North India deserves credit for the demographic dividend

Once, India had a supposed problem called the population explosion. Today, in a dramatic reversal, India gets congratulations for garnering a huge demographic dividend. The working age (15-65 years) proportion of its population is growing fast and will keep growing for decades, boosting GDP growth, while other countries suffer from falling workforces and ageing populations that crimp growth. India will add maybe 200 million to its workforce in the next three or four decades while China suffers a declining workforce. The supposed population curse has suddenly become a global advantage.

This change has not been absorbed fully into popular or political thinking. The southern states have long been leaders in family planning, while northern states have long had the highest fertility and population growth rates. Between 2001 and 2011, population growth was 25.1% in Bihar against just 4.9% in Kerala.

The south has long been congratulated for its fertility success, and the north slated for its failure. But, with the change in perceptions, the north can demand recognition for contributing the most to India’s demographic dividend. Many countries now offer large incentives (grants and free childcare) to induce parents to have large families. North Indians do the job free of charge.

Today, the southern states are outraged that the terms of reference of the 15th Finance Commission mandate the use of 2011 population data in its complex formula for sharing central tax revenues between different states. Earlier Finance Commissions used the state-wise population shares of the 1971 census, to avoid penalising states with good family planning and hence falling population share. This benefited the south at the expense of the north.

Now the 15th Finance Commission has been told to use the state-wise population shares of 2011, ending the reward for falling fertility. Some angry southern politicians want the south to secede from India. However, as a matter of basic equity, every citizen is entitled to a slice of tax revenue, and to that extent, using the latest population share (and not the 1971 share) is equitable. Moreover, the demographic dividend means rising population is now a blessing, not a curse. That constitutes a case for rewarding, not penalising the north.

Readers will ask, how did the population explosion morph into the demographic dividend? When a poor country improves health and nutrition, its death rate plummets, while its birth rate falls only gradually. Hence its population suddenly shoots up, and can look threatening. The ratio of dependents (children and aged) to workers rises, straining breadwinners.

In the next phase, rising incomes and education induce family planning. The birth rate falls. As kids of the preceding baby boom reach working age (15 to 65 years), the proportion of workers to dependents rises sharply. This is the demographic dividend — more workers for a given population. It is often buttressed by more women getting educated and joining the workforce, further increasing the demographic dividend. Some studies estimate that almost half the growth boom in Asian miracle economies was due to their demographic dividend. India has now joined the happy band.

However, in the next phase, the aged start living much longer, even as the birth rate falls below replacement levels. The rise in aged dependents can far exceed the fall in child dependents, so the ratio of total dependents to workers rises. This strains not only household budgets but also national budgets, which provide large sums for pensions and healthcare costs for the aged. This is one reason for reduced economic performance in Japan and Europe.

India’s southern states led the lowering of birth rates and initiated the demographic dividend, and were rewarded with rapid GDP growth. But the birth rate in Kerala and Tamil Nadu has already fallen below replacement levels. Their populations are ageing fast and will soon begin shrinking, portending serious problems. Fortunately, north India will provide an expanding population and workforce for decades. Bihar may keep this up until 2100. The demographic dividend launched by the south is now being carried forward by the north. Caveat: to maximise the dividend, India must improve worker skills and female labour participation.

The Finance Commission should incentivise good performance by giving some weightage to efforts by states in fiscal effort, quick justice, environmental protection, education and health. That will benefit the high-performance states of the south and west, and alleviate their grievance about the use of 2011 population figures. But they must adjust to the fact that what was once called poor performance in fertility by the northern states can, ironically, now be called high performance in creating future workers.

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