The fallacy of the “Demographic Dividend”

Allow me to explain what Demographic Dividend is, before we go into why it is a fallacy.

Wikipedia says – “Demographic dividend refers to a period – usually 20 to 30 years – when fertility rates fall due to significant reductions in child and infant mortality rate.”…meaning that:

  • Women and families gradually realise, because of falling infant mortality rates and increase in life expectancy, the need for producing more children is lower.
  • This is correlated in a way to the transition of a nation’s economy from being primarily agrarian to industrialized.
  • In the initial phases of this transition, the labour force then grows faster than the population dependent on it.

So, when the data starts showing a fertility drop, one knows that your population growth rate is starting to slow down compared to that earlier. Which means that in about two decades you would end up having a large population in the age bracket of 20 – 50. The data which shows the manifestation of demographic dividend, you will appreciate, is a leading indicator for what would happen a couple of decades in the future.

What the demographic dividend theory does not tell you is that this precedes a larger percentage of population growing older as well.

In a more developed country, a demographic dividend works well because the larger working population means (hopefully) economic growth. Check some of the relevant data points; Per 2011 census, India’s

  • Birth Rate is 20.22 per thousand
  • Infant Mortality Rate (below 5 yrs.) is 40 per thousand
  • and Death Rate is 7.4 per thousand

So the effective growth rate is something like 11.6 per thousand, assuming of course that if a child does get to an age of five, he or she will live till the expected life span limit. The numbers seem to suggest that if the trends remain about the same India will reach replacement levels of fertility by about 2020 -2022.

Two ways to look at the phenomenon

1. The positive first

One is that India’s population will get checked, regardless of what the naysayers keep saying. And that India will have a large workforce. During the period of demographic dividend, usually these three things happen:

  • There will be a quantum increase in labour supply. The magnitude of this benefit will, however, be dependent on how much of this supply the economy is able to employ productively. More on this shortly.
  • There is a potential of increase in per capita savings because the number of dependents will be less, eventually leading to an increase in national savings and thus availability of capital. If channelized well, there should be influx of capital into the economy as people invest more or at least put money into the banks.
  • Drop in fertility rates should also mean that womenwillbe pregnant less often, will add to the workforce and cause lower economic pressure at home and thus higher amounts of disposable income. The higher amount of disposable income should result in:
    • investment into the children’s future
    • and perhaps growth in domestic demand

2. and then what we should be concerned about

The other is what is actually starting to happen to India’s overall population and what the implications are in the long-term.

What will start happening in about 20 odd years is that India will begin to have a super large work force. While this is happening, consider the fact that a larger percentage of the population of many of the developed countries would have gone old. Now, to be able to sustain that workforce, given the above two situations, all the following need to happen:

  • There has to be larger and larger quantum of work being shipped to India in sectors which can afford to outsource; either in the services sector or in manufacturing.
  • India needs to have enough of its own employment generating capacity. Now, do you realise why “Make in India”, being pushed by our prime minister, is so important?
  • The demographic dividend phenomenon will happen for say two or three decades, after which the impact will start waning. Why? Because the working population will retire and start getting old. And we need to prepare for that, starting now.

Consider the following:

In about two decades from now, there has to be enough work has to be available to ship out to India. If the demographic dividend happens to coincide with a global economic slump for even quarter of the period, we will be in serious trouble.

It would be unwise to imagine that the quantum of work which gets outsourced to India from the services sector will grow in leaps and bounds. It won’t, and more likely will flatten out as other smaller countries get into the game.

The developed countries have already gone through the transitory period and their manufacturing bases would have weakened somewhat. Where will they manufacture? That is what China has been reaping the benefit from, now they have realised the situation as well and are slowly starting to move away from the one child policy. The impact of this is the availability of a short window that we will get to be able to insert ourselves and capitalise, if we really can.

Many of India’s large industrial houses have always been petty minded and selfish. They have thought nothing of transferring whole manufacturing lines to, or sourcing entire lines of products from China. In the past (before opening up of the economy) they have deliberately starved the Indian populace of temporally contemporary products. Want an example? Allow me to give you two: Do you remember the way Bajaj continued to produce lousy two and three-wheelers over the decades; made people wait for months for rubbish engineering from decades back? Or How about Hindustan Motors? (Sorry, I have no love lost for Ambassador getting extinct. It has gotten to where it should have in 1960.) That begs the question – can we depend on these industrial houses?

