Can the demographic dividend cheque bounce? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Can the demographic dividend cheque bounce? A  A  A

9 MARCH 2013

India's story has one strong pillar on which it is based viz. the youthful population of the country, even as the rest of the world ages fast. India will keep producing graduates who, on entering the workforce, will start earning income and spending money, creating an economic boom based on domestic consumption.

The key phrase here is 'on entering the workforce'. The demographic dividend will accrue only if enough jobs are created; else the dividend cheque would bounce.

Where would the jobs come from?

Not from the agricultural sector, which already employs around 55% of the population, and accounts for 15% of national income. This means that farm productivity is low (we have amongst the world's lowest yields in many crops) and that the agricultural sector is supporting more people than it possibly can, simply because they don't get opportunities elsewhere. Besides, they do not get the requisite education for a variety of reasons, including paucity of schools/teachers in villages and the economic compulsions to work rather than to study, even for young children.

The service sector which has been providing jobs in construction, retail, IT sector etc., and accounts for 55% of national income, can provide more.

The main thrust in employment would, however, have to come from the manufacturing sector, which accounts for barely 16% of GDP. A March 2012 study done by MacKinsey Quarterly on Fulfilling the Promise of India's Manufacturing Sector talks of 4 imperatives for the Indian Government to tackle, if the growth is to be achieved.

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If all these 4 imperatives are tackled, India's manufacturing sector could grow 6 times, by 2025, to $ 1 trillion, and provide 90 million jobs.

If we fail to tackle them, the demographic dividend cheque will bounce.

We could end up, instead, with a lot of social problems.

What are the four imperatives?

First is the product market and ownership barriers. More than half of the organised labour is employed by Government owned companies, and, due to protection of labour laws, have lower levels of productivity. They can't be fired for underperformance. These are in sectors such as base metals (like steel), power and oil and gas. In sectors where private companies and/or foreign competition, has come in, such as automobiles, productivity growth is much higher. In this context, the faster rate of privatisation, thanks to empty Government coffers, is a blessing.

The Government has set a higher target from disinvestment, which includes stake sale in Rashtriy Chemical and Fertilizers Ltd. (RCF),National Aluminium Company Ltd. (NALCO), Steel Authority of India (SAIL), which together are expected to fetch Rs 4,650 crores, the Governments residual stake in Hindustan Zinc and Bharat Aluminium, which it hopes to sell to Vedanta, that acquired the majority stake, for some Rs 14,000 crores, and sale of holding in blue chip stocks like Axis Bank, Larsen & Toubro (L&T) and Indian Tobbaco Company (ITC), held by SUUTI (the old UTI).

The second imperative is to resolve barriers to land acquisition and for environmental clearances. Capex of $ 60b. committed in the steel industry alone, has been blocked for want of land and environmental clearance, and is not earning a return. Also, of course, providing no jobs.

Although a small portion of India's workforce is in the organised sector, which is subject to labour laws, they are vocal enough to prevent any change in these laws. This deprives future generations the benefit of protection under such laws. The growth happens in smaller units, in the unorganised sector, using contract labour.

Poor infrastructure and outdated facilities also provide a drag to productivity. Bad roads means that a truck moves 250-300 kms a day, versus the 500 kms. in foreign countries. The time taken to unload cargo from ships is several times more than in an efficient port like Hong Kong.

There is an awareness of these imperatives and the need for urgency to resolve them. But there is no political will to tackle them, especially not in a pre-election year.

Labour productivity is falling in all countries, as this chart in the Economist reveals.

Because of falling labour productivity, there is a trend towards using more mechanised means of production, such as robots. This is worrying. Youth unemployment has already reached levels of 50% in countries such as Greece and Spain.

The inability to get jobs is also resulting in untenably high levels of student debt. A whopping 35% of recent graduates are delinquent in their student loan repayment. Outstanding student loans in the US are nearing $ 1 trillion and are a bigger problem than credit card debt.

But even this figure of $ 1 trillion pales into insignificance if one sees the unfunded liability in the US pension funds. State Governments have created these funds to meet pension liabilities of retirees. But primarily because of two reasons, the assets are falling short of the amount needed to meet liabilities, and the balance is 'unfunded'. In other words, it is the amount State Government would need to add. The two reasons are that the assets are earning less, and the retirees are living longer.

