Demographic time-out

The demographic dividend that India is currently reaping is so much a part of accepted wisdom that we are in danger of becoming complacent about it. Loosely speaking, a country derives a demographic advantage when its working age population is rising, leading to growing demand, rising private consumption, booming government revenues, et al. 

India is going to have a rising working age population (ages 15-64) at least for the next 35 years. In  comparison, China will soon face the reverse situation: a demographic tapering down. India’s population is about 150-and-odd million behind China’s. The US Census Bureau says that India will overtake China around 2025, with a population of 1.4 billion.

In terms of working age population, expert projections are that India will add about 140 million in the 15-64 age group between now and 2020. China’s will grow at half that rate. In the decade after that, India may add another 100-and-odd million workers, but China’s will actually drop, possibly by 20 million. Considering that India’s total working age population will continue rising till 2045, the decade of 2020-30 is when we will probably overtake China as the world’s fastest growing economy.

But there’s a big if to all this.  The power of demography has to be harnessed through the right social and economic policies. There are five things we have to fix quickly: education, labour markets, economic policy, governance and corruption. If we don’t, the demographic advantage will turn out to be a curse. Just as there is nothing more useful than having a youthful labour force, there is nothing worse than having a disengaged and angry population that does not find meaningful jobs.

We need to understand that the window of opportunity is not as big as it looks. If our working age population is going to peak in 2045, it may seem as if we have all the time in the world to steer policies in the right direction. In fact, we have to fix it all in five years — which more or less means within during this UPA government.

A small example will illustrate why we have no time to lose. To ensure good jobs for our youth, we have to fix education. Even if we can wave a magic wand and fix primary, secondary and higher education instantly in 2010 (this is impossible, given the issues involved), it means we will be able to have a well-educated population in 2025-30. That will give us just 15 years of a demographic advantage till 2045. With every year of delay in getting our education system fixed, we lose time and advantage. Worse, a badly educated workforce will offer a good pool of potential recruits for the Maoists and jehadis.

The second area that needs fixing is labour markets. Currently, India has a highly fossilised labour market, where organised labour is mollycoddled and unorganised labour is left to fend for itself.  A more flexible hire-fire policy is required, backed appropriately by social safety nets. This can easily be financed by higher taxes on employment and/or unemployment insurance, but there is as yet no move in this direction. Without labour flexibility, businessmen will prefer automation to hiring new employees and our demography will be one seething mass of unemployed or underemployed workers.

Flexible labour markets will allow us to operate more open economic policies that can create more jobs in manufacturing. As China ages, India can become the next factory to the world.
But none of this is going to happen if we don’t improve governance and reduce corruption. We cannot hope to join the ranks of the developed with crony capitalism and bribery. The key to abolishing corruption lies in reforming electoral fund-raising.

Every political party collects humungous amounts of money through corrupt means, and businessmen help them in return for favours. While no country has managed to root out corruption entirely, there is a huge difference between mild and occasional corruption and systemic and large-scale skulduggery. The former is tolerable, and may even be mildly beneficial by lubricating the wheels of commerce, but the latter is going to choke off economic growth at some point.

A case in point is Mumbai’s real estate. Thanks to land cornering and the involvement of politicians and criminals in jacking up prices, no salaried person can afford a home in the metro anymore. The real estate market is atrophying. What is happening
in urban real estate can happen in the economy as a whole at some point in the next 10 years if we don’t reduce corruption. Our demographic revolution could then end in a social explosion.