The Budget Fails India’s Demographic Dividend

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The Economic Survey released on January 31, points out: “Over the next three decades… India… seems to be in a demographic sweet spot with its working-age population projected to grow by a third.”

Estimates suggest that a million Indians enter the workforce every month.  They are India’s demographic dividend. The hope is that as these Indians work, earn and spend money, India will grow at a faster growth rate than it currently is.

This theory works if and only if India’s demographic dividend can find jobs. And the question is where are the jobs?

As per the Report on Fifth Annual Employment – Unemployment Survey, the unemployment rate in India during 2015-2016 stood at 5 per cent. If a person is employed for 183 or more days during the year, he is considered to be employed.

Further, only 60.6 per cent of those who were available for work for 12 months of the year, found work all through the year. Hence, India’s problem is underemployment and not unemployment. There aren’t enough jobs going around for everyone. And in this scenario, the single most important focus of the Indian government should be to facilitate policies and create an environment in which jobs are created.

This should have been the focus of the annual budget of the central government as well. But the budget failed miserably on this front.

Take the case of public sector banks(PSBs) which are sitting on a huge amount of bad loans. In fact, in 2009-2010, 58.7 per cent of all banks loans went to industry. By 2015-2016, it was down to 13.4 per cent. In the last one year, industrial credit has contracted.

Unless, banks give loans to industry how will industries expand and jobs be created? But banks are in no mood to lend to industry given the huge amount of bad loans they have accumulated over the years by lending to industry. The budget makes no effort to come up with a holistic solution for bad loans of banks. Many piecemeal solutions have been tried and they have failed.

These banks require a large amount of capital to continue to function. In the budget for 2017-2018, the government has allocated just Rs 10,000 crore towards their recapitalisation.

An estimate made by Viral Acharya (now one of the deputy governors of the RBI) and Krishnamurthy Subramanian, suggests that in a prudent scenario PSBs would require around Rs 9,97,400 crore of capital. The government clearly doesn’t have this kind of money. In this scenario, it should be looking at exiting out of the ownership of most of these banks. But nothing of that sort has been suggested either in the budget or otherwise.

Over and above the PSBs, the government also continues to run loss-making companies which include an airline, a couple of telecom companies as well as a company which used to make photo-films. There was no mention in the budget about getting out of these companies.

In 2014-2015, the total losses of loss-making public sector enterprises stood at Rs 27,360 crore. Given the government’s total expenditure that is not a lot of money, but at the same keeping these companies going, does take away the focus and attention from other more important areas like education, health and agriculture.

At the same time, another factor that continues to hold back India are its labour laws. The Economic Survey talks about generating jobs in the apparel sector. The sector should be employing a large number of unskilled Indians entering the workforce. It has the ability to generate close to 24 jobs per one lakh rupees of investment. Rapid export growth can create close to a half a million jobs every year in the apparel as well as the leather goods sector.

But that is not happening primarily because an average Indian apparel and leather firm continues to be small and thus lacks economies of scale to compete globally. As the Economic Survey points out: “Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam.”

This situation can be handled by ensuring that we simplify our labour laws. But no government worth its salt has been able to do anything about it till date. Nevertheless, if the government wants to handle India’s demographic divided well, it needs to simplify the labour laws and in the process help companies grow and create jobs.

If that does not happen, it is worth “remembering that demography provides potential and is not destiny”. And the budget was as good an opportunity as any to set this right.

The column originally appeared in Daily News and Analysis on February 2, 2017

 

Of Rahul Bajaj and India’s So Called Demographic Dividend

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One of the things that I have recently been asked more than a few times is that why isn’t anyone else talking about the demographic dividend point that I have been making in the recent past.

The basic argument is rather straightforward. At a certain point of time, countries reach a stage where their working population grows much faster than their overall population. This means that there are more people who can earn and spend than those who need to be taken care of.

This trend typically lasts for two to three decades. When the people entering the workforce get jobs and save and spend money, the economy grows at a much faster pace than it has in the past. This faster economic growth helps pull out more and more people out of poverty. This is referred to as the demographic dividend.

