(October 2018)

Will India Deliver its Demographic Dividend?

  • The number of persons in India aged 15 to 64, defined as working age, is projected to increase from 887 million in 2017 to 1.004 billion in 2027.  .  Will this benefit India’s economy?

  • The propensity of these persons to be employed declined in the last decade meaning that India had 40 million fewer workers than might have been expected

  • This decline in propensity to be employed is expected to reverse in the next decade as the education profile improves.  Better educated people are more likely to be employed.  Total employed is projected to increase from 502 million in 2017 to 570 million in 2027.

  • By 2027 it is expected that 37% of working age adults will have upper secondary or better education – probably biased to urban areas.  In addition to improving propensity to be employed, this should also positively impact productivity of the worker.

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There is a significant body of thought that countries such as India with high birth rates over the last two decades will do well economically over the next decade as a result of an increasing proportion of the population being of ‘working age’, which is generally defined as 15 to 64 years of age.

It is certainly true that the historic (and future) birth rate will result in a rapid expansion of the number of persons of working age in India – although as a proportion of the population the lift is not as great for the simple reason that there is still a significant ‘tail’ of children in the population because of the continuing high birth rates.

This is demonstrated clearly in Figure 1 and Table 1 of this Month’s Global Demographics’ Insight.  As shown in Table 1, the youngest age segment (0-14 years) is relatively stable in number from 2007 through to 2037 at around 370 million persons. The oldest increases dramatically in size – doubling between 2017 and 2037 – but it is a very small proportion of the total population.  In contrast the working age segment dominates the population age profile (see figure 1) but, and this is important, it stops growing after 2027 and declines marginally as a proportion of the total population – although it has increased dramatically over the last and projected to continue to increase for the next decade.  The working age segment goes from 62% to a projected 67% of the total populaiton.  Figure 1 shows the changing importance of age segments graphically.

 

 Table 1: Historic and Projected Size of Key Age Groups.

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Figure 1: Changing Size of key age groups – 1995 to 2037

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While it is a reality that the working age population will increase over the next decade, whether that is a benefit or not is very much a function of whether India is able to find employment for these persons.  Here, the picture is potentially less positive.

Using the top line statistics at first, in 2007 it is reported that 61% of persons aged 15 to 64 years were in full time (20 hours or more a week) employment.  That is a total workforce of 440 million.  If India is to benefit from its increased working age population then the expectation is that the 61% participation rate would be maintained.  That means total employed by 2017 should have increased to 540   million (61% of the 2017 working age population of 502 million persons).  However, that is not the case.  The trend in the participation rate has been steadily down and by 2017 it is 57% - a significant decline in the context of a population of 1.3 billion.  Whereas the employed population should have been 541 million persons it is actually   502 million.  There is a shortfall of 40 million (or an average of 4 million a year for the last decade).

Before looking at the detail behind this it is useful to look at some implications of this decline in propensity to be employed.

First has meant that the average number of employed persons per household has declined from 1.59 to 1.52 – a 5% drop -  which means that household incomes have not grown as fast as wages, so the benefits of increased Fixed capital investment and improved education outcomes are not fully realised in the average household’s income.

Second it means the dependency ratio, which is already high by international standards, has not improved as much as might have been expected.  The average number of dependents per worker has decreased from 1.71 to 1.68 in the last decade.  In the case of India this is a concern as, unlike the older affluent countries, the dependents are biased to children who are much more expensive to maintain (health education and no savings) than older persons - especially in India where life expectancy is short so, as shown in Figure 1, the number of old as a proportion of dependents is low.

If the trend in propensity to be employed continues then the situation clearly worsens.  But the good news is that the education profile is starting to improve more rapidly and as a result Global Demographics expects the propensity of a 15 to 64 year old to be in employment to remain at 57%.  This means the total workforce will grow from 502 million to 571 million by 2027 and 617 million by 2037.  This clearly will assist the overall GDP growth.

But why would we expect the propensity to be employed stabilise?  The statistic to look at in the case of India is education. It is a simple reality that the better educated the working age population the more likely it is that they will be in employment and that they will be increasingly productive as the standard of education improvises (a better educated workforce also attracts more capital investment which helps productivity).

Using the data available on the education profile of the 15 years plus population of India and projecting that to 2017 and then on to 2027 and 2037 using the current enrolling profile and assuming the people leaving the workforce because of old age have the worst education profile of the working age population, then the education profile of India’s workforce is as shown in Figure 2.  There is a significant improvement taking place.  Note particularly the decline in the number and proportion of persons with no education.  Conversely the upper secondary and post-secondary segments are showing significant growth – and they are almost certainly the ones getting employment.  It is worth noting that in absolute number this segment is projected to grow from 324 million persons in 2017 to 418 million by 2027.

Figure 2:  Changing Education Profile of India’s Adult Population

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This lift is the skill level of the workforce could have significant implications for the overall prosperity of the nation.  For example, 1 in 3 workers (and hence potentially households) will be upper secondary or above educated with consequent implications for productivity and earning power.  As a result, the productivity of the average workers is expected to lift by 5% per annum for the next decade.

It could also have implications for the structure of society – or alternatively the structure of society could put constraints on the ability of the labour force.  In 2017 just 33.5% pf the population (and presumably persons aged 15 to 64 years) are urban – and these will, given the present availability of education in India, be biased to those with upper secondary and above education.  It is also urban jobs where productivity is greatest, Therefore the Government has to encourage the move from rural to urban occupations if it is to take full advantage of this education uplift.  If it doesn’t then the payoff may not be as great.

 

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