Demographic advantage, Indian economy’s sweet spot

Much has been written about India’s emergence as an economic giant – it is the world’s fastest growing big economy, and is currently the fifth largest. Demographics is a major factor in propelling this rise given that the median age is around 29 years and 63% of the population is of working age. However, the labour force participation rate stood at 55.2% in 2022, according to a recent report released by the International Labour Organisation (ILO), which goes on to state that falling labour intensity is due to growth being led by the services sector rather than manufacturing. Therefore, while we are certainly not experiencing “jobless growth”, more steps are needed to harness the demographic dividend.

Continue with the reforms agenda

First and foremost, there is a need to press ahead with the ongoing reforms agenda as mentioned, if not accelerate, India’s growth trajectory as that will create opportunities galore. There was a welcome reference to this in Finance Minister Nirmala Sitharaman’s Budget speech to initiate and incentivise improvements in productivity and facilitate farmers and sectors to become more efficient. While there is much that the Centre has done to enhance ease of doing business, much more needs to be done to be seen, especially in the context of production concerns the States (which is where the action is). Hence, both need to walk in lockstep to broaden and deepen reforms.

The Economic Survey for 2023-24 states that technological advancements have led to a declining capital-to-output ratio and an increasing capital-to-labour ratio. It was perhaps in this context that Arvind Panagariya, economist and Chairman of the 16th Finance Commission, while speaking at a recent event in the Federation of Indian Chambers of Commerce and Industry said capital-led economic growth is not ideal as the country has an abundance of labour.

The reluctance of Micro, Small and Medium Enterprises, the backbone of employment, to grow in size and scale as well as that of large business houses to diversify into labour-intensive sectors can be attributed to the compliance burden and costs imposed by outdated labour laws.

The impasse over implementing the new labour code as approved by Parliament is sending a wrong signal to existing and prospective investors alike. It is important that one or two States with an evolving manufacturing ecosystem break the logjam by taking the lead.

The Centre’s efforts to give a boost to the manufacturing sector is generally viewed favourably but the fact that it is unsuitable for 45% of the workforce to be employed in the agricultural sector which accounts for only 15% of GDP. While we must focus on enhancing agricultural productivity, we must not forget those who are engaged in the services sector and more particularly those at the lower end of the services sector – which are highly manpower intensive but suffer from low productivity.

For this, robust skilling and reskilling programmes, innovation, human resources upgradation, and logistics sector are essential. More than the jobs, the skills we impart today will ensure tomorrow’s workforce is equipped to perform even better and stay ahead of the curve.

Skilling as a continuous process

There needs to be greater acceptance of making future skilling an integral part of society. The Economic Survey highlighted that only 4.4% of the workforce is formally skilled as compared to 24% in China. The gap is immense and must be addressed through meaningful public-private partnerships wherein industry plays an integral role in devising the curriculum and imparting “on the job training”. Moreover, skilling is not a one-time intervention but a lifelong process which requires flexibility in institutional mechanisms as well as learning agility.

The emphasis of the New Education Policy (NEP) 2020 on foundational skills as well as higher order cognitive skills and critical thinking is a good step but, in a constantly changing world, the document must be reviewed periodically and updated.

Impact of AI/ML

Finally, in an era of artificial intelligence (AI) and machine learning (ML), perspective tasks will be taken care of at much faster speed but there will always be a need for human intervention and oversight. While we must not underestimate the impact of AI/ML, neither should it be overestimated. The key is to have appropriate regulations in time to avoid the happenings that we fear of. In addition to the opportunities offered by various emerging sectors, AI/ML itself as estimated by Statista to grow by nearly nine times to become $267.3 billion worldwide market by 2030. Further, according to NASSCOM, India already has the second largest talent pool globally in this field but there remains gap between demand and supply of skills which is projected to widen. Though very much a risk, it is an opportunity which should not be missed.

Gainfully employing a large, young and aspirational population is not easy but it is a far better challenge than dealing with an ageing population given its attendant economic and societal implications. India is in the sweet spot and must employ a judicious approach to create a talent pool so as to harness this demographic dividend for the benefit of the world at large.