Prepare now, India's population won't be a demographic dividend forever

India is now the world’s largest country by population — or, at least, it will be at some point during 2023. While this shift has been a long time coming, it arrived sooner than anyone expected because China’s population appears to have begun shrinking in advance of projections.
 

Undivided India and China have vied across history for the population crown. The partition of India in 1947 appeared to put China permanently ahead in the numbers game. But India’s new position will likely last into mid-century and beyond. The Lancet’s projections for population in 2100 suggest India will still have over a billion people, while China will have slipped to third position, with 730 million inhabitants to Nigeria’s 750 million.

Moreover, this shift of demographic weight from East and Northeast Asia to the south is likely permanent. A UN report points out that in 1980, 42% of Asians lived in East Asia; that proportion will be well under a third by 2050. Indeed, by that date almost half of Asians will be South (and Southwest) Asians.

From now until 2050, therefore, South Asia should enjoy an enviable demographic dividend, boosted by a rapidly growing working-age population. Former Asian Tigers such as South Korea used this same moment very effectively to transition to rich-country status.

We have long known, however, that the nations of South Asia will be unable to take full advantage of this demographic opportunity because they haven’t prepared their populations for the task. Indicators for the health and education of the workforce are too low. If the world is less open to trade than it was when the Tigers emerged, many of South Asia’s governments must also accept their share of blame for failing to support trade, investment, and worker welfare.

The likelihood that we will waste this moment is bad enough. What would be worse is if we compounded the error by failing to think now about what happens when our societies begin to age.

That prospect might seem as though it lies in the ridiculously distant future. For anyone arriving in South or Southwest Asia from, say, Europe, the overwhelming feeling is one of being surrounded by youth. India’s average age is still around 28, compared to 38 in China or 47 in Germany.

But, as we have seen with China, those numbers can change more rapidly than expected. Originally, neither the United Nations nor leaders in Beijing expected China’s population to begin shrinking until the 2030s. Instead, it started happening last year — and perhaps earlier. When the demographic turn comes, its swiftness tends to take us by surprise.

Within India, there are already signs that this pivot is going to happen sooner than was projected just a couple of years ago. The country’s total fertility rate has now fallen below replacement levels overall. Moreover, that figure masks big differences across regions: Population growth is concentrated in a few northern and central states while many others, particularly in the east and south, have fertility rates that are more like Japan’s or Russia’s.

Such uneven demographic trends within one country aren’t unprecedented. Unfortunately, in India’s case, inter-regional migration, which would normally act as a stabilizing factor, isn’t as easy as elsewhere. India is too heterogenous, and ethnic and sub-national politics mean that internal migration — while a right, as in China — is rarely a preference.

As we know from watching China, an ageing population means that the government suddenly faces more calls on its resources with fewer taxpayers to support them. The balance between savings, consumption, investment, and growth must change.

Most importantly, entitlements and state services designed for an expanding working-age population might become unaffordable for countries that have more retirees than expected. The United States is perennially worried about the finances of Social Security and Medicare for good reason.

India’s military and state pensions themselves are enough to tip the country into fiscal disaster as and when its demographic structure changes slightly. For state governments, paying pensions already takes up almost 30% of their tax revenue.

Attempts have been made over the past two decades to shift to more fiscally responsible entitlement schemes. But all these keep on being rolled back by politicians looking for votes from retired soldiers or government employees.

As Indian officials prepare to present the new federal budget next week, the country’s status as the world’s largest must be on their minds. New entitlements must be fully financed, and old ones must be re-examined for their fiscal implications. Preparations will have to be made for an India that pays less taxes and wants to run down savings instead of setting them aside.

South Asia may not have prepared for its decades with a growing workforce. It must not repeat that mistake when it comes to the dangerous decades in which that workforce will shrink.