How India's demographic dividend is being eroded

Rural and urban regions present different labour participation and employment levels. These differences also are not tuned to India exploiting its demographic dividend, says Mahesh Vyas.

The unemployment rate continues to rise. It has been rising steadily since July 2017 when it had reached its recent low of 3.4 per cent.

The relentless rise in unemployment led to it peaking at 7.4 per cent in December 2018. Then it fell to 7.1 per cent in January.

But faster-frequency estimations such as the weekly estimates and the 30-day moving average suggest a resurgence of the unemployment rate in February. 

The 30-day moving average, which signalled a fall in the unemployment rate in early January, now shows an upturn from February 4.

The 30-dma seems to have bottomed out on February 4, when it touched 7.05 per cent. Since then, it has steadily risen to reach 7.29 per cent by February 10.

Weekly estimates show that the unemployment rate has regained its higher levels in the two weeks ended February 3 and February 10. 

Weekly estimates are always a shade higher than the 30-dma and the monthly estimates. While the weekly levels are about 50 basis points higher, the trends depicted by them are still very useful to understand the direction of the labour markets.

The unemployment rate in the week ended February 3, at 8.56 per cent, was close to an earlier recent peak of 8.55 per cent in the week ended January 6, 2019.

In the week of February 10, the unemployment rate reached a new recent peak of 8.63 per cent. This is the highest weekly unemployment rate in 127 weeks, that is, since the week ended September 4, 2016.

It is worrisome that the unemployment rate is rising steadily. The average increase per week since August 2017 is 0.07 percentage points.

This is an 80-week period over which the unemployment rate has risen steadily. This seems to suggest that the Indian economy faces a rising unemployment trend.

The labour participation rate has remained largely stable during this 80-week period. The average weekly change in labour participation is a negligible -0.004 percentage points.

While this is a negligible change, the negative sign against it is telling. It implies that the rising unemployment rate is in the face of stagnant or even falling labour participation rate.

As political parties raise the bar of distribution of cash and given that there are no incentives to increase job-creating investments, it is likely that the unemployment rate could continue to rise and labour participation rates may continue to remain low in the coming months.

Evidently, India seems to be kissing goodbye to its demographic dividend.

Rural and urban regions present different labour participation and employment levels. These differences also are not tuned to India exploiting its demographic dividend.

The weekly urban unemployment rate crossed 10 per cent thrice in the past six weeks. In fact, it was 11.2 per cent during the week ended January 27.

It has since fallen -- to 9.8 per cent in the week ended February 3 and then to 9 per cent in the week ended February 10.

The 9 per cent unemployment rate in urban India denotes a sharp fall in the rate. After remaining largely on a sharply rising gradient for five weeks, the urban unemployment rate has declined quite substantially in the past two weeks.

Urban labour participation rate has not changed much but the little change that can be deciphered is positive -- particularly from January this year.

The urban labour force participation rate (LPR) was 40.5 per cent in November and 40.8 per cent in December 2018.

In January, it was 41.4 per cent. In the first two weeks that ended in February, the average urban LPR was 41.5 per cent.

This gradual increase in the urban LPR, however, is too small and too vulnerable. The small momentum can easily dissipate and the LPR may then continue to remain at its current very low levels of 42-43 per cent.

It is imperative that the rate rises back to the pre-demonetisation levels of 45-46 per cent. Urban India provides the better jobs and it is here that the labour participation should be high.

However, in India, the labour participation rate is higher in rural areas. Rural LPR in India is about 3.5 percentage points higher than urban LPR.

The gap narrowed a bit in January 2019. Yet, rural LPR was 44 per cent while urban LPR was 41.4 per cent in the month.

Rural unemployment rate has traditionally been lower than urban unemployment rate. However, in the two weeks ended February, rural unemployment rate has risen quite sharply to average at 8.2 per cent.

The average rural unemployment rate is a shade below 6 per cent.

Large parts of rural India manage to live off farmlands with very informal forms of employment and with high levels of underemployment. This is not similarly true of urban regions.

Urban regions offer better quality jobs. Thus, the lower labour participation rates and higher unemployment rates in urban India are worrisome.

Mahesh Vyas is managing director and CEO, Centre for Monitoring Indian Economy P Ltd.