Can India get rich before growing old?

Projections suggest that within 10 years, the proportion of working-age individuals in the total population will begin to fall, marking the beginning of the end of India’s demographic dividend.
| Photo Credit: Getty Images/iStockphoto

There has been a lot of hype about India’s demographic dividend, ever since liberalisation unlocked possibilities beyond the reach of our once socialist, more austere imagination. Demographic dividend denotes a country’s economic growth advantages when most of its population is in the working-age bracket. Today, the dividend has become this vague, almost mythical assurance of perpetual economic growth. Unfortunately, as often happens with things that are, or assumed to be, perpetual, we take them for granted. This perhaps explains why we end up resenting the ‘extra’ number of people vying for education, employment, and housing. Politicians then give expression to this resentment by trying to reserve jobs for locals.

The middle-income trap

A reality check is in order. Even though three-fourths of India’s population is aged 15-64, the dividend, as it turns out, is not the silver bullet that we have held it out to be, nor is it perpetual. India’s total fertility rate (TFR) — the average number of children a woman has in her lifetime — is declining at a faster pace than was anticipated a decade ago. Projections suggest that within 10 years, the proportion of working-age individuals in the total population will begin to fall, marking the beginning of the end of India’s demographic dividend. Most States are now below the replacement-level fertility rate of 2.1 children per woman, needed to maintain a stable population. Southern States such as Andhra Pradesh and Karnataka, with TFRs below 1.75, are leading this trend. Other States, including Punjab and West Bengal, are also experiencing similar declines, indicating that this is a nationwide phenomenon.

India’s rapid decline in TFR also challenges conventional wisdom, which links lower birth rates to improvements in education and income. Despite modest gains in per capita income, which still places India among lower-middle-income countries, the country’s TFR has dropped from 2.6 in 2010 to 1.99 today. As India approaches middle-income status by the next decade, this decline is expected to accelerate. Whether India can get rich before it grows old is no longer just an alarmist concern; it has become an existential dread.

What is even more worrying is that our dividend is right now being wasted as people remain stuck in low-productivity agricultural jobs or remain unemployed while preparing for competitive exams. Since liberalisation, India has reduced the proportion of its workforce in low productivity agriculture by a mere 17 percentage points, from 63% to 46%; for comparison, 30 years after China’s liberalisation, the country’s share of workers in agriculture reduced by 32 points, from 70% to 38%. Meanwhile, India’s labour force participation rate (LFPR) in urban areas remains at a dismal 50%. If India continues on this path, it risks falling into a middle-income trap from which only a handful of countries have escaped. Even China, after years of rapid growth, is slowing down. India must not assume it will fare any better, especially as its demographic window narrows.

Focus on manufacturing

So, what must we do to leverage the demographic dividend before it is too late? Throughout history, the proven path for economic growth has been the movement of workers from low-productivity sectors such as agriculture to higher-productivity jobs in manufacturing and services. While the services sector has grown significantly, manufacturing has stagnated in India. This needs to be addressed, because manufacturing, particularly in labour-intensive industries, creates far more jobs than services. For example, the textile and apparel industry, worth $150 billion, employs 45 million people, compared to 5.5 million in the $250 billion IT-BPM sector. Moreover, textile factories often employ 60-70% women, empowering those who might otherwise be confined to unpaid work (only three out of 10 working-age Indian women are in the labour force).

Manufacturers in India face significant challenges. According to recent World Bank surveys, one in six manufacturers cites business licensing and permits as major constraints, compared to less than 3% in Vietnam. Similarly, access to land and cumbersome customs and trade regulations are major hurdles, with 17% of manufacturers facing such issues, compared to 3% in Vietnam. These barriers are stifling manufacturing growth. Thus, India must improve its business environment, which is crucial for enabling large-scale job creation.

The Central government should lower tariffs to make inputs cheaper for Indian manufacturers and boost exports. Finalising long-pending free trade agreements with the U.K. and EU should be another priority to expand market access for Indian products. State governments should be bolder with labour reforms, allowing workers to choose flexible work arrangements, and also look into land and building regulations for factories. As per a recent report by Prosperiti, many factories can only use half their land due to restrictive building standards, which increases manufacturing costs. Additionally, restrictions on creating worker housing in industrial zones raise hiring costs. Addressing these issues and improving the investment climate must be India’s priorities.

We must strive to capitalise on our demographic dividend. With a similar per capita income to India in the 1980s, China transitioned millions from agriculture to manufacturing. It is time India stops patting itself on the back for the short-lived blessing that is its ‘demographic dividend’ and gets to work on leveraging it.

Harshit Rakheja, Communications Manager, Foundation for Economic Development; Yuvraj Khetan, Programme Manager at the Foundation for Economic Development