I met a Chinese scholar who told me something rather interesting. I didnít know this. Nor do I think this is common knowledge. This nugget concerns the quality of Chinese population statistics. Chinaís annual rate of population growth is now 1.1 per cent, which means China adds between 16 and 17 million annually to its population size. There is a separate data source from school enrolment figures and these show fresh annual enrolment of around 13 million. A typical Indian reaction would be, so what' Four million children donít join school. What is so odd about that' Except that, given the Chinese system, it is inconceivable that children donít enrol in school, even among poor rural families, and this proposition is independent of gender bias. Subsequent dropping out is different. So the government attempted to match the two data sources and discovered that the birth figures were over-stated. Nursing homes and hospitals receive budgetary support on the basis of births registered and there is thus a perverse incentive in favour of overstating births. Abortions are, therefore, shown as births and anything between 3 and 4 million children are non-existent. This may seem like a colossal figure. But consider estimates of missing women in India, courtesy female infanticide and foeticide. Those are also between 3 and 4 million per year.
The upshot is that the Chinese population will age faster than what one had earlier assumed. Instead of the aging factor hitting China beyond 2035, it will begin to hit beyond 2015. By 2015, 32 per cent of Chinaís population will be over 50, while 31 per cent of Indiaís population will be under 15. This has direct implications for the growth prospects of the two countries. A simple framework for predicting growth is to divide the investment rate by the capital/output ratio, the latter also a measure of efficiency of capital usage. The investment rate is a function of the domestic savings rate and foreign savings.
Chinaís investment rate has been almost 45 per cent and the capital/output ratio around 5, thus explaining 9 per cent GDP growth. Until recently, Indiaís investment rate was around 26 per cent and the capital/output ratio around 4, thus explaining 6.5 per cent GDP growth. Capital is more efficiently used in India, understandably so, because money hasnít usually been ploughed into massive infrastructure projects. Compared to India, China is a capital abundant country, which explains why returns on capital are lower in China than in India, a fact foreign investors have also discovered.
To get back to the growth point, the domestic savings rate in China is around 45 per cent, compared to the historical trend in India of around 25 per cent. However, what people often ignore is that the household savings rate in India (at around 18 or 19 per cent) is higher than that in China. Unlike south-east Asian countries like Singapore, there is no mandatory component to household savings in China. Privatized recourse to education and healthcare, and the breakdown of traditional social security nets, have driven savings behaviour in China, spliced with young populations and greater prosperity. As the Chinese population ages, the household savings component will decline. And so will the corporate component, as reforms increasingly require state-owned enterprises to pay dividends. While savings and investment rates decline in China, they will increase in India. Indeed, the Indian savings rate has already increased to 29 per cent, driven by higher incomes and demographic transition. The Indian investment rate has also gone up to 30 per cent, with a still relatively small component of foreign savings. No one should regard a current account deficit/GDP ratio of 3 per cent as unsustainable. So, we should witness an increase in the Indian savings rate to 32 per cent and an increase in the investment rate to 35 per cent.
We donít quite know what Indiaís capital/output ratio is. At one point, it was as high as 6 and is probably around 4 now. With a figure of 4, an investment rate of 35 per cent gives us GDP growth of 8.75 per cent. One must also remember that there are two other reasons why Indiaís capital/output ratio should decline to around 3.5, jacking up growth even further. First, competition and resultant efficiency improvements lead to such declines. Second, the services sector has a lower capital/output ratio and the shift in the sectoral composition of GDP, away from agriculture, also helps reduce the capital/output ratio. The point is that such trends should bring Indian and Chinese savings and investment rates closer together and there should be increased convergence in growth rates also. It is sometimes argued that the Chinese growth pattern has emphasized investments, while the Indian one has emphasized consumption. This is simplistic. But to the extent this dichotomy is true, these differences have also begun to converge. And, except for the indirect effect on the savings rate, we havenít even mentioned the demographic dividend yet, something rarely considered in economic forecasts, the Goldman-Sachs BRIC report being an exception.
In 2015, 31 per cent of Indiaís population will be under 15, 27 per cent will be in the 15-29 bracket and another 27 per cent will be in the 30-49 bracket. Consequent to demographic transition, such steep declines in dependency ratios boost GDP growth incrementally. In some east Asian countries, the increment to GDP growth was 2 per cent. To get that increment, jobs have to be found for new entrants into the labour force, at something like 15 million new jobs a year. (The official target of 10 million a year is not good enough.) And these jobs have to be found in states where these new entrants into the labour force are, that is, in the Hindi heartland. Migration out of Bihar and eastern Uttar Pradesh is not a solution. Finding jobs requires growth and easing of rigid labour laws (not just the Industrial Disputes Act) that work against employing people in the organized sector. In addition, one requires better healthcare (lower mortality and morbidity), education and skills. Lack of requisite skills is now fast becoming a problem, especially in the backward states. On the flip side, wages are increasing in west and south India. A trained plumber not only commands a high premium in London, Washington and Singapore, but in most of urban India.
The education reform agenda has three separate segments of school, vocational and higher education. Without these reforms, supply-side adjustments cannot take place. And despite a macro or overall excess supply of labour, in selected niches, we have excess demand for labour. Forget higher education. While unlimited unskilled labour is available, even limited skills arenít available. In a way, the school education indicators have improved, partly thanks to the Sarva Shiksha Abhiyan. There are problems of measuring out-of-school children. Subject to this, in the course of the tenth plan (2002-07), we will have attained universal enrolment, the out-of-school figure having been 40 million in 2002. True, there are problems with retention and transition from primary school upwards and also unequal access across class, caste and gender, apart from quality, but what has been achieved still needs to be applauded. Problems of getting children into schools are major issues only in eastern parts of UP, Bihar and West Bengal. Other places like the North-East arenít significant in numbers. We now need to replicate this success for vocational education, by roping in the private sector and not depending on the public sector for delivery. The public sector delivery presumes that every male must be a carpenter and every female must be a seamstress. Skills imparted have no link with what the market wants. Nor is there a system of independent testing, undertaken by a body other than the trainer. Thatís the reason Indiaís demographic dividend may turn out to be a demographic drag.