‘India will become an ageing society by 2040’

SOURCE: THE HINDU

We have only 20 more years left to tap the demographic dividend optimally, says economist Santosh Mehrotra is a professor of economics at the Centre for Labour, Jawaharlal Nehru University. A PhD in economics from Cambridge University, Mehrotra spent 15 years with the UN in research positions, heading UNICEF’s global research programme at the Innocenti Research Centre, Florence, and as chief economist of the global Human Development Report, New York. He returned to India to head the rural development division and development policy division of the Planning Commission (2006-09). Reviving Jobs: An Agenda for Growth edited by Mehrotra is part of the Rethinking India Series brought by Penguin Random House India.

The volume features scholars/policymakers such as Jeemol Unni, Vijay Mahajan, Ajay Shankar, and Arunabha Ghosh and examines India’s unemployment crisis in detail. Mehrotra speaks to BusinessLine about the book, the job crisis and the country’s future. Excerpts:

What makes the current episode of the job crisis different from others in the past?

The crisis comes at a time when India is at a crossroads in terms of the demographic dividend. The demographic dividend means the share of the working-age population rising and the share of the dependent population falling. In India’s case the demographic dividend began in the early 1980s. Unlike what many people believe, the dividend lasts for a finite period after which India will become an ageing society, like all the OECD countries and China have already become.

India is due to become an ageing society by 2040. So, we’ve already completed two-thirds of our dividend period. But this is an opportunity which comes but once in the life of any nation. It came in the life of every nation and those which rode the wave, managed to grow massively, reduce poverty and also structurally transform their economies away from agriculture towards industry and then services. Those that did not ride that wave have been stuck at relatively low levels of per capita income and human development.

You discuss the contrast with Latin America here.

Yes. Latin America has run out of its demographic dividend and is trapped in the upper middle-income category — the middle-income trap — now. The region became independent within 30-40 years of the US becoming independent. But there is no high-income country in Latin America. The reason is they did not manage to ride the wave of demographic dividend. Understanding this international context is important because people do not realise we have only 20 more years left to tap the dividend optimally.

There are three concepts that need to be kept in mind here: those in the working age; those who are looking for work — the labour force — and those who actually work — the workforce. The difference between the labour force and workforce is equal to the unemployment rate. The working-age population has been rising since the early 1980s and it will continue to rise until 2040 after which it will fall sharply. The total population will shrink like in the OECD countries and China.

As young people enter the working age, they should find work. The young are better educated now as they enter the labour force, as enrolment in education has improved. Our enrolment rates have risen sharply over the past 20 years or so at every level. As the number of educated youth entering the labour force increases, they will prefer work in urban areas in industry or modern services, not to work in agriculture.

So, we have a situation where most of the illiterate and poorly-educated are left in agriculture, while the newly educated are looking for work in industry and services. And that is the meaning of development: structural transformation is taking place meaning people are moving out of agriculture into industry and into services, and output share of industry and services is growing.

The crux of the crisis is: just as the number of entrants into the labour force has increased, and just as the young people have gotten better educated, the number of industry and modern services jobs that are being created has fallen. This is the reason for the rise in the open unemployment rate. In 2018, the Periodic Labour Force Survey data, saw the open unemployment rate for the overall labour force shoot up from 2.2 per cent in 2011-12 to 6.1 per cent — that’s a tripling in a matter of six years. Open unemployment rates had never risen beyond 2.1-2.2 per cent.

Youth unemployment rates went up from 6.1 per cent in 2011-12 to 17.8 per cent in 2017-18. The unemployed among 15-29 year-olds rose from nine million to 25 million over that period. ‘Youth Not in Labour Force, Education or Training’ shot up from 83.7 million to 100 million in the same six years.

Between 2004-05 and 2011-12, real wages were increasing because non-agriculture job growth was very high. More than 7.5 million new non-agri jobs were being created between 2004-05 and 2011-12, at the time when only two million young people were joining the labour force (because they had all entered education from the early 2000s).

The combination of rising non-agri jobs and rising real wages meant that for the first time in India’s history, the total number of poor fell by nearly 140 million between 2004-05 and 2011-12. Until 2004, the share of population below the poverty line had been always falling, but the absolute number of poor had remained the same 30 years.

