India's Demographic Dividends

May 31, 2012

3 minute read

Week of May 25, 2012

by Sunil Asnani, Matthews International Capital Management, LLC

The wine of youth does not always clear with advancing years; sometimes it grows turbid.—Carl Gustav Jung

Fortunately, India’s vast population of 1.21 billion, considered a “time bomb” not long ago, is increasingly being viewed as a positive. While its population has grown by roughly 18% over the past decade, the percentage of its children has actually fallen during this same period. This demographic shift could help India enjoy increasing national prosperity. The country appears to be at an early stage of declining fertility, leading to fewer young mouths to feed at the same time that it has a greater number of wage earners. This may result in a rise in income per person and the freeing up of resources for investment in economic development and family welfare. Popularly called “demographic dividends,” this phenomenon is expected to bridge regional economic inequalities as the poorer states in northern India catch up to their southern peers, which were early beneficiaries of this trend. Gender equality may also get a boost as women may have more freedom to work outside the home as their domestic responsibilities decrease.

This shift is worth a closer look. First of all, nations that have benefited from both declining fertility and advances in health care have eventually seen a resurgence in dependency ratios (a measure that expresses the number of a nation’s unemployed dependents—children under 15 and seniors over 65—to the total working age population) as their elderly populations rise in proportion. This means that today’s "dividends" will eventually have to be paid back. Granted, in India’s case, any reversal in fortunes is still a few decades away. But sooner or later, the country needs to develop a stronger culture of productivity and sustainable family planning. Secondly, India needs reforms that enable investments in social infrastructure and mobility within the labor pool while ensuring an adequate social safety net for all.

Cultivating the quality and skills of India’s young workforce is probably more important than the sheer increase in its employable population. Currently, at least a quarter of India’s population is illiterate. Having a workforce that has recently seen double-digit wage growth alongside a vastly unemployed and malnourished young population (the prevalence of underweight children in India is among the highest in the world) does not bode well. In addition to devoting further investment to improve nutrition, education and skill development for its citizens, the country must also reform its labor laws in order to attract more investment in the manufacturing sector. This segment has had a better track record of creating jobs than, for example, India’s "knowledge-outsourcing" industries. The timing arguably could not be better: China’s low-cost labor advantage is dwindling, and many companies with a presence in China are looking to base manufacturing operations in other countries.

India would do well to realize that this period of demographic shift is not merely a stroke of luck, but a window of opportunity. For growth to be sustainable requires some reforms in the way people live and work.

Sunil Asnani
Portfolio Manager
Matthews International Capital Management, LLC
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