Sessions 01-02

Socio-Economic and Cultural Environment of

Businesses

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Scope of the Course
The course will cover the following topics in the Indian context
• Socio-Cultural Environment of Business
• Political-Economy of India
• Demography
• Structure and Composition
• Agriculture, Industry and Manufacturing
• Tertiarization of the Economy
• Black Economy
• Foreign Trade and Balance of Payments
• Challenges of Business Innovation

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Group Project
The theme: An Economic Strategy for Inclusive and Sustainable
Growth of India

Agriculture Manufacturing
Service-led growth and employment Agriculture credit
Healthcare Political Economy: Business Policy Making
External Sector Higher Education
Private Investment Housing
Environment Public Debt
MSME sector Technology and innovation

Resource(s): 1. Rajan et al, “An Economic Strategy for India”, 2018

2. NITI Aayog, “Strategy for New India @75”, 2018
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Socio-cultural Environment of India
Some resources you can lay hands on
• Mitchell Charles, “Short Course in International Business Culture”. World Trade Press, 2008 (the
resource is available online)
• Ravi Venkatesan, “Win in India, Win Everywhere: Conquering the Chaos”. Harvard Business
Review Press (this is not course material but may be picked if your personal reading taste lies in
understanding MNC experiences in India!)
• Cheema (2011). Sociocultural Stratification of India. Policy Perspectives, 8(1), 49-63. (this
resource is available online)

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Socio-cultural Environment of India
The non-market environment of businesses
• The nonmarket environment consists of the social, political, and legal arrangements that
structure the firm's interactions outside of, and in conjunction with, markets
• Nonmarket strategy recognizes that businesses are social and political beings, not just economic
agents
• Because companies create and distribute value, a plethora of actors seek to influence them —
formally, through laws and regulation, and informally, through social pressure, activism and
efforts to shape the public perception of business – these cannot be escaped
• In a global economy, sustained competitive advantage arises from tackling social, political and
environmental issues as part of a corporate strategy — not just pursuing business as usual
• The nonmarket environment is characterized by four I's: issues, institutions, interests, and
information. Issues are what nonmarket strategies address

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Socio-Cultural Environment of India
Socio-Cultural Environment
• The sociocultural environment refers to trends and developments in changes in attitudes,
behavior, and values in society
• It is closely related to population, lifestyle, culture, tastes, customs, and traditions
• These factors are created by the community and often are passed down from one generation to
another
• Specifically, culture is a set of learned core values, beliefs, standards, knowledge, morals, laws,
and behaviors shared by individuals and societies that determines how an individual acts, feels,
and views oneself and others

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 Social Stratification
• Social stratification is a reflection of Ascribed Stratification Achieved Stratification
socially created inequalities
• The unequal distribution of wealth,
power and prestige in a society can be Based on standards beyond one’s These are acquired by one’s special
examined through several lens, both control skill, knowledge or ability
ascribed such as caste, gender, religion, Example, one’s caste, color,
Example, educational attainment,
geography creed is merely by birth
ethnicity, race, disability status and age accident
occupation, intellectual ability
and achieved such as the division based
on which college you got into after senior
secondary
• Which do you think about CGPA-based
stratification?
• However, it is important to understand
that stratification is are not always
independent, they operate with varying
degrees of correspondence

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Social Stratification
• In a stratified system, a particular stratum experiences similar circumstances and tends to
develop shared norms, attitudes and values distinctive to it
• For instance, hierarchies based on class and caste may run into parallel into one another
• These may be cross cut by perspectives on gender or ethnicity
• Functionalist theory and conflict theory-perspectives on social stratification
• The conflict theory perspective is that stratification is dysfunctional and harmful in society. For
example, capitalism, an economic system based on free-market competition, particularly
benefits the rich by assuming that the “trickle down” mechanism is the best way to spread the
benefits of wealth across society. Governments that promote capitalism often establish
corporate welfare through direct subsidies, tax breaks, and other support that benefit big
businesses. Conflict theorists would argue that these measures haven’t been successful rather
have been used by the top family to solidify the patterns of stratification that keep
the family rich
• Functionalists criticize this approach by arguing that people do not always act largely out of
economic self-interest. For example, Chuck Feeney, the creator of Duty Free Shoppers, has
given $4 billion to charities. Bill Gates has given 58% of his wealth to charity
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 Examples of Socio-Cultural Variables

