Is India’s Demographic Dividend a Liability?Published: November 18, 2010 in India Knowledge@Wharton
More than half of India's population is younger than the age of 25 and the entry of this group into the working population over the next few decades is expected to spur India's economic growth. But this will be possible only if the youth are employable; if not, the situation will lead to wide social unrest, according to Kartik Hosanagar, professor of operations and information management at Wharton. In this opinion piece, Hosanagar discusses the dangers of India's seeming demographic dividend.
During a recent visit to India, my colleagues at Wharton and I had the chance to meet with the cream of India's industry and government. The optimism and excitement about India's future was palpable to all of us. CEOs talked about the exponential growth at their firms in the past few years and how the only constraint in India these days is supply, not demand. One phrase that emerged in just about every meeting was "India's demographic dividend." People have been talking about it for the last seven or eight years but it appears to have reached fever pitch now. The demographic dividend, put simply, is that more than half of India's population is under the age of 25. The next few decades will see this age group join the working population. The entry of this young group into the workforce will contribute to a significant increase in GDP per capita and be a source of great economic prosperity.
This sounds great in theory. And in fact, there is ample evidence that in the past, several countries have witnessed periods of increased productivity and savings during periods in which they have enjoyed a demographic dividend. But all this assumes that this young and upcoming workforce can be trained and meaningfully employed. In India, that is a big if.
Although the literacy rate has been climbing up steadily, India still has the world's largest number of illiterates at over 250 million. Although more and more jobs are being created thanks to the economic boom, the gap between the haves and have-nots seems to be increasing. I shudder to think what might happen if we have a sudden influx of large numbers of unemployed and disgruntled youth. Besides the obvious worries about crime rate, one has to increasingly worry about political unrest and issues like Naxalism.
But before we jump to this doomsday scenario, let us start from the very beginning. Why is everyone teeming with excitement about our demographic dividend? First, it should be obvious that the size of our workforce will increase significantly based on the current under-25 population. For example, it is estimated that India's average age in 2020 will be under 30, whereas the average age will be 37 in the U.S. and 48 in Japan. Another interesting trend is the steadily declining fertility rate. With relatively lower number of children, this will help improve the dependency ratio -- i.e., the ratio of working-age population to dependents. Further, with fewer children, more women will be able to join the workforce. With fewer dependents and more workers per family, the savings rate of the country will also rise.
So greater income and greater savings is the rosy future that potentially lies ahead of us. And it is not just a theory. Similar booms, driven in part by shifting demographics, have been seen in Japan in the 1950s and in Ireland in the 1980s. Interestingly, in Ireland, the demographic dividend arose due to the legalization of contraception in 1980. Being a strongly catholic state, contraception was banned in Ireland until a group of feminists defied the ban and forced the government to revisit the issue. The lift of the ban resulted in lower birth rates and, in turn, a better dependency ratio. This has partly contributed to the Irish economic boom.
The Difference in India
Despite these similarities, there is one obvious difference between India and these countries. In the cases of both Ireland and Japan, the human resources challenge of educating and employing the workforce was of a much smaller scale. Not only does India need to train and employ many orders of magnitude more people but it has also to start from a worse initial position in terms of existing educational infrastructure. We will need a massive infrastructure of universities and vocational training institutes spanning the country, including its rural interiors.
Kapil Sibal, the human resource development minister, discussed this challenge with our group. He indicated that over 60 million children will soon be entering colleges and that 700-800 universities need to be founded in the next 10 years. On the one hand, this is a great opportunity for private enterprise but, on the other, it is not clear whether we have enough qualified teachers to staff this many universities. We do not want fly-by-night operators filling the gap. Only thoughtful, concerted action will ensure that we are able to provide the basic tools the emerging youth will need to be productive citizens. I understand Mr. Sibal when he says, "I've had sleepless nights; the task is daunting."
The conversation with Mr. Sibal reminded me of the obvious challenges ahead. But it was Mr. Vijay Mahajan, the founder of the microfinance company BASIX, who perhaps best drove home the significance of the issue. He worries that all the recent growth, while very welcome, has unfortunately not been inclusive. He believes that people increasingly have high aspirations, driven by the influence of media, but limited potential to achieve those aspirations. With limited access to quality education and employment, most of the youth will enter the labor force at the lowest levels. The frustration feeds into movements like Naxalism and even manifests itself in the form of violence based on religion or regionalism. Mr. Mahajan pointed out that as many as 175 districts in India have been labeled as disturbed and only 25 of these are on the border. The rest are often tied to exclusion from India's economic growth.
Investment in Education
I do not wish to sound like the grim reaper. My point is not that India faces doom. Rather, I agree that a rosy future awaits India. But this future cannot be taken for granted and, in fact, a number of pressing concerns need to be addressed before we can make any conclusions about the demographic dividend. The public and private sectors need to invest heavily in education, including in rural India. I do not envy Mr. Kapil Sibal's task but there is no doubting that it is one that requires attention and support from all of us. The silver lining is that there is a genuine thirst for education in India. And this is one sector where I agree that the issue is not about inadequate demand but one of inadequate supply.
In addition, we will need to invest heavily to protect and grow our natural resources. I still recollect Mr. Mahajan's list of environmental concerns, ranging from floods made worse by rampant deforestation to water degradation and soil devoid of micronutrients. Given that half the country depends on agriculture (and the rest anyway depend on food and water), economic prosperity for the nation cannot occur without investments in our natural resources.
There are many reasons to believe that it is ultimately feasible to provide hundreds of millions of Indians with education, employment and a decent quality of life. But I am not yet ready to call it India's demographic dividend. And I sincerely hope history does not judge it as India's demographic liability.