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Introduction ...................................................................
..................... 3
India s demographic edge in the global context ................................. 4
India s labour supply ............................................................
............... 5
India s labour demand ............................................................
............10
The outcome.....................................................................
...................13
Conclusion......................................................................
.....................16
CRISIL Centre for Economic Research
2
Introduction
Evolving demographics unambiguously point out that India will remain a young
nation and the largest contributor to the global workforce over the next few
decades - an exceptional strength compared to the rapidly ageing population in
the Western countries, and that in China, owing to its one-child policy. Althoug
h
investment, reforms and infrastructure are likely drivers of India s economic
growth, no growth driver is as certain as the availability of people in India s
working-age group. A young population is India s demographic dividend. It
gives India the potential to become a global production hub as well as a large
consumer of goods and services. Further, since the age-group of 45-60 years is
the key contributor to household savings, India s savings rate, which has
increased rapidly in the last decade, will get a further boost thereby supportin
g
investment.
The rise in its working-age population, however, is necessary but not sufficient
for India to sustain its economic growth. If India does not create enough jobs
and its workers are not adequately prepared for those jobs, its demographic
dividend may turn into a liability.
This report examines the pros and cons of the swelling working-age population
by taking stock of India s likely demand for labour. It analyses India s labourmarke
t
imbalances and highlights how skill mismatch and shortage can impact
productivity growth which is critical for India to enhance its long-term growth.
And finally, it identifies fiscal implications of India s population dynamics.
CRISIL, Skilling India: The Billion People Challenge, November 2010 3
Quality Quantity
Educati no
il s Sk l
Yon n ug ad
lgare
o f r w rk o ce
Indian demographics in the global context
India will be the world's most populous country by 2030
and have the largest working-age population
India s share in world population in 2010, at 17.6 per cent, is the
largest, after China, according to UN World Population Prospects
2008. With India s population forecast to grow at 1.0 per cent per
year, significantly faster than that of China at 0.4 per cent per year,
India will become the most populated country in the world by 2030.
India s population is likely to rise from 1.21 billion in 2010 to 1.48
billion by 2030, and further to 1.6 billion by 2050 (figure 1).
More significantly, India will have the largest number of people in the
working age group of 15-59 years (figure 1). (The working age group,
as per the Indian definition, is taken as the age group of 15-59 years
throughout this report.) As on 2010, half of India s population is
below 25 years of age, and 62 per cent of its population is in the
working-age group. India, thus, accounts for 17.5 per cent of the
world s total working-age population. From 2010 to 2030, India s total
working-age population is poised to rise from 749 million to 962
million, accounting for about 28 per cent of the increase in the
world s total working-age population over the period. In contrast, the
working-age population of China will shrink by 45 million (figure 2).
213
14
-11
-45 -54
340
Africa India US Japan China Europe
Figure 2
Addition to working age
population between 2010
and 2030
0-14 years
15-59 years
60+ years
2040 2050
0
600
1,200
1,800
2010 2020 2030
Figure 1 million
India s bulging
working-age
population
Source: UN World Population Prospects, 2008 Revision
Source: UN World Population Prospects, 2008 Revision
million
CRISIL Centre for Economic Research
4
India is set to become the largest
contributor to the global workforce.
India s labour supply
How many?
Only 61 per cent of working-age population is available for work
Working women are a minority
India has a higher real-dependency ratio
According to the National Sample Survey Organisation s (NSSO)
latest large-sample survey in 2004-05, India s labour-force
participation rate was a mere 61 per cent for that year. The balance
39 per cent of the working-age population, consisting mostly of
women, kept away from the workforce for various reasons such as
studying further (9.3 per cent), raising children and managing
households (15.9 per cent), or engaging themselves in other
household duties (12.1 per cent).
According to the NSSO survey, while only 13.8 per cent of workingage
men stayed out of India s workforce in 2004-05, most of whom
did so to study further, about 65.4 per cent of working-age women
kept away from work. Hence, of the 282 million working-age
women, only around 94 million were employed and another 4.3
million women were looking for work.
India s real dependency ratio of 1.67 dependents per employed
person in 2010 far exceeds the conventional dependency ratio of
0.62. A cause for optimism is, the real and conventional dependency
ratios are both set to decline over the next few decades - while the
conventional dependency ratio will come down from 0.62 in 2010 to
0.54 in 2030, the real dependency ratio will fall from 1.67 to 1.54 over
the period.
In India, the working-age population
represents the total number of people in the
working-age group of 15-59 years. 'Labourforce
participation rate' refers to the share
of people in this group, who are working or
are willing to work, in total working-age
population.
