India’s demographic advantage is shrinking fast, country has 12 years to reach developed phase: SBI's Soumya Kanti Ghosh

In June 2018, the State Bank of India (SBI) in its monthly publication Ecowrap warned establishment policymakers on the threat of India losing its demographic dividend. The report cited the case of the Karnataka, which is witnessing population ageing amid declining fertility rates, and cautioned about the declining enrolment in primary public schools in the state. The report said: “We believe this is a problem across other states too and India’s strength of demographic dividend could actually turn into India’s disadvantage by 2030.”

India has one of the youngest population in a world which is ageing. In 2011, an IMF report said that about a quarter of the projected increase in the global population aged 15-24 years between 2010-2040 will occur in India. In the next two decades, India will be the largest single provider of the global workforce, providing India with a rich demographic dividend, which, according to IMF, “gives India the single biggest hope to catch up to China.” Today, India is struggling to reap the benefits of its prized demographic dividend largely due to lack of jobs, inadequate spending in education, health and infrastructure. Again, just last month, the World Bank released its inaugural Human Capital Index (HDI) report where it placed India at a lowly 115 among 157 countries. The BJP-led government rejected the report, saying it had “serious reservations about the advisability and utility of this exercise of constructing the HCI.”

Soumya Kanti Ghosh is the Group Chief Economic Advisor at State Bank of India (SBI) where he heads the Economic Research Department (ERD), which published the report in June. Ghosh spoke with Rohit Inani on the SBI report and the dangers of India losing its demographic dividend.

Excerpts from the conversation:

The SBI recently warned in its Ecowrap about the dangers of India losing its demographic dividend by citing the example of "empty primary government schools in Karnataka". Summing up, the report said that "the moot point of this discussion is that India has perhaps now only a limited window of a decade to get into the developed country tag or stay perpetually in emerging group of economies. Policymakers, wake up and smell the coffee!" It is a harsh indictment.

No, actually it is a fact. But take the demographic profile. Of course, India is enjoying the fruits of its demographic profile. We are a very young population [with] 65 percent of the median age around 27 years. All of it is true, but my limited point of view is that there are states like Karnataka and Kerala....It's a myth that the population has been going up. In the last two decades, the addition to the incremental population as per the 2011 census has been already around 18 crore. In the last 10 years, the same number of the populace has been added. So the overall population growth in India has been declining over the last two decades. Firstly, India's population growth is a myth. Second, out of 25 million babies that are born every year, say close to 15 million gets into the labour force if we consider a 40 percent drop.

The issue is that the way the things are moving we think that by 2030, at the current rate, the older age of the population will gain impotence. So the demographic dividend that India was enjoying for the last several decades may see a downside. Until we have a proper statewide policy of addressing the demographic dividend, I think it will be difficult for India to get the developed country tag. By 2030, in terms of size, we can become the fourth or even the third -largest economy. This is one part of the dialogue; but the other part is that if you don't address the issues facing our demographic dividend in terms of state-specific policies, I think it will be difficult for us to get out of this developing country tag.

Soumya Kanti Ghosh. Group Chief Economic Advisor, State Bank of India. Pic courtesy: @kantisoumya

Soumya Kanti Ghosh. Group Chief Economic Advisor, State Bank of India. Pic courtesy: @kantisoumya

India is in the middle of its demographic transition at the moment, which began about 40 years ago and will continue for 30 more years. Presently, it could be said to be at the peak of this transition. Can you briefly talk about this transition of a nation from a developing to a developed economy at such an opportune time?

The transition from a developing to a developed economy comes in terms of the growth in the per capita income. This is one part. The other part is skilling your labour force, making sure they get well-paying jobs. It's a necessary pre-condition apart from other issues like infrastructure development. So if you have a population that is not ageing, unlike the population ageing we are witnessing in some developed countries that is contributing to their financial depredation for a long time, so unless we take advantage of our young demography in terms of their skill and knowledge, we cannot call ourselves transitioning to a developed economy. This is the bottom line.

And why did we give India a "limited window"? It's because in the next 10-12 years, the trend of declining population growth in the [more prosperous] southern states coupled with declining enrolment in government primary and secondary schools, which has been happening now for the last decade or so; and this means that we are entering an age where a slowing population growth is having an impact on a young demography.

You are saying that India's demographic dividend has reached a tipping point?

Yes, it is reaching a tipping point, but I will not say that we are there yet. We will get into a situation whereby it will be difficult for us to get out of the developing economy tag if we don't address policies on sectoral imbalances and state-specific imbalances. For example, the southern states are witnessing a population decline unlike the northern states where the fertility rate is higher, and hence the replacement fertility rate will peak out in 2021.

What are the dangers then of India actually losing out on its prized demographic dividend? There are already concerns regarding this possibility in certain political and industry circles. Recently, Pranab Mukherjee warned that "India's demographic dividend will turn into a demographic disaster" if jobs are not created.