Culture
Geography Example: Ethnicity
McDonalds and its Example: L'Oréal’s
no beef, vegetarian product portfolio
tikki burger in India across markets

Aesthetics Religion
Wealth and Social Example: Islamic banking,
Example: British Class the economic order in Number and growth of
Airways removed
the British national Refer to the Islamic countries population
flag from its aircraft economic
livery; stratification of India

Age Composition Habits

Example: As the elderly Example: EuroDisney
Household and population begins to in Europe - French
Family Structure dominate, the need for business negotiating
health services and styles to employee
pensions increases flexibility and dress
habits to consumer
spending patterns
and eating
preferences

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 Economic Stratification of India
• Economic stratification is a reflection of income-
based inequalities
• The structure of demand in India is flattish pyramid
with a fat base
• A small affluent segment lies at the top, the
“Australia at the top of India”, as Steve Ballmer of
Microsoft calls it
• A quickly growing, middle market segment has the
same number of households as Germany and the
United Kingdom combined
• Tapping that segment represents a big opportunity.
Then, there are the 700 million people at the
bottom of the pyramid who survive on less than $2
a day
• To succeed in such an environment, a company has
to straddle the pyramid
Entire country stratified by NCAER-CMCR 2010 annual income data
Source: Aresh Shirali, “The Wealth Report” Open Magazine, March 12, 2011
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India’s Socio-Economic Stratification
Business Implications for MNCs in India
• Smart companies start by selling global products at global prices to the top but quickly find a way to
crack the middle market – this is not easy, because it requires considerable innovation
• As Mitchell Charles puts in his book, “Companies have to develop products in India that are
disruptive and offer perhaps 70 percent of the value of the global product at 30 percent of the price”
• Think of $100 smartphones, $2,500 cars, X-ray machines at $400, and so on
• To make money at these price points, companies must localize supply chains and alter business
models
• They also have to develop deep distribution that reaches into small-town India and build trusted and
aspirational brands
• Once they succeed, they find that the same offerings and capabilities allow them to win in many other
developed and developing countries

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India’s Socio-Economic Stratification
Business Implications for MNCs in India
• Telecom operator Vodafone’s success in India, a market where a phone call costed $0.02/min and the
average revenue/ customer was $3 gave it an advantage in many African and European markets
• American tractor manufacturer Deere & Company’s big success in India with (locally engineered) compact
and affordable thirty-five-horsepower tractor suitable 2010 (its giant tractors and harvesters were too
large, expensive, and complicated for tiny farms) – today, Deere exports tractors from its Pune factory to
seventy other countries
• Hyundai and Suzuki made India their global hub for small cars
• Unilever is repeating its success with low-cost detergents and sachets, and Pureit water purifiers in India
in many other developing countries
• Unilever and Novartis have created new models of distribution to reach less affluent consumers in
smaller towns and villages
• Companies such as Bosch, Dell, Reckitt Benckiser, L’Oréal, Nestlé, Kraft, Schneider Electric, Honeywell,
GE, Cummins, and Standard Chartered have used India as a proving ground for leaders

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India’s Socio-Economic and Cultural Stratification
What Business Leaders Have to Say
“They send their stars to India to deliver on tough missions, and Indian stars work overseas, particularly
in Southeast Asia and Africa, which are characterized by high growth and volatility”, HBR Press

“Our success in China and India has created a model that allows us to succeed in Brazil, Africa, and
elsewhere”, Shane Tedjarati – President, Honeywell’s New Markets

“India is at the forefront of the company’s transition strategy. All our dual SIM launches are doing well,
and we are witnessing strong sales”, Stephen Elop, Nokia’s CEO

“India’s strategic importance is not only because it is a large market; more importantly, it is a laboratory
or petri dish for developing products, business models, talent, capabilities, and operating models that will
help companies succeed in a host of challenging markets” HBR Press

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India’s Socio-Economic and Cultural Stratification
Summarizing What Business Leaders Have Said
• Both in its potential and in its challenges, India is an archetype for many emerging markets,
especially emerging ones
• As India offers a market with huge potential, substantial managerial capability, a decent talent
pool and important institutions that many smaller markets lack it is a good place for
multinationals to learn to deal with corruption, volatility, poor infrastructure and the problems
they will face in other emerging markets
• In a nutshell, given the complex socio-economic and cultural environment in the country, success
in India has perhaps been seen as a litmus test of a business’s ability to succeed in other
emerging markets