So, if we can’t up our manufacturing either through Indian companies or non-Indian ones setting up base in India, we will have a rather large unemployment problem on our hands; much, much larger than what we have now. Again, given the unreliability of Indian industrial houses, do you see again why promoting Make-in-India outside the country is so important so that they set up base in India now and remain here through the next forty years?

Where is India’s educational system currently? We are neither in a situation where we provide enough of a base for students to grow on their own, nor do we take education to the level of vocational training. We produce students with a BE in Information Technology, but unable to relate basic physics in real life situations. WTF is BE in IT anyways, with reduced stress on Mathematics and added subjects related to Management? You might as well send these kids to an IT training school around the corner already.

During the demographic dividend period itself, another phenomenon will start happening. The population will start ageing. Every year a certain percentage of the workforce will move into retirement and progress towards old age when they will need medical help. For a smaller, wealthy country the situation would be very different. For us, a one percent is a very large absolute number. Gradually, the entire workforce (from this period) will move over to retirement and old age. The burden on the healthcare system or the amount of money needed to support pensions will be tremendous, the costs very high.

Yesterday, the President talked about harnessing the demographic dividend in India and has talked about it a few times now (including twice in the parliament). Pranab babu’s pointers have been towards India not having enough quality educational institutions to train this large (forthcoming) workforce and that we might miss harvesting the transitory period if not careful. Today CII is orgasming about it too. It is surprising that little thought has gone into this, by CII, in understanding what the implications are for India and what we need to start building right now. But, then the CII is populated by India’s industrial houses which behave the way I have already mentioned above.

Now, do you see the knife’s edge we are sitting on? And why just getting euphoric about one face of the demographic dividend is such a fallacy?

Who gains from the PMI report? And why manufacturing needs attention.

The question is – who is poised to gain from this PMI report? Oh, wait. I am getting ahead of myself. This rant of mine is about HSBC’s PMI data which has reached a two-year peak.

Hate to start the new year on a morbid note related to the economy. But, that is current reality. In one of my previous posts, I had talked about the country’s rate of WPI related inflation and the indicators coming in from the secondary sector.

The story seems to continue, but the industry pundits strangely are floating in some sort of self-created euphoria. Brent’s barrel seems to be continually rolling downwards. Manufacturing in our country is showing not so great figures (will talk about this shortly). The WPI has come down, and the inflation rate touched zero percent for a period. That does not really have a direct impact on the common people. What matters is the Consumer price index, the CPI.

The last CPI data released by the RBI (last month) clearly shows that the CPI is actually going upwards. It showed at a 145.2 (for combined) for Oct 14 as compared to 137.6 for Oct 13. For your amusement, check this RBI graph which also shows the CPI-Industrial workers along with combined CPI and WPI.

RBI Credit data by sector

RBI Credit data by sector

The previous post also showed you that our WPI for manufacturing had dropped by 0.3% and our exports have shows a -5% progress. That should be causes for alarm. If inflation does trend downwards, interest rates get chopped. The finance minister however,  declared two days back interest rate cuts aren’t really being considered. That overt statement tells you something, and also of course is the right direction to go.

Very recently, you must have read about Mahindra & Mahindra dropping its production to bring it in line with demand. My above findings / analysis seems to be exactly in line with what M&M is doing. Another piece of data which corroborates this is the falling credit being given by banks (as you will see in the RBI graph above). Get the picture?

HSBC’s Purchase Manager’s Index for India shows to be at 54.5 and there is a sudden euphoria again. Most Indian trade and finance newspapers have already have had a picnic because the number is the highest in the last two years. And by later today or tomorrow you will see various finance wizards carrying the group love fest together. But, hear this. This report is surveyed data from only 350 private sector companies. Just 350, in a country like India.

This really has to do with the sample size and type and does not have to do with any synchronicity with other economic factors and data available. So, why this hype? You might want to consider the fact that a piece of news does impact the market, and one should consider what stake does HSBC have in the market. You sense a link? There might be.

What is completely silly is Economic Times, and Business Standard (there might be others) jumping in joy. And what should bother us is that not only newspapers, and a bank but other finance experts will project this as an amazing this. You might ask what are these guys smoking? Yes, I would too.