Reaping India’s Demographic Dividend through jobs in Manufacturing 

Context:

Since economic reforms, there’s been a lot of excitement about the Demographic dividend  potential. But many now assume it will bring growth automatically, and this has made us overlook the real effort needed. As more people compete for jobs, education, and housing, frustration grows, and politicians respond by trying to reserve jobs for locals.

About the Demographic Dividend (DD):

• India’s demographic dividend represents the economic growth potential that arises when a large portion of a country’s population is in the working-age bracket. 
• This opportunity was spotlighted after India’s economic liberalisation, which highlighted a path to rapid growth fueled by a burgeoning labour force.
• The demographic dividend brings optimism for economic progress, but harnessing it requires strategic planning and sustained efforts.

Challenges to Realising the Full Potential of the Demographic Dividend: 

Declining Fertility Rates

• India’s demographic dividend is not perpetual, and the declining Total Fertility Rate (TFR) suggests a diminishing growth window. 
• India’s TFR has dropped from 2.6 in 2010 to 1.99, with most states below the replacement rate of 2.1 needed for population stability.
• Southern states like Andhra Pradesh and Karnataka report TFRs below 1.75, and other states, including Punjab and West Bengal, follow this trend, marking a national shift. 
• As fertility declines, the proportion of working-age individuals in the total population will also start to decrease within the next decade. This rapid TFR reduction, despite modest income gains, challenges conventional wisdom that links lower birth rates to significant economic and educational improvements.

Impact of Not Realising the Demographic Dividend: 

• Risk of Falling into the Middle-Income Trap
• With India’s approaching middle-income status, there is a critical question: can India grow rich before its population ages? Failure to capitalise on the demographic dividend could leave India in the “middle-income trap,” a stagnation stage that has challenged several economies.
• As the working-age population declines, the nation’s elderly population is expected to double by 2050, straining social security systems and economic sustainability.
• Demand for Local Job Reservations
  As the demand for jobs, education, and housing surges, resources may fall short, leading to public frustration. This often surfaces as a call for local job reservations, with politicians channelling these demands for electoral gain. Without creating sufficient opportunities, this trend may grow, intensifying socio-economic tensions.

Required Steps to Realise the Demographic Dividend: Promoting Manufacturing

• Shift from Agriculture to Manufacturing: To leverage the demographic dividend, India needs to accelerate the shift from agriculture to higher-productivity sectors, particularly manufacturing. 
• Manufacturing has greater job-creation potential than services, especially in labour-intensive industries like textiles and apparel. 
• Promoting Indian Textile Industries : For example, India’s textile industry—worth $150 billion—employs 45 million people, compared to just 5.5 million in the $250 billion IT-BPM sector. 
• Textile factories, which often employ 60-70% women, also contribute to economic empowerment and gender inclusivity by providing paid work for women who might otherwise be limited to unpaid labour. 

Challenges Faced by the Manufacturing Sector:
Despite its potential, the manufacturing sector in India faces substantial barriers:

• Regulatory Constraints: According to World Bank surveys, one in six Indian manufacturers cites business licensing and permits as major constraints, compared to less than 3% in Vietnam.
• Access to Land and Trade Regulations: Around 17% of Indian manufacturers face land access and regulatory issues, in contrast to 3% in Vietnam, impeding competitiveness.
• Labor Force Participation: India’s urban Labor Force Participation Rate (LFPR) remains low at 50%, showing that a considerable portion of the urban labour market remains untapped.

Steps the Indian Government Has Taken

• Make in India Initiative (2014): Aims to transform India into a global manufacturing hub by encouraging domestic production, reducing regulatory barriers, and attracting foreign direct investment (FDI) in sectors like electronics, textiles, and automobiles.
• Atmanirbhar Bharat (Self-Reliant India): Focuses on reducing import dependence by promoting local manufacturing, especially in strategic sectors such as defence, electronics, and pharmaceuticals, and includes the Production-Linked Incentive (PLI) scheme to incentivise manufacturing and exports in specific industries.

Way Forward: India has implemented measures to boost the manufacturing sector, but further efforts are necessary to address existing bottlenecks:

• Reducing Tariffs: The government should consider reducing tariffs to lower input costs, making Indian products more competitive domestically and internationally.
• Free Trade Agreements (FTAs): Prioritising FTAs with the U.K. and EU would open export markets for Indian products, driving manufacturing growth.
• State-Level Reforms: States should reform labour laws to allow flexible work options and address restrictive land and building regulations. 
• For example, recent findings by Prosperiti report that factories can only utilise half their land due to regulatory constraints, raising costs. Additionally, restrictions on worker housing in industrial zones further increase hiring costs and reduce competitiveness.
• Encouraging Female Labour Participation: Policies to support women’s employment, such as targeted skill development and incentives for female hiring, are essential for boosting the overall labour force and ensuring inclusive economic growth.
• Learning from China’s Model: China’s transition from agriculture to manufacturing in the 1980s offers India valuable insights. With similar per capita income at the time, China shifted millions to higher-productivity sectors, driving rapid economic growth. India can draw from China’s model, actively creating policies that support manufacturing expansion and high labour absorption.