The paradox of rising population, declining workforce! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The paradox of rising population, declining workforce! 

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In this issue:
» India's fiscal deficit target seems unachievable
» Gold could cost US$ 7,500 an ounce if ...
» China holds the biggest chunk of US govt debt
» FDI by way of imports?
» ...and more!

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After all, you never know how bad a market crash could get.

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For answers to these questions, and more, click here to read on...

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00:00
 
Human capital is the most important resource in any kind of economic activity. Indeed, the protagonists of the great Indian growth story are its people. On the other hand, several developed economies are engulfed with the burden of an ageing population.

Despite having a young and growing population, India has not been quite successful in mobilising the country's massive workforce effectively. The main problems so far have been those of poor education and a serious lack of soft and technical skills. But some recent employment data released by the National Sample Survey Organisation (NSSO) seems to add to the worries.

Employment data for the financial year 2009-10 reveals that the total labour force participation rate declined by 3% points. Whereas 43% of labour force was available for employment in 2004-05, the same stood at 40% in 2009-10. As far as the female workforce is concerned, the decline from has been even severe, from 29.4% to 23.3% during the same period. For your understanding, labour force participation rate is the percentage of the total population in the age group of 15 to 59 years that is willing to work. It is worth noting that the rate had actually been positive until 2009-10.

What happens when people, especially women choose not to work? The dependency ratio has gone up from 1.2 to 1.6, thus, lowering the per capita income. In simple words, fewer hands would feed many stomachs. It seems like the much touted 'demographic dividend' could actually become a burden for India going forward if such a trend continues.

However, it would be naive to jump to conclusions by looking at such broad numbers without taking into account the various reasons responsible for the decline. One major reason is the structural changes taking place in the economy. For instance, as the farm sector becomes more mechanised, the requirement for manual labour goes down. Such people have to be, therefore, dropped from the workforce. Lack of appropriate jobs for women with moderate education is also a concern. Apart from these problems, when people in the age group 15-24 opt for education or skill development programmes, they also effectively end up reducing the workforce.

So it is clear that the 'demographic dividend' is not going to get automatically credited in India's account. We have to find ways and take solid steps to harness the best of our most valuable resource.

What do you think is the best way to employ the partially skilled in India? Share your views with us or post your views on our Facebook page.

01:17  Chart of the day
 
As per legendry commodity investor Marc Faber, there is a long term risk for people who do not own any gold. The argument he presents is very interesting. What would be the price of an ounce of gold if the US dollar was backed by the yellow metal? Today's chart of the day shows that gold could cost US$ 7,500 an ounce if the greenback was backed by it. This also indicates how recklessly the US central bank has printed money over the years.

Data source: Gloom Boom & Doom Report

01:48
 
The government has an ambitious plan of reducing the fiscal deficit to 4.6% of the GDP (Gross Domestic Product) in the financial year 2011-12 (FY12). This is only slightly lower compared to 4.7% of GDP previously in FY11. But, this task seems difficult on account of rising subsidies and higher than anticipated expenditure. Revenues are also far from satisfactory. Revenue receipts in the first two months of the year were Rs 287 bn. This is just 3.6% of the total target of Rs 7.9 trillion. Last fiscal, the figure for the initial two month period was 6.5% of the target. Either way with volatile equity markets, the government's Rs 400 bn target for divestment may also not be met. Plus with higher expenses due to the lower duties on petrol products, reducing the fiscal deficit for the year seems like a long shot.

02:23
 
It is common knowledge that debt outstanding for US is huge. But guess who holds the maximum share of this debt after the US Fed? It is not the US public or the US banks. It is China. By using multiple firms, China has sneakily increased its holdings in US debt. So much so that the dragon economy now holds US$ 1.12 trillion of US debt, which is roughly 26% of the outstanding paper issued by Washington. One may wonder what could possibly go wrong if China holds so much US debt. Well think of the scenario where China sells its holdings? What would happen then? The interest rates on these bonds would go up sharply. And this would undermine the US markets as well as its economy. So no wonder the US has revamped its treasury auction method. The method was revamped after Washington realised that China actually holds more US debt than what it had disclosed. Therefore, they have now put in place a mechanism that prevents any one government from holding a majority share of US debt.

