Demographics of India: Opportunity or Threat?

Introduction

India is not only the world’s second most populated country but also one of the most culturally diverse ones. The first question that arises is how this population affects the country’s economic growth. India’s population has been steadily increasing, from 450 million in 1960, it now stands at 1.28 billion. In fact, over the past few decades, both globally and in India, rapid population growth has been accompanied by a decline in infant mortality rate and by a moderate increase in per capita income. Demographic transition is a pervasive change that countries go through when they move from a period of high mortality and high fertility to low mortality and low fertility, resulting not only in population growth, but also a change in age structure. India has been going through a similar demographic transition in the last few decades, with estimates of a future population with greatest proportion being concentrated in the working ages (14-45), a big stepping stone for progress and a better future.

The optimism felt is profound mainly due to the approaching low dependency ratio, but it must be duly noted that the age structure can do no wonders unless India is able to use its working population to the fullest. Education, health, infrastructure, employment, and inclusion of women – these five pillars will take the burden of the increasing population, aiding the restoration of the once revered ‘Sone ki Chidiya’ (the golden bird).

The Pillars

Education is an important factor affecting economic growth. As for the country statistics, the female adult literacy rate stands at 59.27% against the male counterpart at 78.87%, both dawdling behind the world rate of 84.1%. The government expenditure on education is significantly less than that of countries like the United States of America and United Kingdom. Higher education implies better skills, ensuring better paying jobs and increased expenditure and investment, ultimately boosting economic growth.

Sector-wise unemployment trends are as follows: agriculture (47.2%), industrial (24.7%) and service (28.1%). People who have attained tertiary education but are still unemployed account for about 23% of the total unemployed population in the country. As of 2014, the value added by the manufacturing sector (as a % of GDP) is only 17.03%. This inefficiency in labor utilization calls for extensive job creation in the manufacturing and service sector, having an added benefit of relieving the agricultural sector.

The expenditure on health (as a % of GDP) is only 3.97%, actually coming down from 4.56% in 2004 – with a hike in public expenditure, but a fall in private expenditure. Only 39.6% of the total population of the country has access to improved sanitation facilities, leaving the remaining with little to no improvement. Interestingly, access to clean water has witnessed quite an improvement - from 84.5% of the population in 2004 to 94% in 2015.

Many infrastructural projects have been undertaken by the government like the plan to invest $137 billion in the rail network enhancement, highway projects, development and housing projects, etc. Despite this no significant growth in infrastructure is observed.

India stands where China stood a couple of decades back, though perhaps not on as strong a pillar. Another factor to be considered is the influence that cultural and religious diversity has in India as opposed to China.

Religion & Ethnicity

Heavy influence of religion on the economy is a universal phenomenon. Religious beliefs affect women's contribution, level of education, job, etc. Notwithstanding their effect on economic growth, religion hasn’t been included in any growth studies, owing majorly to difficulties in its measurement.

Ethnic conflict could be a reason for slow economic growth. Different religions have different ways of understanding the world, social relations, etc., leadings to differences in preferences creating social cleavages. The presence of a polarized society not only destroys the local industries and infrastructure, but also holds a perpetually looming danger of riots and civil wars. Social unrest in a country creates an unstable political scenario, poor policies, reduced communication and hence less technological innovation and diffusion of ideas.

According to PRS India, 24 out of 35 states and union territories of India reported instances of religious riots over the 5 year 2005–2009 period. Most of these religious riots resulted in property damage and no injuries or fatalities. These conflicts have a negative impact on the economic growth. Though the problem can never be completely eradicated, the situation has improved.

No matter the religion, a common problem faced by one billion Indians is the lack of financial inclusion.

Financial Inclusion

India boasts a higher economic growth rate than most developed countries in recent years and yet majority of its population is still unbanked. Financial inclusion is a relatively new socio-economic concept in India which aims at providing financial services at low and affordable cost to the low-income groups. It also inculcates a culture of savings among a large segment of rural and urban poor which in turn fosters investment and thus increases economic growth. To realize the opportunity that the unique demographic profile of India holds for the future, we need long, sustained periods of growth and inclusive development.

Through financial inclusion, the government aims for a cashless economy. Among the several other advantages, it will make tracking money easier for the government and allow for direct cash transfers to beneficiary bank accounts. This will prevent leakages in the system, ensuring that all funds reach their intended recipients.

The Reserve Bank of India (RBI) and the Government of India (GOI) have made efforts like SHG-bank linkage program, business correspondents providing doorstep delivery of financial services, flexibility in Know Your Customer (KYC) norms, electronic benefit transfer, use of mobile technology, bank branches and ATMs, providing ‘no-frill-accounts’ and encouraging financial literacy. They all have played a significant role in increasing the use of formal sources for availing loan/credit.