Given India's low rate of labour-force
participation, its dependency ratio (DR) - a
conventional measure of the number of
children and old-aged persons supported by
each working-age person - masks the extent
of dependency. Real dependency ratio
(RDR), measured as the proportion of nonworking
population - children, old-age and
working-age people who are not working to working population, would be a more
appropriate measure of the dependency.
CRISIL, Skilling India: The Billion People Challenge, November 2010 5
Regional demographic diversity will be unfavourable
How good?
High levels of illiteracy
According to Census of India s population projections, Uttar
Pradesh, Bihar, Madhya Pradesh and Rajasthan will account for more
than 50 per cent of the increase in India s working age population
over 2011 to 2021. These states, also the poorest four states among
the 15 major states, based on per capita income (Net Domestic
Product), would add 54 million to India s workforce, whereas the four
most affluent states - Haryana, Maharashtra, Punjab and Gujarat would together add only 21.6 million to the workforce (figure 3). The
maximum increase in working-age population will therefore take
place in states that are the poorest and offer the lowest employment
opportunity.
About 23.7 per cent of Indian men were illiterate in 2006-07 whereas
almost 46.6 per cent of women were illiterate. Although India s
literacy has improved over the past four decades, the proportion of
its illiterate population, over 15 years of age continues to be much
more than in most other developing countries (figure 4).
The working-age population will increase
the most in states that are the poorest and
offer the lowest employment opportunity.
Figure 3
State-wise
incremental workingage
population over
2011 to 2021
0 5 10 15 20 25
Himachal Pradesh
Uttarakhand
Jammu & Kashmir
Kerala
Punjab
Tamil Nadu
Chhattisgarh
Orissa
Haryana
Jharkhand
Karnataka
Andhra Pradesh
Gujarat
West Bengal
Rajasthan
Madhya Pradesh
Maharashtra
Bihar
Uttar Pradesh
million
Source: Population Projections, Census of India
CRISIL Centre for Economic Research
6
Due to neglect of basic education, a large
proportion of working-age people are not
equipped to compete in the job market.
Persistent drop-out rates and lack of teachers plague India s
education system
India s school drop-out rate continues to be alarming. As on 2006-07,
only 17 of 100 children who entered 1st grade completed 10th grade
(figure 5). Drop-out rates have, however, marginally declined over the
past two decades.
One-fifth of India s primary schools are single-teacher schools. India,
similar to sub-Sahara African countries, has a pupil-teacher ratio of
45, which lags behind most Asian countries. According to the Global
Education Digest 2010, China and Japan have a pupil-teacher ratio
of 18, whereas Indonesia and Malaysia have a pupil-teacher ratio of
17 and 15. India s pupil-teacher ratio in primary schools has been
rising over a period of time, which is worrisome (figure 6). The lack
of a sufficient number of teachers has adversely affected the quality
of learning in India s schools (figure 7).
Figure 5
Share of children
dropping out of
schools
0
25
50
75
100
1980-81 2006-07P 1980-81 2006-07P 1980-81 2006-07P
Primary Middle High
%
Boys Girls
Source: Selected Socio-Economic Statistics, India, 2008
Figure 4
Share of population
more than 15 years of
age, without schooling
0
14
28
42
56
70
1980 2010 1980 2010 1980 2010 1980 2010 1980 2010
India China Malaysia Korea Thailand
%
CRISIL, Skilling India: The Billion People Challenge, November 2010 7
Source: Barro-Lee Dataset 2010
India s drop-out rates are declining, but not
fast enough.
High pupil-teacher ratio impacts quality of
schooling.
(Grade I-IV) (Grade V-VII) (Grade VII-X)
Lack of vocational training is a hurdle for India s youth
In 2004-05, only 28 million of India s 257 million job-seeking
population in the age group of 15-29 received any form of vocational
training. And, only 9 million of these 28 million received formal
vocational training from training institutes; the others acquired skills
informally from their preceding generation or other household
members (figure 8).
Mathematics
Language
Environmental studies/Science
20
45
70
Class V Class VII
Figure 7
Percentage of
students with
learning achievement
4.3
9.5
86.2
3.0 5.9
91.1
Formally
skilled
Non-formally
skilled
Unskilled Formally
skilled
Non-formally
Skilled
Unskilled
Figure 8 %
Percentage of
youth population
with vocational
training
Lack of vocational training diminishes
employability.
CRISIL Centre for Economic Research
8
Primary
Middle
Secondary
25
30
35
40
45
50
1980-81 1990-91 2000-01 2006-07P
nos
Source: Selected Socio-Economic Statistics, India, 2008
Figure 6
upils P per teacher
Source: Selected Socio-Economic Statistics, India, 2008
supply
India s unconventional economic development has led to excess
employment in agriculture
During an economic upturn, when demand in an economy rapidly
grows, demand for labour exceeds the supply of employable
workforce. The reverse of this happens during a downturn. The
consequent mismatch between labour demand and supply is normal,
and not a cause of concern.