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Hitchhiker’s Guide to Global Business Environment
Venkatesan’s Litmus Test for MNC Success in India

Position in the Leader in the industry, i.e., number one, two, or three in the local market and gaining market
Industry share
SUCCESS PARAMETERS

Share in Typically, a successful MNC in India delivers 10 percent to 20 percent of the company’s new
Global growth in revenues and profits on a global basis
Business In comparison, China may be delivering 20 percent to -40 percent of global growth

These MNCs use India as a hub to win in other markets

India on the
Strategic These take products developed for India overseas and using the low-cost manufacturing,
Map engineering capabilities, and managerial talent there to support similar markets

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Operating Amidst Cultural Differences
The Globalisation Paradox
• The whole concept of effective globalization of a company presents a paradox: the more global a
company becomes the more reliant it must become on local resources—people and management
and marketing talent—to distribute its products or services to new markets
• Successful companies, both large and small, are dealing with the globalization paradox by learning to
think globally and act locally
• Few products can boast of beating the globalization paradox  Managing the global-local balance
• Coca-Cola is one. Its formula, its logo and its packaging are the same virtually all over the world. It is
one of the few exceptions to the prevailing rule of catering to local preferences. However, when it
comes to soft drinks other than Coke, the company indeed manufactures to local preferences. Its Mello
Yellow drink is called Lychee Mello in Japan. Meanwhile, Fanta, which most Europeans know as an
orange flavored drink, is peach-flavored in Botswana, passion fruit-flavored in France, and flower-
favored in Japan.
• But at least in one instance, even the giant Atlanta, Georgia-based company has been forced to bow to
local taste preferences when it comes to its flagship cola. In India, Coke pushes a rival brand it owns
called Thums Up over its own cola. Thums Up outsells Coke by a four-to-one margin. In no other
country in the world does the company sell a rival to its own Coke. So successful has Thums Up been
compared to Coke that the company has no plans to alter the marketing pattern. Coke will play second
fiddle to Thums Up so long as Indians prefer the local brand.

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Operating Amidst Cultural Differences
The Globalisation Paradox
• The American fast food giant, McDonald’s, is a dramatic example of how a company that does
business around the globe can have an impact on local cultural traditions that seem totally
unrelated to their main product—fast food. The company is also a prime example of how a
company can think globally and act locally.
• McDonald’s opened its first restaurant in Des Plaines, Illinois in 1955. Today, the company
operates more than 22,000 restaurants in 109 countries on six continents. McDonald’s first began
to expand internationally in 1967 with the opening of restaurants in Canada and Puerto Rico.
• Contrastingly, the failure to understand socio-cultural subtleties has been costly for many others.
EuroDisney, a Disney theme park chain, failed to do its cultural homework on many fronts
including business negotiating styles to employee flexibility and dress habits to consumer habits
and eating preferences.

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L'Oréal Masters Multiculturalism: Operating Amidst Cultural Differences
The Game of Global-Local Balance
• The tension between global integration and local
responsiveness is particularly high when product
development and marketing require complex Global
knowledge Integration
• Such knowledge is usually tacit and collective and
is revealed only in action and interaction
• Culturally diverse teams exhibit the so called
Tower of Babel syndrome marked by members of Local
the team talking past one another and teamwork Responsiveness
breaking down

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Operating Amidst Cultural Differences
Cross-Cultural Management
• The case of an American manager who worked for a firm that had merged with an Italian
company. He was frustrated by his Italian colleagues, who were regularly late for meetings. As a
result he ended up padding his schedule, adding in an hour of “slack” time, just to take into
account their tardiness
• Stories about Germans frustrated with the lack of timeliness from their Indian and Brazilian
colleagues
• While bridging the cultural divide is quintessential to success, sometimes it may be challenging
and even dysfunctional to cater to others’ differences, particularly when it means you can’t get
your work done
• Demanding cultural compliance — even from subordinates — can sometimes be dangerous
because it can breed resentment and anger