Although a large number of bank accounts have been opened under the Pradhan Mantri Jan Dhan Yojana, many are still inactive – screaming for the need to incentivize the population. Financial services must be made user friendly so that the rural sector can be brought under the organized financial system where they have an access to credit, savings, insurance and remittance facilities, while simultaneously preventing them from being exploited by the usurious money lenders. Instead of viewing financial inclusion as a Corporate Social Responsibility, the banks need to view it as a business opportunity and pursue it aggressively, keeping the bigger picture of the future in mind.

Rural credit organization and infrastructure building poses a challenge for the policy makers and financiers in India. The major objectives for improvement in the field can be divided in three areas.

First is the settlement of old debt and ancestral debt. The present trends have made it profitable for farmer unions to argue for waivers or writing off the debt. Even the most generous of government plans, like the Farm credit package of ₹ 2 lakh crore by the UPA II in 2006-07, hasn’t lowered the farmer suicide rates substantially; pointing to the fact that adequate help has still not trickled down to the poorest of the poor. We must seek amicable and mutually beneficial solutions like restructuring and lower transaction fees for the farmers, which would also encourage future cooperation between financial institutions and farmers.

The second is the problem of low availability of institutional credit. Due to the efforts of the government and the RBI, non-institutional debt (moneylender, landlords, etc.) has decreased from 93% in 1951-52 to about 37% in 1981 (as per All India debt and investment survey), replaced by co-operatives, regional rural banks and commercial banks. It has expanded cheap credit and reduced regional imbalance.

The third challenge is to set uniform norms for new credit, ensuring a ceiling on the percentage of willful defaulters and over dues.

In the long run, removing illiteracy, ignorance, caste and religious barriers are very important for the financial inclusion of the rural areas. Financial literacy of the demand side, i.e., the rural population accompanied by strict reviewing tactics is essential for the judicious use of bank credit, ensuring that the money isn’t being used for lavish and non-productive purposes.

The banking system should work in alliance with the telecom industry as the mobile phone has been more successful in penetrating the rural population than any other bank, with the added benefit of reduced costs coupled with a greater inclusiveness.

Urban banking and credit infrastructure had been taking slow strides since its inception. But since the liberalization of 1991, it witnessed the entry of foreign banks and the privatization of operations by Indian banks from the resulting competition. With the arrival of the information age, banks in India smoothly adapted to the changing environment, cutting costs and increasing transaction speeds. But here again, the benefits of the betterment in the urban banking sector have mostly been distributed to the urban rich and middle classes. The urban poor face a lot of obstacles. Lack of identity proof and social cohesion, frequent migration and lack of collateral are the major reasons for the denial of services to the low income section.

To overcome these problems, the unique identification scheme of the government needs to be implemented faster. Along with this, previous performance of the borrowers needs to be accounted for by helping establish credit ratings agencies, and to promote proper and timely repayment of loans. Instead of creating new schemes in the banking systems in urban areas, it is important to first provide the most basic services in rural areas, thus ensuring that there is some level of financial security available for every citizen.

Integrated Rural-Urban Development

Several studies emphasize the interdependence of rural and urban regions. The focus on development of urban areas alone has led to depopulation of rural areas, thus divesting these areas of their human resources, development, and economic growth. India witnesses a very powerful rural push being attempted to be supported by a somewhat weak urban pull. A balance between the two is needed - building a shared vision for development. NDA II’s program – Sansad Adarsh Gram Yojana - attempts to do so by instilling a desire to develop that trickles down to every single individual of the community, starting from the model villages being developed by each MP.

Here is where the plan of making smart cities could backfire, as it will increase rural to urban migration exponentially. We should instead develop the rural and peri-urban areas, thereby curtailing the unemployment in urban areas and creating job opportunities in the rural areas.

In addition to programs like these, promotion of an integrated food supply chain augmented by an efficient storage system, strengthening infrastructure and connectivity, food literacy, financial literacy and waste reduction are crucial to the end result, all round development.

The above boons can only be realized if technology comes together with exogenous policies or financial intervention, and individuals, making both rural and urban regions more competitive leading to a two-way flow of knowledge and an economic stimulus. Start-ups (including non IT-based ventures) must be promoted. Market centric agricultural diversification must be encouraged with financial subsidies. Intermediate small and medium towns must be given due importance as well, following the tenet of peri-urbanization. With a plethora of employment generation schemes being implemented by the NDA II government, 70% of India’s working population can't be left behind. Indian rural workforce must be provided with essential skill development opportunities, including those pertaining to non-agricultural vocations. Rurbanization, as they call it, is the call of the future.

To summarize, we see India as a land of infinite opportunity, provided financial inclusion and integrated rural urban development is implemented efficaciously. The central government, along with the state, must pursue these goals in addition to the resurrection of aforementioned pillars in order to achieve the most coveted place in the history of civilization.

- Manaswini Pandey, Priyadarshini Sundar, Bhavya Mishra

References:

1. All demographical data was taken from the World Bank website

2. G. Datt and A. Mahajan. Ch. 34 Organization of rural credit in India, “Indian Economy” 68th edition

3. Barro and Sala-i-Martin, “Economic Growth” 2nd edition

4. D. Ray, “Development Economics” Oxford University Press