An important assumption in the demographic dividend is that people who enter the workforce and are actually looking for jobs, are able to find jobs.

In the Indian case, around one million individuals are entering the workforce every month. This means around 1.2 crore individuals are entering the workforce every year. This will continue to be trend over the next couple of decades. More than 54 per cent of the country’s population is under 25 years of age.

If this demographic dividend needs to be cashed in on, there need to be jobs for these people. Also, if a bulk of these people need to find employment, the jobs need to be in the unskilled and the low-skilled space.

The question is, are enough jobs being generated for the million Indians entering the workforce every month? The answer is no.

This is the basic point I have been making over the last few months. And this has led to the question, as to why others are not talking about it.

While, I have no control over why others are not talking about what I am talking about, it took me a while to understand why people are asking the question.

The way the human brain works, most of us deem something to be important only if more than a few people are talking about it. In this case, it seems I am the only one rattling on and on about an issue. And given that the question is, is it important enough? Or is it something which one cranky guy seems to have gotten into his head. Making that distinction is important. And this is where external validation comes in. Or whether others are also talking about the same thing.

This phenomenon of seeking external validation is clearly visible in the stock market. Most retail money comes in when the markets are at their peak. And most people get totally disillusioned about investing in the stock market once the market has bottomed out.

That’s how human psychology works and I really cannot do much about. The question is why are others not talking about the risk to India’s demographic dividend? For the English language media, it is a question of us and them. People who are not finding jobs are not the ones who read the English language press.

Further, in India, nobody really stays unemployed. People do find a way of doing something. Either they become a part of the agricultural workforce where the disguised unemployment is very high. Or they become what economists Abhijit Banerjee and Eshter Duflo call reluctant entrepreneurs.

Over and above this, we do not have a good regular measure for unemployment. And given that unemployment rarely makes for news unlike a lot of other economic indicators like inflation, index of industrial production, fiscal deficit and so on.

Also, the demographic dividend not working out is a long-term trend. It is not going to have consequences overnight. Having said that, one consequence that has already started to playout is the land-owning upper castes in various parts of the country are now demanding reservations in government jobs.

I guess these are the reasons why others are not talking about this trend. Nevertheless, I recently came across someone who talked about what I have been talking about.

Industrialist Rahul Bajaj, wrote this in the 2015-2016 annual report of Bajaj Auto: “Each year, India is producing an extra 12 million young people of an age that makes them ready for the nation’s workforce. Unfortunately, while there is no doubt that we as a country can increase our GDP growth initially to 8% per annum and then hit a steady-state of around 8.5% for several years, everything seems to suggest that employment will not rise at anywhere close to that rate of growth.”

I don’t really buy the fact that India will be able to grow at a steady rate of 8-8.5 per cent per year, for several years. Very few countries have been able to grow at a rate of six per cent or more for a long period of time. Hence, there is no reason for us to assume that we will grow at 8-8.5 per cent, consistently.

Nevertheless, I agree with everything else that Bajaj has written. As he further writes: “Indeed, all recent data across most manufacturing and service sector activities show that employment elasticities (namely, the percentage increase in employment for a percentage growth in value added) are not only less than unity, but often negative. Matters worsen if you juxtapose significantly greater skill and multi–tasking needs of the future with the inadequate educational and technical abilities of many who are entering the labour force — thanks to years of neglect of our schools, colleges and technical and vocational training institutions. How then can we expect to employ the majority of our youth even when we attain higher growth? And what will this do to inequality and social tensions? I don’t have ready answers. But as a nationalist in his seventh decade, I am concerned.”

All I can say to conclude this is that like Bajaj I am very concerned.

The column originally appeared in Vivek Kaul’s Diary on September 27,2016

India and the Fallacy of the Demographic Dividend

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At times it is very difficult to make sense of a country as complicated as India is. What complicates the situation further is the fact that we have very little data going around in many cases. But then there are broader trends, which one can comment on.