If you have a country which doesn't have a substantial young population, it could have a lot of impact on the macro parameters because young people have a propensity to spend more. We have a population which is "low-leverage". If the skilling of the labour force is not methodically perceived and developed in a country like India, we will be unable to get up the ladder in terms of our economic potential or economic realisation to where we should have been.

India's problem today is a huge labour force which is not adequately compensated. The major problem is not lack of jobs, but lack of quality jobs that pay well. It is unlikely to push the consumption of an economy toward a higher trajectory.

Take the West or China and some East Asian nations. Most of the growth acceleration in these countries was harboured by capitalising on its demographic transition. India is a latecomer to this transition, but today it stands to lose its only chance, and indeed a rare opportunity, to transition into a middle-income economy from a low-income economy.

I won't say it is India's only chance, but the window of this transformation is indeed limited today. My sense is that...I won't say it won't happen, but I think if we fail policy-wise to craft state-specific policies so as to benefit from our demographic dividend, then it will be difficult.

Recently a report by UNDP stated that India will need 280 million jobs by 2050, the year when India's working age population is expected to peak. But since 1991, when India liberalised its economy, close to 300 million Indians sought employment but less than half were employed, according to the same report. Today, even though India's GDP has consistently grown, we are still struggling to create jobs. How do you assess this situation considering, according to the SBI study, that we have a limited, irreversible window to turn things around?

I have a strong objection to the employment figures. These are mostly based on surveys. Until and unless these surveys are scientifically designed and contracted, they will give out a number which will be on the conservative side but a wrong number nonetheless. Most of these surveys came out after the 2008 financial crisis and were restricted to 10 industries [in the EPFO payroll data]. If a country which is growing at 7 percent, or a country which is growing at 9-10 percent in between 2003-2008, I don't believe that jobs were not created. The larger issue is the quality of jobs generated in India, which is very poor.

But a high GDP growth doesn't necessarily translate into a higher job growth, especially in the case of the Indian economy.

Yes, high GDP growth may not lead to a surge in employment and this causation between a higher GDP and employment growth has been broken. What you are saying is correct. But in the last 5 years there is a perverse causation that is happening. For example, China produced 15 million jobs last year but look at the growth rate of China, it was one of the lowest in the country in the last few years.

But China and other developed economies can create the same number of jobs even at a lower growth rate because they have a highly resourceful human capital, which we don't have.

And that is the entire argument I'm making...that we have to develop our human capital. For example, the participation of more women in the workforce. Having said that, I still don't believe that we have a job crisis in India; the more important issue is the lack of quality jobs.

In January this year, the Maratha caste protests brought Mumbai to a standstill, demanding reservation in jobs. Many, including some prominent names in the industry, saw it as evidence of India's demographic implosion.

I get your point. See, it's similar to saying that X number of people or X to the power infinity number of people are applying for 10 jobs. In the Indian context, job security has now become very important. After the 2008 financial crisis when the economy went into a tailspin, people believe that government jobs are actually more secure. So there could be a perverse causation in the other way. If you find that there is social unrest or the issue of more people applying for government jobs, my only request is to look at it through a larger prism that even if a person is employed, that person is always going to apply for a more secure job.

Harvesting demographic dividend usually depends upon how a country mobilises its savings, channelling the same into investments in education, healthcare, infrastructure, et cetera. In low-income countries like India, public sector banks remain the most important source of finance. Consider our Current Account Deficit (CAD), which is expected to hit 2.8 percent of GDP this financial year and the gross non-performing assets (NPA) plaguing our public sector banks, which stood at Rs 4.04 lakh crores in 2016, equalling the combined public spending for health, education, defence and roads. How do you assess this situation in the light of the limited window of a decade for India to reap the benefit of its demographic dividend?

See, any economy goes through the ups and downs of the business cycle. It is a fact that there has been an accumulation of non-performing assets (NPAs). But we also went through a crisis in 1998, the Asian banking crisis. It's unfortunate that this problem has arisen for reasons that were outside the control of banks. Having said that, I think the banks always have enough to lend. We are a country where a fiscal deficit has always been a concern. My sense is that this should not be a hurdle for India going forward [with maximising its human capital resources]…I think it will be better for India as a country to deliver what it has promised its citizens.

In 2008, in a lecture delivered at the University of Chicago, "Is there a threat of oligarchy in India?”, Raghuram Rajan cautioned about India arriving at a “crossroad”. He said, “With the right policies and some luck, we will become a middle-income constitutional democracy in my lifetime. I think it is fair to say that we are entering one of the most critical periods in India’s history. The next ten years will determine whether we will take our place amongst the group of nations like South Korea and Taiwan that have made their way from poverty to moderate prosperity in a couple of generations.” Today, almost 10 years later, the SBI has sent out a similar warning.

I have already said that India has a limited window [of a decade] for becoming a developed economy unless we get our policies and priorities right.

(Inani is a journalist based in Delhi. He has contributed to TIME, The Nation and The Caravan, among other publications)


Updated Date: Nov 08, 2018 15:34 PM

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