India: harnessing demographic strength

Transcription

1 Economics India: harnessing demographic strength DBS Group Research 27 July 215 India s population will surpass China s within a decade The workforce will grow faster than population overall But this could become a burden if not harnessed efficiently. Growth needs to be inclusive and employment-generating Three issues need to be addressed. Labor needs to be absorbed more rapidly, skills need to be upgraded and fragmented labour markets need to be unified India is the world s third largest economy in purchasing-power parity (PPP) terms. Demographics are one of the economy s key strengths population and workforce growth should boost GDP growth overall. A favourable working age ratio and a low base per-capita GDP will add to the mix. Faster growth would be more significant if the process is inclusive, and provides employment opportunities alongside higher incomes. In this note, we discuss India s demographic strengths. While on one hand, these imply a steady supply of labor, boon could become bane if labor not utilised efficiently, given India s low employment elasticity and disproportionate sectoral distribution of labor. Favourable demographics give India a good starting point India s demographic dividend is a key strengths of the economy, not only in terms of a fast growing population but also a favourable mix of the populace. At 1.2 billion, India is the second-most populated country in the world, behind Chart 1: India to surpass China's population within a decade million 1,8 1,5 1,2 9 India China Source: UN, DBS Group Research Radhika Rao (65) radhikarao@dbs.com 1

2 China. The UN estimates India s population will surpass China s within a decade, even as population growth slows in both the economies (Chart 1, page 1). The composition of population is also encouraging (Chart 2). While Japan, China and many Western countries grapple with ageing populations, India s dependency ratio is declining. The working age group (15-64 years) makes up close to two-thirds of the overall population. Growth in the working age population will exceed overall population growth for at least two more decades, pointing to a sustained fall in the dependency ratio (Chart 3). The dependency ratio that of children and elderly to total population stood at.52 at end-214. Young (<14 years) make up 8% of the dependents, suggesting that the potential add-on to working population in the years ahead will be significant. In addition, more than half of India s population is below the age of 27, amongst the youngest in the world. A rising working age population points to higher disposable incomes, positive wealth affects, ready availability of labor (with appropriate skills-training) and eventually an increase in consumption spending. An increase in the working age population also points to higher savings, which should lift investment and help bring structural improvement to the current account imbalance. India faces falling output elasticity of employment Output elasticity of employment has been on the decline Despite these strengths, India has been unable to utilise labor efficiently. Employment growth has barely exceeded GDP growth in recent years, which is unusual for a developing economy. The ratio of the two the output elasticity of employment eased from.44 in 2-5 to.1 in 21 according to the Planning Commission. Simply put, a 1% rise in GDP growth lifted employment by a mere 1 basis point. And this already marks a decline from.6+ levels in the mid-8s. This trend is consistent across major sectors except construction according to the press, implying that the decade s strong growth had not led to a meaningful rise in employment (Chart 4). Part of this may be attributed to greater mechanisation and use of capitalintensive technologies. But, there is a disconnect. Despite the falling elasticity ratio, the labor force and number of employed actually rose in the period. Between 24-5 and 29-1, the total employed rose by about 3 million. In the same period, the number under informal employment rose by 4.6 million, Chart 2: Favourable mix of the population ratio % of total populn Source: World Bank, DBS Dependency ratio (lhs) Working age population Chart 3: Faster rise in working age population vs population growth to keep dependency ratio low YoY % Forecasts Source: UN, DBS 2

3 Chart 4: Non-employment generating growth INR mn million Chart 5: Sectoral employment elasticity ratio Output Employment (rhs) Source: Govt data, Univ of Massachusetts & DBS Agri Util Other servs Manfg Trd, trans Source: Planning Commission, DBS Mining&Q Fin, real est Contrn while under formal employment fell. What do these numbers imply? That all the increase in employment in the period was concentrated in the informal/ unorganised sector (Chart 6). These trends are worrisome. Firstly, if faster growth is unable to generate sufficient employment, recovery will not be inclusive; income disparities will worsen. Secondly, the rise in informal employment suggests much of the workforce does not have access to social security facilities and is not governed by labor laws and regulations. In the past, to compensate for a widening income gulf, the government focused on entitlement-based reforms (subsidies, rural employment scheme, minimum support prices etc.). This hurt productivity while diverting resources away from investment and into revenue expenditure, proving inflationary in the longerrun. This is neither sustainable nor a productive use of resources. The focus has subsequently shifted to an overhaul of labor legislations and bringing more workers under the regulatory umbrella. Issues need to be tackled on three fronts Labor issues need to be addressed on three fronts. Firstly, faster growth needs to be inclusive and generate sufficient employment. Second, the workforce needs to be skilled and finally, the informal sector needs to be covered by employment rules and regulations. Chart 6: Employment concentrated in the informal and unorganised sector % Unorganised sector Organised sector Formal empt Informal empt Formal empt Informal empt Formal empt Informal empt 3