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Cultural Differences Are More Complicated than ‘What Country
You’re From’
• The obvious question “What culture does this person come from?” may not be relevant in
bridging cultural differences
• National cultural differences do matter – for example, the way you network in India does tend to
be different from how you network in the United States; the way you motivate employees in
Japan is quite different from how you do so in Canada
• But thinking that national cultural differences are all that matters is a mistake
• It is equally important to look for regional differences within the same culture
• What you know about companies and industries is also important – Eg., imagine the
cultural norms of a global consulting firm like McKinsey that also happens to be in Riyadh.
Similarly, how you would interact with a boss at Google is quite different from how you would
interact with a boss at Microsoft or Intel. Meetings at traditional, bureaucratic organizations
are often run quite differently from meetings at small startups. Norms for behavior in the
advertising industry are quite different from norms for behavior in the agricultural industry,
and so on
• What do you know about the people? E.g., it is important to know whether you are
communicating with a 60-year-old senior executive or a 20-something manager?
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Key Takeaways
• The non-market environment of businesses plays a critical role in their survival and success
• Socio-cultural components of the non-market environment deal with population, lifestyle,
culture, tastes, customs, and traditions
• Since businesses operate in a context, a thorough understanding of these components is must to
ensure that failure is kept at bay
• India’s position on the strategic map of global corporations is quite unique owing to its interesting
and rather complex socio-economic and cultural environment
• Understanding cultural differences can be a definite source of competitive advantage for a global
firm

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 Sessions 03-04

Types of Social and Cultural Differences

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Dimensions of National Culture
The Hofstete Model in Context
• Culture is the collective programming of the mind that distinguishes the members of one group or
category of people from others
• Hofstede’s cultural dimensions theory is a framework for measuring cultural dimensions from a
global perspective
• Proposed by Geert Hofstede, a Dutch cultural economist and management expert
• Hofstede’s cultural dimensions theory is a useful business tool which provides insights for
organizations looking to extend their business internationally
• With this framework, any organization planning to enter a market in a new country becomes
aware of the cultural differences of that particular country
• Hofstede’s theory includes 6 cultural dimensions namely, power distance index, individualism
and collectivism, uncertainty avoidance, masculinity and femininity, long term vs. short term
orientation and indulgence vs. restraint (Hofstede et al., 2010)
• For instance, how will your business or brand be affected in feminine cultures? If your brand
supports freedom of speech, how will it perform in a restrained culture where freedom of speech
is not a primary concern?
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Dimensions of National Culture
The Hofstete Model in Context

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I Power Distance
• Low power distance societies are the ones where powerless members or lower caste
members do not subject themselves to the supreme authority of the elites and leaders
• In families, fear and respect for elders is hardly emphasized and obedience is not an enforced
trait
• In social circles, people with power are expected to use it legitimately, as there’s an emphasis
of right and wrong use of power (income distribution is quite equal)
• In politics and governance, there is pluralism meaning that several groups posses political
power that counterbalances and checks each other and, thus, corruption is rare
• In religion, equality of believers is emphasized

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I Power Distance
Low Power Distance
Minimizes inequalities among people
Bosses and employees treat one another as equals
with equal rights
Decentralisation of power
Sub-ordinates expect to be consulted, while bosses Sub-ordinates expect to be told what to do; bosses
also expect initiatives from employees
There is emphasis on democratic decision making
within the organisation
People dis-approve of status
Less formal social interaction
Narrow range of salaries
High Power Distance
Inequalities and hierarchy are accepted between
people
Employees respect managers who expect
obedience
Centralisation of the power
are expected to take all the initiative
Emphasis on autocratic decision making
Privileges are expected for managers
Formal social interaction
Wide range of salaries

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Practical Implications for Managers
I Power Distance
• In high power distance cultures, managers expect an individual initiative from sub-ordinates
• In low power distance cultures, managers must better be prepared to justify their actions and
ask for the opinions of sub-ordinates
• In high power distance cultures, micro-managing is often impossible

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II Collectivism and Individualism
• Collectivism is the principle or practice of prioritizing group cohesion over individual pursuits,
while individualism is a value or political view which focuses on human independence and
freedom
• Collectivism is a cultural pattern commonly observed among traditional communities like
those in Asia, Africa, and Latin America. It is the opposite of individualism which is common in
North America, Western Europe, New Zealand, and Australia
• The political theory of collectivism relies on communism, while individualism is based upon
autarchism, which rejects compulsory government and promotes self-reliance and individual
freedom
• Collectivism is very well reflected in the expressions “The nail that sticks up is pounded down”
and “The highest blade of grass is always the first to be cut”
• While decision making (consensus building) may be faster (slower) in an individualistic
(collectivist) culture, implementation of decisions on a new manufacturing process, reward
policy, etc. will be much faster in a collectivist culture

