Is India Overplaying its Demographic Dividend?

This is particularly so because an increasingly young population without any productive employment opportunities will be a problem rather than an advantage. Moreover, the high rates of unemployment or joblessness coupled with rising income inequality will eventually impose limits on consumption, which has been the top driver of economic growth in India.

The Indicators

A recent CMIE-BSE study estimates that India added 2 million jobs between August 2016 and August 2017, whereas it’s adding 15 million people a year to its workforce. To make matters worse, more births are happening in poor families mainly concentrated in the poorer states of Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan and Jharkhand. The poor can’t afford nutritious food and quality education or healthcare to their children, and are adding new members to India’s pool of unskilled or low skilled and largely unemployable workforce.

Unsurprisingly, more than 90 percent of the country’s workforce is unskilled or low skilled and most are employed by the informal sector wherein productivity and wages are low. Yet, employment opportunities are primarily increasing in the informal sector which was first jolted by demonetization and then by a poorly conceived and implemented GST. CMIE estimates that demonetization could have resulted in job losses of anything between 3 to 12 million—mostly in the informal sector. GST and tax overdrive can further dent job market prospects.

Many argue that demonetization and GST are good for India’s economy in terms of facilitating formalization, which is needed to boost productivity and wages. However, forced formalization without addressing the factors that lead to increased informal sector activity, such as the lack of access to cheaper institutional capital, technological know-how and marketing support along with an untamed skill deficit, may all aggravate the employment situation further.

India’s archaic labor laws are an issue as well, with top companies in the organized sector are increasingly relying on contractual workers to get around them. Roughly half of the workers employed in the organized sector are now contractual, hence they have no job security or social benefits and often get lower wages compared to their permanent counterparts.

The workforce participation of women in the country is already one of the lowest in the world and instead of improving, it is deteriorating further. It fell to 22.5 percent in 2016 from 37 percent in 2005. That shaves off an estimated 2.5 percent from India’s GDP every year. Many of India’s non-working women, especially in the cities, are highly qualified but either never work or leave their jobs post-maternity as quality childcare support is lacking even in large cities such as Mumbai or Delhi.

The low women labor force participation rate will adversely affect key sectors such as banking, IT, medicine/ nursing, hospitality and retail as these sectors usually have a high proportion of women in their workforce. From the demand side, the low participation rate of women will affect the growth potential of the cosmetics, educational and health services, and travel and hospitality in the form of lower demand for these products and services.

Factors Promoting Joblessness

The poor quality of education in both liberal arts and STEM (Science, Technology, Engineering, and Mathematics) with no emphasis on employability of the graduating students is a major factor contributing to the problem of unemployment. That is also the reason why even the biggest companies are facing difficulties in hiring suitably skilled employees.

Cheaper capital or low interest rates combined with India’s unfriendly labor laws have induced top companies in the organized space to switch to capital intensive or labor-saving production methods. That imposes limits on the growth of jobs in India.

Many large companies, faced with intense competition both in domestic and export markets, are trying to cut corners to survive, and one of the suggested ways is to reduce the number of workers. Thus, more jobs have to come from smaller companies/ SMEs, startups and first-time entrepreneurs. However, doing business for these companies (that can’t afford having corporate affairs departments to navigate around India’s opaque bureaucracy and government machinery) is a big challenge. That will have adverse implications for job creation. The recent investment slump is another short-term factor contributing to jobless growth.

Exogenous factors such as growing protectionism in the developed world and rapid technological changes present new threats, and will make it difficult for India to benefit from its favorable demography. Disruptive technological breakthroughs such as automation and 3D printing, although a global phenomenon, will further dilute the importance of labor cost advantage in production, and will make it even more difficult for India to provide jobs for its workforce going forward.

Then there are sector specific issues often compounded by poor domestic regulations (pharmaceuticals and textiles, for instance) and short-term focus (information technology), which have forced top firms to cut jobs. Real estate (another top job creator) is suffering from a particularly bad slowdown and the implementation of a diluted version of New Delhi’s RERA by state governments is unlikely to restore homebuyers’ interest in the industry.

New Delhi’s attempt to hike minimum wages often delinked with labor productivity is hurting the prospects of labor intensive sectors such as apparel, footwear and leather goods.

Demographic Dividend or Disaster?

In the long term, economic growth is a function of the total number of workers and their average productivity. Although the number of workers are growing, labor productivity in the country is near stagnant, as most of them are employed by the informal sector. Moreover, the number of unemployed people is increasing every day.

Jobless growth is the biggest future risk to India’s political and social stability, especially since financing a basic income program (like the one being tried in Finland) would be fiscally too difficult for India.  

And going forward, the failure to address the skill deficit by providing adequate and relevant education, skills and training can greatly impact India’s economic future, especially as it poses a big challenge for existing and potential investors looking to expand their presence in India.

The Way Forward

To improve employability of graduating students, the educational institutions need to coordinate with corporates in designing course curriculum. MOOCS and other short term online courses and certifications could be equally helpful in skill upgrade of existing and potential employees and they should be promoted by the government. Since, population growth rates differ from states to states, encouragement to inter-state migration (e.g. from poorer states to richer states) can solve the twin problem of the shortage of workers in southern region and relatively excess supply of workers in northern states such as Bihar and UP.

A version of this article was also published in Brink Asia.

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  • Kumar Mohit

    I believe that demonetization will bring good things to the Indian economy within a few months, we just need to be patient.

  • Nauaty Subhash San

    This government only acts for the rich people, not the poor and the middle class.

  • Anindya Ganguly

    I personally believe that Demonetization and GST will bring very positive results in the long run and I am very much sure the GDP will go higher than 8 percent. I expect the coming quarter to be a good GDP rate.

  • Ramesh Sharma

    The key to a healthy economy is the mobilisation of the population. Make the common man sleep well, wake up looking forward to going to work, end the work day looking forward to going back to the comfort of a home.... those are the things that makes a nation get up and go to work, and be a productive worker.

  • Naveen Boggarapu

    I think we should be critical, if we have done something wrong and complimentary if we have done good. Your post made many logical points.