large numbers of children started entering the working population in the nineties. Thus, before, say, 1991, the dependency ratio was high. The numbers of dependent persons were large while the numbers of working persons were relatively less.

We became conscious of the need to control population in the eighties. The number of births per woman gradually reduced. This meant that the numbers of children reduced. At the same time, as explained above, the numbers of working persons increased because the large numbers of children born earlier became adults. Thus the dependency ratio declined. The income earned by the working person was now available for savings or investment in the education of the children.

After another 50 years or so in the future, the present large numbers of working persons will become old while the numbers of working persons will be less because of the present low birth rate. The numbers of elderly dependents will increase while the working persons will remain unchanged. Once again the dependency ratio will increase. Countries like Japan find themselves in this situation at present.

The population dynamics, therefore, moves like a wave. In the beginning the dependency ratio increase as the number of children increases. Then the dependency ratio decreases as the birth rate declines and the large number of children become adults. A “demographic dividend” is reaped at this stage because we have large numbers of working persons and less numbers of dependents. This fortuitous circumstance occurs only rarely when the high birth rate declines. India is entering this stage now. In the third stage, the dependency ratio increases again because we have large numbers of elderly dependents. Lastly, the situation becomes “normal” when the large numbers of elderly die.

There are many benefits of the demographic dividend. One, the large numbers of working persons produce more than what they consume. They add to the GDP of the country.  Two, entry of large number of youth into the work force increases the supply of labour. This leads to reduced wages and to lower cost of production for our businesses. Three, the working persons are able to save larger share of their incomes. A working person with one child is likely to save more than a working person with three children. This leads to an increase in investment. Fourth, the working persons are able to invest more in education of the children. A working person with one child can afford to send the child to a college while one with three children may not be able to afford this. This leads to the increase in the availability of skilled workers or in the “human capital.”

These benefits of demographic dividend are lost and the “dividend” becomes a “disaster” if the persons of working age are unemployed during the period of low dependency ratio. In that case, they become “forced dependents.” Other working persons of the family have to take care of them. Further, they may engage in crime and other anti-social activities leading to further loss of income of the country. The main requirement for reaping the demographic dividend, therefore, is to engage the increasing numbers of working age persons productively. As of now, we seem to be losing the race. The National Sample Survey for 2017-18 had shown a spike in the unemployment rate to over 6 per cent, a 45-year high. The Survey has estimated that the number of persons employed has fallen down by nearly two crores in the five years between ending 2017-18. Clearly, on the one hand, large numbers of youths are entering the work force. On the other hand, large numbers of jobs are being lost. We are inexorably moving towards a demographic disaster.

Analysts have suggested a number of steps that the Government can take to create jobs and capture the demographic dividend: One, push manufacturing, especially in labour-intensive areas such as leather products. The difficulty here is that labour-intensive manufacturing is increasingly coming in pressure from machine-based manufacturing. Handlooms, for example, have been wiped out by cheap textile cloth. The number of jobs that have to necessarily be done by human beings in manufacturing is getting reduced.

Two, it is suggested that agriculture may be given a push. The difficulty here is that agricultural labour is also facing threat from mechanization. Tube wells, tractors and harvesters have replaced much labour in agriculture. Moreover, agriculture is a sunset sector. The share of agriculture in GDP in developed countries is less than one percent. The share in India has declined from about 50 percent at the time of Independence to about 18 percent at present and continues to decline. A sinking ship cannot become an engine of employment.

Three, it is suggested that the Government can push a massive buildup of investment in infrastructure like highways, airports and telephony. Once again, the problem is that the works are increasingly being done with machines like excavators and cement mixers. The numbers of jobs created is very small.

The only solution for creating jobs in India is in the services sector. There are a large number of services that can be supplied online such as tuitions, medical consultations, translations, computer games and designs. The offline services are of tourism, beauticians, health tourism and education. We can also export large numbers of persons skilled in the provision of these offline services. We will reap the demographic dividend only if we can enable our youth to provide such services.

Dr B jhunjhunwala, Formerly Professor of Economics at IIM Bengaluru

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Aug 8, 2019

Dr B jhunjhunwala

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