Stanley Druckenmiller is a celebrated hedge fund manager who rarely speaks out. However, in this interview in Bloomberg Businessweek he states that the unfunded liability for social security, Medicare and Medicaid could be as high as $ 211 trillion! This is like 12 times US GDP!

What this means is that in addition to young people not getting enough jobs, the retirees, who are taking too much out of the system, would be, at some point, when the money runs out, not get their full entitlements. It can lead to social chaos.

We seem to be heading in the same direction. As pointed out in these columns, the Government spend on entitlements is far higher, after a lot of leakage by corrupt intermediaries, than the spend on education, health and infrastructure. Instead of providing skillsets for the youth to do jobs, and instead of providing the infrastructure to manufacturing companies to provide them, we are then salving our conscience by providing schemes, which, alas, are misused. Would we, then, get the demographic dividend?

Foreign investors, flush with QE 3 liquidity and eager to fetch higher returns than their own, sluggish, economies are providing, believe that we will. They were buyers at the low levels to which the market had fallen because of a confusing statement on tax residency rules, in the Budget, the clarification of which led to a sharp rally the next day. Their buying pushed up the BSE-Sensex by an impressive 807 points, to end at 19,680, and the NSE-Nifty by 226 to close at 5,945.

Rating agency Moody's also opines that the worst is over for the Indian economy.

This would all be hunky dory except that the stockmarket is more moody than Moodys.

The four imperatives requires strong and committed governance. In a pre election year, this would not be provided. The effort of Government in a pre election year is to be nice. Being strong means being not nice. Voters realise that being not nice is sometimes necessary, and are prepared to vote for those who are not nice.

Politicians don't.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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9 Responses to "Can the demographic dividend cheque bounce?"
Akash Sethia
Mar 10, 2013
The economist graphic referred to in the article is not hyperlinked. Like 
Mar 10, 2013
Mar 10, 2013
When India's problems are discussed it will be nice not to bring in US productivity. What relevance has it got. US is highly technologically oriented. India has large pool of not highly skilled population. We need to discuss education- techinical education in plumbinmg , Car nechaics, welding, building construction etc to improve labour productivity. This is totally neglected area. Poor education spending has to be hammered again and again. Like 
Om Prakash Sharma
Mar 10, 2013
The Congress is prematurely converting the state as a giver state when have nothing in their kitty to give Like 
Mar 9, 2013
All that glitters is debt. Not gold. Like 
S. Rajagopalan
Mar 9, 2013
Excellent and thought provoking article. Our politician and bureaucrats should read and act on this article. Like 
surajit som
Mar 9, 2013
the idea of job creation should be over. job should be a result of country's overall progress. just like a tree. job is like leaf. the tree grows, leaves come out. jobs cant be created artificially on a sustainable basis any longer. not even in rich countries.communist countries tried that.

55 % people are engaged in agriculture sector . but most farmers are terribly poor. thousands of them commit suicide every year. but if their productivity increases that will lead to economic well being across all sectors.

development of infra holds the key. five sectors particularly stand out-bijli,sadak,pani ,school and hospital. they are like vital organs . if they are not healthy and strong, India will not grow. any country for that matter. pl stop talking about creating jobs. healthy infra(soft and hard like the five above) ,good legal frame work etc will create jobs, not the other way around. in fact it has never done anywhere.
Mar 9, 2013
We can avoid the catastroph if We can stop Scams & corruption at all levels + restructuring the Infrastructure! Like 
Mar 9, 2013
Great column as always. You are right that there is no will to tackle the four imperatives. The politicians are working on their own imperative of getting rich by their corrupt practices. And it is also true that politicians like to be "nice". They are not nice because they have altruistic motives. They are nice because they want to remain in power and avail themselves of kickbacks and bribes. Unfortunately, this happens in every country. The latest example is Venezuela where Chavez was loved because of his generous handouts to the people and now the economy is in shambles. The greatest thing a government can do is to provide the citizens with the education to succeed in this competitive world. Who is the cabinet minister in charge of education? Would anyone know his name or recognize him if they saw him?? Like 
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