03:08
 
The weakness of the US dollar against the rupee has not exactly been in the best interest of Indian exporters over the past few months. However, the improved performance of both merchandise and software exports in FY11 brought India closer to meeting its current account deficit targets. At 2.6% of GDP in FY11 as against 2.8% of GDP in FY11, India's deficit position has certainly enjoyed the benefit of revival in IT spending as also a turnaround in global economic output. However, given the lingering uncertainty about global GDP growth, steep commodity prices and weak trend of the dollar, the current deficit levels may be difficult to sustain. The only way to sustain a strong export demand is to cater to need for more value added products and services.

03:46
 
FDI norms in the country have kept on evolving. Currently, companies have been allowed to issue equity or preference shares to foreigners who provide technology under the automatic route. The RBI has now liberalised this policy further by allowing corporates to pay for import of capital goods, machineries and equipments by issuing equity to their suppliers. This is subject to the import being in accordance with the Exim policy and the regulations issued under the Foreign Exchange Management Act (FEMA), 1999 relating to imports issued by RBI. That said, this moves seems more of an initiative to provide some flexibility in terms of making import payments and does not necessarily open up new sectors for foreign direct investment. And what India needs is long term capital that will help it ramp up its crumbling infrastructure if it has to sustain above 9% GDP growth on a sustained basis year after year.

04:30
 
The Indian stock markets have been trading in the red after opening trade on a positive note. At the time of writing, the benchmark BSE Sensex was down by 124 points (0.7%). Realty and IT stocks are the maximum gainers while Oil and Gas and Consumer Durables are losing the most. All Asian stock markets were also trading in the positive except China and Malaysia.

04:45  Today's investing mantra
"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February." - Mark Twain
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7 Responses to "The paradox of rising population, declining workforce!"

Deepak Mohite

Jul 4, 2011

As we all know agri sector is employing 40% of our work force our dependancy on agriculture sector is very much in sector disgised unemployment is very high only way out to this sicuation is to create too much jobs in service sector where very little skill is required and provide tranning to semi skilled work force to achive better results. agro processing industry is to given prority for development

Like 

MURACHAI

Jul 2, 2011

The problem is more of the youth softened by the money doled out by the ruling parties thru schemes like the unemployment scheme. Other aspect is the unwillingness of the people to have their children do hard labour. everyone wants to become a doctor or engineer at least an IAS!! this in turn has turned topsy turvy the agricultural aspect of the Indian villages. Till we change our view the workforce is sure to decline .

Like 

ATMA RAM KEJARIWAL

Jul 2, 2011

'For your understanding, labour force participation rate is the percentage of the total population in the age group of 15 to 59 years that is willing to work. It is worth noting that the rate had actually been positive until 2009-10.'

INCLUDING AGE BELOW 18, IN THE LABOUR FORCE, IS IT NOT AGAINST LAW?

Like 

CA Manju Sharma

Jul 2, 2011

The education system in india is not as good as it should be. The good education is available but every person in the society cannot afford it. The inflation is so high that the aam aadmi could not afford to have good meal so forget about the good education. Govt is claiming that they are increasing the standard of education in india. If it is really happening then what is the need for the people to go abroad and join the universities like oxford, harward.

Like 

mm gupta

Jul 1, 2011

Govt should not increase the petrol or diesel price as creates an spiralling effect on the inflation and price rise. The govt should maintain the price level of the factors which are in its control.

The railway has not increased the fair for long time. The fair may not be an spiralling effect. However the transportation cost of rAILWAY MAY BE AN SPIRALLING EFFECT.

Also the govt should ask oil cos to cut their cost.

Like 

Sarat Palat

Jul 1, 2011

One of the reason for terming the youth as semi skilled or unskilled is that of the current education system. The subjects and the topics are not as per the current requirement. The syllabus, method and technology should be upgraded in order to meet the current demand. The current situation is that the employer has to spend additional time and money for training in order to current youths to the required level.

Like 

shome suvra

Jul 1, 2011

Employment is required for growth of output and vice-versa which is dependent on profitability of the cos. The growth rate of factor productivity should not affect the labor intensive industries. Savings must be increased to increase capital.

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