One such thing is the demographic dividend or to put it more precisely India’s demographic dividend. Nearly eleven years back, when I didn’t understand much economics or finance, this was one of the terms I heard people connected with the investment industry, continuously talk about.

India will do well in this decades to come because of its demographic dividend, they said. In fact, some of them are still talking about it.

So what is the demographic dividend? As country progresses it moves from being a largely rural agrarian society to a predominantly urban society. Along the way it changes from being a society with high fertility and mortality rates to a society which has low fertility and mortality rates.

As Ronald Lee and Andrew Mason write in an article titled What is the demographic dividend in the Finance and Development magazine of the International Monetary Fund: “At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labour force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly too.”

The infant mortality rate in India was 75 in 1996. It has come down to 38 in 2015, data from World Bank shows. The infant mortality rate is essentially defined as the number of infants who die before reaching one year of age, for every 1000 live births during the course of a given year.

Along with the infant mortality rate declining, the general technological advances as well as access to medical facilities have improved. This essentially means that in the coming years there will be a huge bulge in the number of young people in the country. In this stage, the workforce of the country will increase dramatically.

There are multiple estimates of what India’s workforce will look like in the years to come. Most of these estimates essentially suggest that India’s workforce is increasing at the rate of one million workers per month and will continue increasing at this rate in the years to come.

The Planning Commission, before it was disbanded by the Narendra Modi government, had made an estimate on India’s workforce in the years to come.

As the 12th Five Year Plan (2012-2017) document pointed out: “One hundred and eighty-three million additional income seekers are expected to join the workforce over the next 15 years.” This essentially means that a little over 12 million individuals will keep joining the workforce every year, in the years to come. This works out to around one million a month. And at this rate, the Indian workforce is expected to be larger than that of China by 2030.

And this is India’s demographic dividend. As these individuals enter the workforce, find work, earn money and spend it, the Indian economy is expected to do well. When economists and politicians talk about an economic growth of close to 10 per cent per year, they are essentially hoping that India’s demographic dividend will play out as it is expected.

But the question is how likely is this? How have things with other countries been in the past? Have countries which were expected to benefit from the demographic dividend benefitted from it?

As Ruchir Sharma writes in his new book The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The trick is to avoid falling for the fallacy of the “demographic dividend,” the idea that population growth pays off automatically in rapid economic growth. It pays off only if political leaders create the economic conditions necessary to attract investment and generate jobs. In the 1960s and ‘70s, rapid population growth in Africa, China, and India led to famines, high unemployment and civil strife. Rapid population growth is often a precondition for fast economic growth, but it never guarantees fast growth.”

Sharma then talks about the Arab world which despite being poised to, did not benefit from a demographic dividend. As Sharma writes: “The Arab world provides a cautionary tale. There between 1985 and 2005 the working age population grew by an average annual rate of more than 3 percent, or nearly twice as face as the rest of the world. But no economic dividend resulted. In the early 2010s many Arab countries suffered from cripplingly high youth unemployment rates; more than 40 percent in Iraq and more than 30 percent in Saudi Arabia, Egypt, and Tunisia, where the violence and chaos of the Arab Spring began.”

This is something that India and Indians need to be aware of. The demographic dividend benefits a country if the government of the day is able to create the right environment in which jobs are created. As Sharma writes: “In India, where hopes for the demographic dividend have also been sky high, ten million young people will enter the workforce each year over the next decade, but the lately the economy has been creating less than five million jobs annually.”

If this were to continue, there will be no demographic dividend for India.

The column originally appeared in the Vivek Kaul Diary on June 17, 2016

Demographic dividend – The biggest risk to the India growth story

indian rupeesIn an interview last week I was asked what is the biggest risk to the India growth story. The term India growth story made me think about a period ten years back when I was just starting up in business journalism as a personal finance journalist.

Back then, every fund manager I met said the same thing—the India growth story is still intact. But no one ever bothered to explain what the India growth story actually was. In fact, for a while I even thought that the fund managers were talking in some sort of a code.

