REALISING THE DEMOGRAPHIC DIVIDEND
Policies to Achieve Inclusive Growth in India
Santosh Mehrotra
Cambridge University Press
472 pages
It is well known that India is in the midst of a demographic boom. Between now and the 2030s, the country's working-age population is expected to rise by 100 million, making it the largest contributor to the global work force. At a time when China is nearing the end of its demographic dividend, this boom places us in a sweet spot.
But considering the scale of the challenges, it's difficult not to be sceptical about India's ability to harness this dividend. Europe became rich before it became old. Will India end up becoming old without becoming rich?
In Realizing the Demographic Dividend Santosh Mehrotra, a professor at Jawaharlal Nehru University, addresses a range of issues that are central to harnessing this dividend. The book is dense, but undoubtedly ambitious in its scope. To his credit, the author has managed to weave issues as diverse as employment, public finance, the subsidy regime and decentralisation into a coherent narrative.
Drawing on China's experience, Mr Mehrotra attributes that country's successful harnessing of its demography to public investments in basic services, which allowed the population to take advantage of reforms that began in the late 1970s. In India by comparison, the author argues, public spending has been largely misguided: Education, preventive healthcare, adequate nutrition, water and sanitation were barely on the policy radar in the first decades of planned development.
China managed to universalise primary education in the 1970s, well before its reform process began. India only managed to do so in 2007 - a decade and a half after reforms started. And despite improvements in enrolment rates, learning outcomes remain poor, so many question whether this "educated" workforce is even capable to competing in the global arena.
In health, China's strategy focused on preventive and promotive healthcare. By contrast, India has neglected preventive health care with grave consequences. The public healthcare system is simply not geared to cope with the disease burden. The problems are compounded by the lack of interventions in nutrition and sanitation.
The low quality of our human capital stock, a direct outcome of this neglect, has meant that millions are simply unable to take advantage of the opportunities of high growth. Rectifying this, which is critical to harnessing the dividend, requires carefully crafted and coordinated interventions in diverse areas. Is it too late?
That government spending on public services in India is well below other developing countries is well known. It's a sore point for every left-leaning economist. But on this issue Mr Mehrotra takes a refreshingly non-ideological approach. At one level he argues for creating a safety net and for public provision of basic services; but he also recognises the importance of pruning inefficient government spending.
Mr Mehrotra argues that fiscal prudence will require reducing the burden of untargeted subsidies, of which the fertiliser subsidy is the best example. Without this, public investment in infrastructure, which is critical to sustaining a high growth trajectory, will suffer. But pruning inefficient subsidies has proved devilishly hard.
Drawing on his experience in the Planning Commission, Mr Mehrotra rightly points out that subsidy problems are compounded by exclusion and inclusion errors. To overcome these issues he makes a cogent argument for shifting to cash/conditional transfers using the Aadhaar platform. Critics may disagree, but it is worth listening to someone who has worked so closely on these issues.
On the contentious issue of the public distribution system (PDS), the holy grail of left-wing economists, Mr Mehrotra contends that even after reforms, over a third of the grain procured by the government is still pilfered. Leaks are higher than they were 20 years ago. Cheap PDS grain is diverted into the open market and sold at higher prices by a mafia comprised of state officials, transporters and ration shop owners who operate with impunity under political patronage. Thus, extending PDS coverage will compound the problem. And no one has addressed how this issue will be resolved.
On the revenue side, Mr Mehrotra makes the usual noises about raising compliance rates and shoring up government revenue from other income streams. A few sections touch upon the Goods and Services Tax and inheritance tax, if rather superficially. But on compliance, the numbers he presents are astonishing. Ensuring greater compliance among those earning between Rs 5 lakh to Rs 20 lakh he argues could yield roughly Rs 1.4 lakh crore in additional taxes. On the fundamental question of how this is to be achieved, though, precious little is said.
Surprisingly, Mr Mehrotra proposes levying a tax on agricultural incomes. Since most farmers own minuscule land holdings he proposes a tax only on those who own more than two hectares of land. That's bold stuff by any standard. Politically though, it's difficult terrain.
It's a pity that the author has dealt with contentious yet critical issues such as land and labour market reforms in a rather cursory manner, given that these are fundamental to addressing employment.
His treatment of the manufacturing dilemma is also perfunctory. Though a well-thought-out industrial policy will help, the problem is that globally, technological change in manufacturing has been labour-saving. Further, as the author points out, historically employment generated in manufacturing has been lower in late industrialisers than in early industrialisers.
This implies that manufacturing is likely to be increasingly capital-intensive even in labour-surplus countries like India. Which raises the fundamental question - can India really build a labour-intensive manufacturing sector on the scale that it requires to harness its demographic dividend?
Creating productive jobs for the millions entering the labour force each year is arguably the biggest challenge before the Narendra Modi government. As Mr Mehrotra points out, time isn't on our side. That is why it is difficult to agree with the government's logic of incremental reforms.
