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Saturday, October 16, 2004Demographics And Indian AdvantageVijay Kelkar has been writing about India's potential for competitiveness and economic growth for sometime. In this article he elaborates about demographic advantage that India would have and identifes two major threats to an optimistic scenario. First the advantages -When a country gets more people in the working population, it tends to get high GDP growth. Young people are the ultimate fuel for growth. Countries go through a sequence where, at first, there are many young people, then incomes go up, then birth rates go down, and then there are few young people. Every country also goes through a “demographic transition” where old people live longer, and richer people have fewer children: which puts a squeeze on the working population. But that middle period — when there are many young people — is a powerful opportunity for growth.GDP is made by labour and capital. Not only do young people supply labour, but young people also tend to save. Children don’t save, and the elderly dissave. It is in their working years that people put aside savings. Hence, in the demographic transition, countries benefit from a double effect — of more people in the labour market and of more savings in the capital market.The “working age ratio” conveys the fraction of the population which is between age 15 and 64 — roughly the working years. As an example, Japan was at 70 per cent in 1990, has dropped to 66 per cent, and is likely to drop to 56 per cent in 2035.India was at a ratio of 57 per cent in 1980 (which is strikingly like Japan in 2035). The ratio has gone up to 63 per cent. This increase was one of the factors which gave us the acceleration of GDP growth from the early ’80s onwards. The ratio is projected to go all the way up to 68 per cent in 2035. Existing projections show that in 2035, India will have the highest proportion among all large countries. This will inexorably induce massive changes in global power equations, through the contrast between young India and aging world powers. From 2005 to 2035 is thus a historic opportunity for India to harness the demographic situation. India must get up to 8-10 per cent growth in this period, and decisively get away from mass poverty, as was done in miracle growth economies like Japan, South Korea and China. The two threats are India's Tax Structure and Healthcare concerns like HIV.Our tax system today hinders economic growth. India urgently needs to get a world class non-distortionary tax system that fosters growth and solve fiscal crisis. India development project will be ill served if, out of the coming 30 precious years, ten years are wasted in a fiscal crisis. Equally important is the task of refashioning government on the expenditure side. The task of government is to produce “public goods”: those which benefit everyone, such as law and order and the judiciary. Instead, most government expenditures today are a gift to one narrow constituency or the other. India faces a crisis in terms of inadequate quality and quantity of public goods.India needs a transformation so as to shift the focus away from handouts to this or that constituency, and instead devote money to providing public goods. The second major threat to the demographic story of the next 30 years is HIV. There are many situations where public health problems, like leprosy or malaria, are problems of health economics. HIV is different: it is a problem of “macro” economics. It is big enough that it can single-handedly torpedo India’s development project. HIV spares young people and old people. It hits at precisely the group — age 15-64 — that we are looking to for obtaining high economic growth in the coming 30 years. An explosive HIV epidemic will destroy our hopes of transforming ourselves in the coming 30 years. India has a per capita GDP of $650, one of the lowest in the world. If India plays its cards right, it can be at $10,000 per person in 2035, roughly 30 years from now. | |
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