As John Lanchester writes in How to Speak Money: “Practitioners of almost every metier [profession], from plumbers to chefs to nurses to teachers to police, have a gap between the way they talk to each other and the way they talk to their customers or audience.

Over a period of time I realised that it was much more than that. As Lanchester writes: “There are a lot of things…in the world of money, where the explanation is hard to hold on to because it compresses a whole sequence of explanations into a phrase, or even just into a single word.”
India growth story was that kind of term. In three words fund managers encapsulated a whole sequence of things that that they thought would lead to the

Indian economic growth continuing to remain strong in the years to come. Or if I were to look at it in a cynical sort of way, fund managers wanted to sound like other fund managers. I guess it was a bit of both.

Having said that over the years I have come to realise that one fundamental point behind what has come to be known as the India growth story is the demographic dividend of India. The demographic dividend of a country essentially is a period of two to three decades when the birth rates go down and this leads to a situation where the workforce of the country is growing at a faster rate in comparison to its population.

Sanjeev Sanyal explains this in his book The Indian Renaissance—India’s Rise After a Thousand Years of Decline, where he defines three stages: “In the first stage, there is an increase in the proportion of the young in the population as birth rates stay high but infant mortality declines.”

In the second stage, the birth rates come down and the number of old people in the population increases at a modest pace. In this stage, the workforce of the country increases dramatically. This is the demographic dividend. In the third and final stage, the working population falls and the number of old people goes up.

India is currently in the second stage. As Sanyal writes: “The UN’s projections suggest that India’s working age population will rise from 691 million in 2005 to 829 million in 2015 and 942 million in 2025 before stabilizing at around 1050 million in the late 2030s…By this time, India will have the single largest pool of workers in the world, by passing an aging China. This means that we have entered a phase where the labour supply will be growing at a very rapid pace for a prolonged period of time.”

What this means is that India needs to create jobs and that too at a very rapid rate for the huge number of people that is entering the workforce every year. And that does not seem to be happening. As the latest Economic Survey points out: The power of growth to lift all boats will depend critically on its employment creation potential. The data on longer-term employment trends are difficult to interpret because of the bewildering multiplicity of data sources, methodology and coverage. One tentative conclusion is that there has probably been a decline in long run employment growth in the 2000s relative to the 1990s and probably also a decline in the employment elasticity of growth: that is, a given amount of growth leads to fewer jobs created than in the past. Given the fact that labour force growth (roughly 2.2-2.3 percent) exceeds employment growth (roughly about 1½ percent), the challenge of creating opportunities will remain significant.”

If this trend continues in the years to come, the demographic dividend can easily turn into a demographic nightmare.  And this remains the biggest risk to the India growth story.

Another impact of the demographic dividend is an increase in savings. As Sanyal writes: “When the demographic bulge raises the share of working-age adults in the population, the overall propensity to save rises sharply…The bottled up savings cause a sharp decrease in the domestic cost of capital and a sharp increase in the quantum of resources available to the financial system…In turn, this results in a lending boom, job creation and consequently even more savings.”

In the Indian case, the savings instead of going up, have been falling. In 2007-2008, the financial savings had stood at 11.7% of the gross domestic product (GDP). In 2014-2015, the number was at 7.5%, having stood at 7.2% in 2012-2013. There has been a dramatic fall in financial savings over the years. Further, even though the financial savings have improved over the last two years, the improvement has been at a very slow pace. This dramatic fall in financial savings has primarily been on account of high inflation that prevailed between 2007 and 2013.

In an Indian case given the semi-skilled nature of the workforce, the construction sector could have been a huge creator of jobs. But one reason that doesn’t seem to be happening is because the construction activity in the real estate sector has come to a standstill. This is primarily because real estate prices continue to remain high and hence, unaffordable to a large section of the population.

And all this has me worried. And it irritates me no end when fund managers say: “The India growth story is still intact.” It makes me wonder what they have been smoking.

The column originally appeared in The Daily Reckoning on Sep 16, 2015