When an economy is in the initial stages of development, the share
of the agriculture sector tends to be high. Then, the share of industry
increases, and eventually, services account for a dominant share of
the GDP. In this pattern of economic development, labour is
transferred from agriculture to industry and finally to services. India s
pattern of economic development has, however, been quite
unconventional.
The share of agriculture in India s GDP came down sharply from 30
per cent in 1993-94 to 18.9 per cent in 2004-05 (figure 10).
Agriculture s contribution to total employment, however, reduced
narrowly from 62.3 per cent to 56.1 per cent. In contrast, the share of
industry and services in GDP together rose by just over 11
percentage points to 81.1 per cent whereas the share of employment
in these sectors grew only by 6 percentage points. Thus, more than
half of India s total employed population remains occupied in
agriculture even though the sector currently contributes less than 20
per cent to GDP.
CRISIL Centre for Economic Research
10
Economic cycles and India's development
pattern, which is governed by economic
policies, determine the nature of India's
labour demand.
%
30.0
62.3
18.9
56.1
25.2
15.4
28.0
18.8
44.8
22.4
53.1
25.1
1993-94 2004-05 1993-94 2004-05 1993-94 2004-05
Agriculture Industry Services
Figure 10 GDP Employment
Share of major
sectors in GDP and
employment
Source: Central Statistical Organisation, National Sample Survey Organisation
A disproportionately large share of
population continues to depend on
agriculture for employment.
Neither has industry expanded fast enough
nor has it been able to absorb labour to its
fullest potential, owing partly to India's rigid
labour laws that discourage employment by
the organised sector.
Policy barriers curtail labour demand in industry
education.
Shortage of high-skill labour can constrain productivity and
economic growth
Skill shortage could raise inequality and inflation
If India is to achieve and sustain double-digit economic growth in the
near future, the key would be to raise the supply potential of the
economy. The number of hours of work and the productivity of
workforce, measured as output per unit of workforce, affect the
supply of goods and services. Keeping the number of working hours
unchanged, India will need to increase employment or productivity to
maintain its current growth rate. Growth in labour productivity
would be especially critical in high-end service sectors.
Three factors determine growth in labour productivity - more capital
per unit of workforce, advances in technology, and quality of
workforce. Notwithstanding a rise in investment rate and advances in
technology, India is likely to fall short of skilled workers, which
would adversely affect the rate at which its labour productivity rises.
As the demand for skilled workers increases, if relatively low-quality
workers are added to the workforce, they would drag down overall
workforce quality and impact productivity growth. Further, skilled
workers would have to put in longer hours for sustaining the current
growth rate, which, in turn, would adversely affect their productivity.
Thus, given its shortage of skilled workers, the growth in productivity
of India s workforce could slow down in future.
The bargaining power of companies with their skilled employees is
severely restricted during phases of skill shortage. Wages hence
increase at a greater rate than productivity growth. Excessive wage
growth for a section of population would impact income inequality
and inflation. Also, if shortages in skills are significant, companies
would avoid investing in new technologies which may require a
specific type of skilled labour. The companies would thus produce
relatively less-differentiated and lower-quality products.
CRISIL Centre for Economic Research
14
Given its shortage of skilled workers, the
growth in productivity of India s workforce
could slow down in future.
Disguised employment will continue in agriculture
Fiscal burden of a young and unemployed population
A large army of undereducated, unskilled and hence unemployable
labour is unable to meaningfully plug into the fast-growing service
sector. Without deliberate policy efforts to expand the labourintensive
industrial sector, a majority of India s workforce would
remain trapped in the agricultural sector.
The fiscal burden of an ageing population is a phenomenon that will
plague Western economies in the coming years. As their working-age
population shrinks and their ageing population expands, the Western
governments would have to spend more on social security, health
care and welfare programmes.
Although India, in contrast, has a relatively younger population, the
youth-dominated population will yield an economic dividend only if
it finds gainful employment. If it does not, the economy will be
fraught with social tensions and instability.
India is currently addressing the issue of unemployment through
social security schemes such as Mahatma Gandhi NREGA (National
Rural Employment Guarantee Act), which is at best a stop-gap
solution. If the Indian economy is unable to generate employment
for its swelling working-age population over the next decade, the
government will need to transfer more funds through social security
schemes to provide income to the unemployed and underemployed.
The C-CER team comprises senior economists with over a decade s experience
of working with premier research institutes.
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