And this was the period of the dream run of the economy…

Yes. Although the global financial crisis hit the economy, but it rebounded quickly. We had been growing fast till the crisis, so the government had massive fiscal space. Post-2008, the fiscal pump-priming was very significant, and growth recovered quickly. The average growth rate of the economy between 2003-04 and 2013-14 was nearly 8 per cent per annum, unprecedented in our country’s history.

It is precisely over that period that we were generating 7.5 million new non-agri jobs. As a result, the unemployment rate of the educated was falling for 2004-05 and 2011-12.

So, what happened after 2012?

First, the UPA went into policy paralysis and growth did dip in the last two years. But it had already begun to revive towards the end of 2013. Otherwise, how could India have achieved 7.9 per cent growth over the 10-year period. Most of the decline in growth occurs after 2014. And the result was that non-agri job growth fell dramatically from 7.5 million per annum to 2.9 million per annum during 2012-08. The number of total unemployed rose from 10 million in FY2012 to 30 million in FY2018. And mind you, this is before Covid-19 hit India.

Now Covid will make it even worse. Growth may be negative for FY21. So you can imagine the implication for unemployment. This is going to lead to an additional 50 million people falling out of employment.

If you look at it sectorally, the crisis will become clearer. For instance, manufacturing has grown so slowly in the past six years that industrial employment in India fell in absolute terms for the first time in the country’s history, because demand is constrained. This happened because the government inflicted shocks on the economy. The first self-inflicted wound was the demonetisation. Second was the hasty implementation of an inadequately designed Goods and Services Tax. The third was the management of the banks’ NPAs, by merely infusing capital into them without governance reform in the system.

When the current government came to power, there was a dramatic fall in oil prices, which gave it an opportunity for a dream run, unlike during the UPA period when oil prices were at a peak of $120-130 a barrel. By 2015, that had dropped to $60-70 a barrel. The fisc got a windfall gain. That could have been used to increase infrastructure investment which generates construction jobs. During 2007-12 — the 11th Five-Year Plan period — there was a massive $500 billion increase in infrastructure investment. That generated jobs on a massive scale for the very people who needed it, the relatively low-skilled and poorly educated, which include the urban poor and migrants. India generated four million new construction jobs annually over 2004-05 to 2011-12; that fell to 0.6 million over 2012 to 2018.

We should focus on manufacturing development. Until 1991, India’s manufacturing growth was limited, compared to East Asia. After 1991 there was explicit industrial policy. The first manufacturing policy was introduced in 2011, which was not implemented. In 1991, the contribution of manufacturing to the total national output was 16 per cent.Fast forward to 2020, it is still 16-17 per cent. The share of manufacturing in employment was 10.5 per cent in 1993-94 and this had risen to 12.8 per cent by 2012. It has sadly fallen back to 11.5 per cent in 2018. The structural transformation that was happening till 2012 has stopped since. So, for jobs to revive we must design a manufacturing strategy (that is spelt out in the new book), especially in the MSMEs. India’s 11.5 per cent workforce in manufacturing pales in comparison with Bangladesh’s 16 per cent. The number is higher in Vietnam, Thailand, Malaysia and obviously China where the figure is around 25 per cent. Without a manufacturing strategy, underpinned by an education and skills policy, manufacturing will not grow. MNCs leaving China are not suddenly turning to India, when they have other SE Asian alternatives.

The book discusses all these macro and micro strategies in detail. A clutch of authors has contributed to it. We must get growth back on track before 2040. This calls for massive infusion of public expenditure. The size of fiscal stimulus post-Covid needs to be nothing short of 3 per cent of GDP. We have to find the resources. It must not be found from abroad. India’s capacity for generating exports is going to be limited because the international economy is going into a massive slowdown. As it is, our exports were not growing for the last five years. Therefore, the strategy has to also focus on reviving agriculture, growing demand in agriculture.

The agricultural strategy should go beyond input subsidy and output price support. Giving cash doles via initiatives such as PM Kisan Yojana doesn’t help with the increasing rural distress. Instead, investment in agriculture must increase, to areas such as sprinkler irrigation, watershed management, research and development, extension services, etc. All these need organisational changes. We should promote producer cooperatives and farm produce organisations.

And all these require a sophisticated capacity for planning, not ad-hoc piecemeal approaches. The country cannot get back on job generation and real growth without coordinated Central and State-level planning. This is where we feel the absence of the Planning Commission. But we will need a PC with greater domain expertise than earlier.

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