India's Demographic Transition: Many Chances, but also many Obstacles

Students at work in India
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Students at work in India

Narendra Modi's victory in the Indian parliamentary elections shows the citizens' hope for a change in the nation's political trajectory and for economic reform. In his election campaign the new Prime Minister had promised better economic perspectives for the largest youth cohort in the world. His agenda of fostering economic growth, reducing bureaucracy and combating corruption was hugely successful because many young citizens have not yet profited much from the economic growth. One important reason for this is that the governments as well as the economic actors of the country were unable to cope with the rapid population growth of the past decades.

The population of 15 to 24-year-old citizens in India has almost tripled since 1960, amounting today to 230 million. This young generation is one of the most important potential sources of economic growth, which, however, has not been supported enough so far. In contrast to the neighbouring East and Southeast Asian states where similar positive demographic trends have been observed, the Indian governments have not been successful enough in reducing poverty on a large scale, establishing higher educational standards, or creating an economic framework suitable for qualitatively better employment positions for young people.

The Population Dynamics of India and its Consequences

Already in the first Five Year Plan after India's independence in 1947, the Nehru government found it necessary to lower the rapid population growth, considering this to be the main cause for frequently occurring famines. The implementation of measures for family planning led to a steady decrease in the total fertility rate. Whereas the annual population growth rate was distinctly above two percent even in the 1970s and 1980s, it has come down today to just over one percent. With the current total fertility rate of 2.5 children per woman, population growth is reducing continuously; nevertheless, India is expected to be home of nearly 1.5 billion people by 2030 and thus becoming the largest population in the world.

In spite of the decreasing total fertility rate, the proportion of children and adolescents has been still very high in the past decades particularly due to the containment of infant mortality, which means that baby-boomers are currently overcrowding the labour market. According to estimations of the World Bank, almost one million young people will be entering the South Asian labour market each month in the coming 15 years, most of them in India. The number will decrease gradually only from 2030 onwards. From an economic perspective, India's favourable ratio between the working age population and children on one hand and senior citizens on the other represents the onset of a "demographic bonus", a period that will last till about 2040. To utilise this favourable age structure for economic growth, investments in the health of children and adolescents, raising the standard of their education, an economic policy geared towards promoting employment, and macroeconomic stability are imperative. Only such steps can bring about increasing income and the higher saving potential of the employed population.

India is considered to be an internationally aspiring power having achieved admirable economic growth rates before the current downturn. The country has a growing urban middle class and internationally competitive sectors such as software, pharmaceutical, medical, film and textile industries. However, the majority of the population has profited insufficiently from this growth so far. The country is characterized by huge social inequalities. The potential of the population growth has not yet been exploited successfully for an economically and socially balanced development. Even according to the official statements of the Indian government, 22 percent of the population still lives below the national absolute poverty line. Other calculations even assume a much higher poverty rate.

The Prerequisites for Benefiting from the Demographic Bonus

In spite of the high economic growth, India performs worse in social indicators, such as infant mortality rate, compared to the neighbouring states like Bangladesh and Nepal. There are considerable regional differences within India itself which are also reflected in the total fertility rates. According to the data of the Indian census southern states like Kerala, Tamil Nadu or Goa indicate comparatively lower infant mortality rates, lower fertility rates, and higher female literacy rates. Some states in the north and the east, namely Assam, Bihar and Uttar Pradesh, have infant mortality rates conspicuously higher than the country average and high total fertility rates, coupled with less progress in the educational system.

Despite considerable success in the expansion of primary schools, the quality of education in India has not improved satisfactorily. More than half of the pupils in the third grade cannot read even a short text meant for the first grade, according to the Annual Status of Education Reports. The poor quality of primary education carries on in the higher school grades and leads to a high dropout rate in the secondary schools. Less than one-fifth of the 20 to 24-year-olds today have more than just the primary school qualifications, although much more than half of this cohort has gone to the secondary school at least for a while. Also the higher education system shows substantial deficiencies. A study of the World Bank has revealed that three-fourth of the employers are hardly satisfied with the technical knowledge of the newly employed engineering graduates.

Besides the standard of education, the insufficient capacity of the economy to absorb the labour force entrants is the key problem; simply put, there is a lack of jobs. The high youth unemployment rate, between eight and ten percent for many decades and thus above the general unemployment rate, represents only the small part of the officially registered unemployed young people, namely those predominantly belonging to higher educational and income strata. Population growth and inadequate education systems have led to a surplus of poorly qualified labour. The Indian labour market is characterized by employment growth that lags behind population growth.
Women experience even more discrimination in the labour market. Thus, the labour market participation rate of adult women is only just above 30 percent according to the calculations of the International Labour Organization (ILO). This figure, too, indicates the failure to utilise the favourable age structure for an inclusive socioeconomic development – since a particular advantage of the demographic bonus is the chance to integrate women in the labour market as they have to look after less children. Through increased participation in the labour market, their status in the household may also be raised and this could contribute to gender equality.

The poor macroeconomic conditions also hamper the creation of highly qualified jobs and the attraction of foreign direct investments. The lack of legal certainty, high inflation rates, bottlenecks in important infrastructural facilities such as energy supply, and the rampant corruption impair the establishment of industries as well as the creation of qualified employment. The country is still mainly agricultural despite the high rate of urbanisation. The contribution of the agricultural sector to GDP is relatively small, i.e. only one-fifth.
More than 80 percent of the labour force is engaged in the informal economy, in the agricultural as well as non-agricultural sectors. The assessment of the National Commission for Enterprises in the Unorganised Sector confirms that employment growth in India between 1990 and 2005 took place mainly in the informal employment relationships – irrespective if the employment was generated in the formal or the informal sector. The World of Work Report 2014 of the ILO notes that the contribution of the industry to GDP, in fact, declined between 1980 and 2011.

Modi's Challenges and Chances

The favourable ratio between the working age population and children on one hand and senior citizens on the other will come to an end in about 25 years. If the above described failures are not remedied till then, the consequences are foreseeable: the demographic bonus is going to be lost, positive effects on income and savings could not be materialised, and simultaneously more financial resources will become necessary for the growing numbers of senior citizens. The underemployed low-income earning youth of today will not be able to finance itself in old age. Changing family structures with fewer children, moreover, challenge the traditional structures of old-age security without providing any effective alternative for the older generation. In absolute numbers, about 100 million people above 60 years live in India today, and the figure is expected to increase to almost 300 million by 2050.

It is expected from Modi's new government that the economic and legal conditions are reformed. In his election campaign he has promised to create employment for all, to lead the Indian industry to new paths, and to promote foreign direct investments. Taking into consideration the failures so far in the health, education and employment policies, following question arises: can a growth-oriented economic-political agenda that mainly focuses on reforms in the formal sector achieve the targeted goals? The new Prime Minister – in view of his liberal economic policy implemented in Gujarat – is not seen as a protagonist of a socially balanced development. The key question will be if Modi in cooperation with the highly diverse federal state governments manages to transform the country's economic growth into an inclusive growth. In contrast to his predecessors in office, he has to his advantage the continually progressing demographic transition. He should derive benefit from it if he does not want to disappoint the great hopes of young Indians.

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