New birth fiat: Does Beijing's move impact us?

Don't want to miss the best from Business Standard?

To reverse its rapidly aging labour force, the government of China has officially ended its one child per family policy.

The communique is reported to have said the move was to "improve the demographic development strategy". The country's working-age population, between 15 and 59 years of age, fell by 3.71 million last year.

How will this affect India's much-touted 'demographic dividend' advantage? Prior to this announcement, population projections of the two countries clearly showed that over the coming decades, while China's work force would decline, India's would rise. China's working population (percentage of population of working age) peaked at 73 per cent in 2010 and was expected to fall to 60 per cent by 2030. In contrast, India's is expected to peak to 68 per cent by 2030.

As of now, India's population is smaller than China's but the population growth rate is more than double that of china. In 2025, India's total population is expected to be equal to China's at 1.4 billion and expected to then surpass it.

This decline in work force rates in China, which resulted in a labour market tightening, pushed up wage rates significantly over the past few years. Many analysts had argued that with India's expanding labour force over the same period, it was well positioned to take advantage of this situation in China and harness its demographic dividend.

But, the latest Beijing move may arrest the downward trend in China's working population. The question is whether this impacts India's fortunes.

Experts say couples in China are unlikely to take advantage of this change in policy. In 2013, the country had relaxed its one-child policy by allowing couples whose first-born was a girl to have more than one child. There were few takers. Even if couples do take advantage of the change in policy, Ravi Srivastava, professor at Jawaharlal Nehru University here, is sceptical that the change in policy will impact India. According to him, "This is unlikely to happen, as the children as a consequence of this policy will enter the labour force only after two decades."

To be sure, in the coming years, as labour shortages and wages rise in China, it will be forced to vacate some product categories, especially in labour-intensive and low-end manufacturing that it currently dominates. While this does provide an opportunity for India, Santosh Mehrotra, professor at JNU, says "its ability to take advantage of this will depend on a host of factors". For one, India will face stiff competition from countries such as Cambodia, Bangladesh, Phillipines and Vietnam, where labour costs are competitive. Second, countries that offer superior infrastructure facilities and a more conducive ease of doing business environment are likely to gain advantage. Then, there is the issue of skill levels in the work force.

Mehrotra contends that it might not be easy to dislodge China from its perch. Despite the decline in working age population, it still has the largest labour force in the world. Further, its investment levels, despite the decline over recent years, remains high. This gives the country tremendous advantage over competitors like India.