4 Chart 7: Sectors % of GDP, share of employment % of GDP, employment sized to Chart 8: Manufg wage per worker (median) as % of avg wage with firms of 2+ employed Formal/ organised Informal/ unorganised Agri Manufg Non-manfg (const, ming, utility) Servs as % of GDP as % of labour force 1 to 4 5 to 9 1 to Source: World Bank (25) 29 2 to 49 5 to 99 1 to 199 Demographic dividends need to be harnessed efficiently First up, there is need to improve the economy s labor absorptive capacity. This involves expanding the economy s manufacturing base. As highlighted in DBS; IN: Reviving manufacturing; 28 Oct14, a disproportionate share of labor works in the agricultural sector. While the latter contributes only 15% to GDP, it employs about two-thirds of the workforce. Services account for almost 6% of GDP but employs only a quarter of the force (Chart 7). The manufacturing sector by contrast is more balanced. It comprises 15% of GDP (old series) and 11% of the employed labor force. Given this sector s absorptive capacity, an increase in the share to the government s target of 25% of GDP would help employ an additional 1mn (one-fifth of the total) labor force. Secondly, though India s demographics are favourable, skills are low. The government s National Mission of Development estimates that only 2.3% of the workforce has undergone formal skills training, compared to 68% in the UK, 75% in Germany, 52% in USA, 8% in Japan and 96% in South Korea. A Skill India initiative has been introduced recently, which includes the launch of a National Skill Development Mission and a new national-level policy to address gaps. If implemented efficiently, this should help meet demand for over 1 million skilled personnel over the next seven years. Finally, India s labor structure is fragmented. In addition to multiple stake-holders government, labor force, employees and trade unions most employment is still informal in nature and concentrated in the unorganised sector. Here in the efforts to jumpstart financial inclusion (i.e., extend the reach of the banking system to the masses) and provide social sector benefits are crucial to bring more under the organised umbrella. At present, India s labor laws incentivise firms to maintain smaller operations, given the rigidity of hiring/firing practises. By lifting some of these restrictions, more enterprises might be encouraged to raise capacity and hire more formally. As Chart 8 highlights, wages tend to rise with the move toward formal employment and larger firms. To the extent these three issues are addressed, faster growth would be more inclusive and lead to an improvement in more real incomes. The on-going multi-layered reform agenda is on track but, beyond the drawing up of the framework, implementation of concrete reforms has so far been incremental. 4

5 Conclusion Overall, India s demographic dividends can only prove beneficial if its strengths are harnessed efficiently. Labor reforms are amongst the most fundamental needs facing the economy, though it will be difficult to quickly sort out a myriad and obsolete laws. A few low-hanging reforms have been undertaken, while more significant / important ones await parliamentary approval. Sources: Data for all charts and tables are from CEIC, Bloomberg, RBI, government, other sources as specified and DBS Group Research (forecasts are transformations). 5

6 Recent Research CN: fiscal reforms to accelerate (2) 24 Jul 15 SG: slowest growth in six years 9 Jul 15 CN Rates: stock market woes driving 9 Jul 15 onshore/offshore divergence Greece: near the tipping point 6 Jul 15 ID: investors staying put 6 Jul 15 VN: Asia s latest electronics spark 1 Jul 15 Japan s go global experience: implications for 3 Jun 15 China SG: watch core inflation 16 Jun 15 Qtrly: Economics-Markets-Strategy 3Q15 11 Jun 15 IN: weak monsoon a risk 8 Jun 15 CN: the AIIB to test diplomatic skills 4 Jun 15 Rates: the rise in global yields where to now? 25 May 15 TH: still climbing Sisyphus Hill 22 May 15 IN: time to deliver 21 May 15 KR: what will the AIIB mean for Korea? 19 May 15 Asia: breaking new new ground 11 May 15 CNH: Q expansion heralds next stage of 6 May 15 capital account liberalization JP: portfolio rebalancing underway 16 Apr 15 US: Fed funds and such 14 Apr 15 CN: more inclusive urbanization policies 13 Apr 15 TH: further cuts unlikely 13 Apr 15 Asia cyclical dashboard: an eerie calm 8 Apr 15 IN: policy to be data dependent 7 Apr 15 SGD: making room for volatility 6 Apr 15 CN: recalibrating monetary policy 2 Apr 15 ID: tax targets are too optimistic 1 Apr 15 CNH: the growing influence of yuan 31 Mar 15 settlement in forex reserves CN: fiscal reforms to accelerate 27 Mar 15 IN: assessing RBI priorities 24 Mar 15 KR: wither export competitiveness? 19 Mar 15 CNH: a freer China 17 Mar 15 Qtrly: Economics-Markets-Strategy 2Q15 12 Mar 15 IN budget: growth trumps fiscal goals 2 Mar 15 ID: no shift in BI s tight policy bias 27 Feb 15 SG budget: shaping Singapore s future 24 Feb 15 Greece: the clock is ticking MY: limited options 4 May15 29 Apr15 India budget: a balancing act 17 Feb 15 US: substantial deflation here, now 16 Feb 15 India and Indonesia: taking stock 29 Apr 15 US: over the hump (and sliding fast) 28 Apr 15 Asia bonds: floating on a yield cushion 27 Apr 15 Asia: breaking new old ground 22 Apr 15 SG: Jubilee budget Feb 15 USD Rates: the market vs the Fed 1 Feb 15 CN: the need for a better unemployment gauge 4 Feb 15 IN: facing ECB QE and a strong dollar 3 Jan 15 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 6