Can India Get Rich Before Growing Old?

Table of Contents

Context

Since economic liberalization, the demographic dividend has become synonymous with a promise of sustained economic growth.
However, India’s total fertility rate (TFR) is declining faster than anticipated, raising concerns about the permanence of this advantage.

Current Demographic Reality

Approximately three-fourths of India’s population falls within the working-age group.
Projections indicate that within 10 years, the proportion of working-age individuals will begin to decline.
The Total Fertility Rate (TFR) in India has decreased from 2.6 in 2010 to 1.99 today, with many states now below the replacement-level fertility rate of 2.1 children per woman.
- Southern states like Andhra Pradesh and Karnataka have TFRs below 1.75, reflecting a nationwide trend.

The Middle-Income Trap Threat

This rapid decrease challenges traditional assumptions linking lower birth rates to high income and educational improvements.
With the demographic dividend not fully leveraged due to many individuals remaining trapped in low-productivity agricultural jobs or are unemployed while preparing for competitive exams.
- This risks India falling into the middle-income trap.
India’s labour force participation rate (LFPR) in urban areas stands at just 50%.
For comparison, China, after three decades of liberalisation, reduced its workforce in agriculture by 32 percentage points, from 70% to 38%, whereas India’s reduction has been only 17 points, from 63% to 46%.

Need for Manufacturing Sector Focus

Historically, economic growth has been driven by transitioning workers from low-productivity sectors (like agriculture) to higher-productivity jobs in manufacturing and services.
While the services sector has expanded, manufacturing in India has stagnated.
- g., The textile and apparel industry, valued at $150 billion, employs 45 million people, significantly more than the 5.5 million employed in the $250 billion IT-BPM sector.
  - Textile factories often employ 60-70% women, providing opportunities for those who might otherwise remain in unpaid labour roles.
- Indian manufacturers face substantial barriers, including:
  - Licensing and Permits: One in six manufacturers cites these as significant constraints, compared to less than 3% in Vietnam.
  - Access to Land and Regulatory Hurdles: Around 17% of Indian manufacturers struggle with land access and complex trade regulations, compared to 3% in Vietnam.

Policy Recommendations for Growth

Tariff Reduction: The Central government should reduce tariffs to lower input costs and enhance competitiveness in exports.
Finalising Trade Agreements: Completing free trade agreements with the U.K. and EU would provide expanded market access.
State-Level Labour Reforms: States should allow flexible work arrangements and revise land-use and building regulations to reduce manufacturing costs.
- g., restrictive building standards mean many factories can only use half their land, raising operational expenses.
- Limitations on worker housing in industrial zones also increase hiring costs.

By addressing these issues, India can better capitalise on its demographic dividend, avoiding the middle-income trap and facilitating a shift from agriculture to manufacturing.