The sad illusion of India’s demographic dividend

Posted on October 17, 2016

As Diwali, India’s festival of light, approaches, the weather in the hill station of Manali in the north of the country is turning colder. Shepherds are leading their flocks to lower climes to escape the freezing nights in the Himalayas, while trekkers no longer venture to the high peaks for fear the passes will soon be closed by snow.

Some of those who cater to tourists to the region are fortunate enough to have small plots of land on which to grow apples or pulses. The rest will spend the winter mostly idle, while a few will follow the flow of tourists to Goa and other beach resorts where they will work as cooks, cleaners and drivers. Others will go to the cities where — if they are lucky — they can find jobs on construction sites. The most fortunate of all will study in the hope of securing jobs in the IT industry.

A young population is supposed to represent a demographic dividend. However, that is only if there are jobs for them — and that is not the case in India. A recent snapshot from the Employment and Unemployment Survey from the official Labor Bureau shows how dire the jobs situation is for most Indians, whatever their age or skill.

The country has little to export but, without better jobs, it will lack the rising income needed for domestic consumption to serve as the engine of growth. Neither recent economic data nor a stock market that is only up about 5 per cent over the past year suggest that improvement on the jobs front — which matters far more than GDP — is imminent. Both the number of jobs created and their quality are disappointing.

India needs to generate about 1m jobs a month to meet the needs of its young people — yet jobs growth between 2012 and the financial year that ended in March amounted to a paltry 5m, according to the EOS survey. The trend is especially worrisome for women, as only 23.7 per cent worked in fiscal 2016, according to the report.

Meanwhile, the unemployment rate for graduates and those with even more qualifications was 28 per cent. Almost 80 per cent of the total labour force was either self-employed or working as casual labour and a mere 17 per cent were regular wage earners.

“We believe new job creation strategies have to be formulated to increase the share of manufacturing jobs, reduce the informal jobs, bring more women into the labour market and meet the aspirations of educated youth,” Citigroup’s India economist Samiran Chakraborty noted in a recent report.

It isn’t clear, though, where and how new jobs will be created. Indeed, most analysts believe the low-end service jobs which were the great growth story of the last decade have peaked. The founder of one Indian bank has a particularly dystopian view in which 150m very rich Indians will look after a legion of low-end service staff and their families.

To be sure, there are a few positive indicators. The Reserve Bank of India cut rates earlier this month in an attempt to spur growth. Also on the positive side of the ledger, the monsoon was good, which means that after two years of disappointment rural income and spending should pick up

However on balance, the broader economic data are not encouraging. Growth remains weak, while private sector investment remains basically flat. Corporate earnings were down 4 per cent in the year ended in March. In addition, the great drivers of the Chinese stock market these days — technology, healthcare and property — are unlikely to serve as catalysts for similar developments in India given the lack of income growth.

India is not rich enough to follow the Chinese template. The definition of middle class incomes in India is generous — perhaps overly so. Annual middle income in India means a range of Rs20,000 to Rs100,000 ($1,500) per household. The total covers about 12 per cent of the population, though some economists think the true number is about 6 per cent. India has neither the low-end manufacturing that helped Chinese workers advance nor the wealth to support the growth of a new economy based on higher quality services.

Sadly, India is not alone in its plight.

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