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II Collectivism and Individualism
Collectivism
People are raised in extended families or clans
Loyalty is emphasized
Preserving harmony and being dutiful is important
Based upon communism
Relies on inter-dependence and conventionality
High context, implicit communication
Associated with stable, hierarchical roles
dependent upon gender and family background
Associated with shared property and group
ownership
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Individualism
Everyone expected to take care of himself or his
immediate family only
Right of privacy is emphasized
Speaking one’s mind is considered healthy
Based upon autarchism
Relies on individual pursuits
Low-context, explicit communication
Associated with egalitarian relationships and
flexibility in roles
Based upon private property and individual
ownership
Practical Implications for Managers
II Collectivism and Individualism
• The story of the American consultant visiting a small family-owned Saudi Arabian lighting
manufacturer investigating the possibility of becoming a public company
• The company’s ownership faced some hard choices if they went public or tapped into overseas
capital
• “The workforce was terribly bloated and inefficient. Output and revenue per employee were
terribly bloated and inefficient” – believed the consultant
• The owners balked at the idea of layoffs and firings
• Their solution: cut pay across the board and reduce everyone’s hours
• The workers understood and did not complain
• Lesson drawn: when dealing with a collectivized culture, pay cuts for all workers work better
than laying off a few employees
• Thus, understanding the cultural mindset can present creative solutions to universal business
problems

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III Masculanity and Femininity
Masculanity Femininity
Gender roles are explicit and concrete Gender roles are interchangeable
Men’s role is to rule, women’s role is to raise up Men are also involved in children’s upbringing
children
Independence is the highest ideal Mutual dependence is the highest ideal
Men dominate the society Genders are treated equally
Ambitions lead to action Service is the greatest motivation to action
Success, money and material possessions are Relationships and quality of life are valued
valued
Such cultures have their origins in the war Origins are harsh life conditions where men and
women had to support each other to preserve life
One lives to work One works to live

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IV Uncertainty Avoidance
High Uncertainty Avoidance
Uncertainty is inevitable and is a constant threat of
life
There exists an inner imperative to work
Reliance on strict rules and regulations
Experts’ knowledge is the source of convictions
Risk avoidance
Lack of tolerance for deviant tendencies, behaviour High tolerance for deviance
and ideas
Stems from the Western rationalistic tradition
Low Uncertainty Avoidance
Uncertainty is inevitable, thus, accepting it should
be easier
Hard work is not a value in itself
The fewer the rules, the better
Convictions are based upon common sense
Risk taking
Stems from the Eastern pursuit of virtues

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Practical Implications for Managers
II Uncertainty Avoidance
• The proverb, “In Switzerland, everything that is not mandatory is forbidden” – speaks of a
high uncertainty avoidance culture in the country
• Low uncertainty avoiding countries have more free-flowing and less structured styles of
management
• The German accounting department that felt uncomfortable with the new accounting system
and ordered that workers keep two sets of accounts
• In Japan, the trade-off of individual freedom and mobility exchange for a guarantee of lifetime
employment speaks of uncertainty avoidance
• While the Japanese may make a highly structured presentation, the American manager is more
likely to be able to handle questions, interruptions and agenda changes
• The United States is the quintessential risk-taking society

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V Long and Short Term Orientation
Long Term Orientation
Frugality and even meanness
Expecting delayed gratification
Importance of preserving one’s own face
Saving for future investments
Fulfilling social obligations within reason
Tradition needs to be adjusted to the present
conditions
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Short Term Orientation
A need to behave as others do regardless of the
consequences
Expecting immediate gratification
Do anything to achieve a goal
Less interest in saving for investments
Fulfilling social obligations at all cost
Respect for tradition
VI Indulgence vs. Restraint
Indulgence
Higher proportion of people declaring themselves
very happy
A perception of personal life control
Higher importance of leisure
More people actively involved in sports
Maintaining order in the nation is not given a high
priority
In countries with enough food, higher instance of
obesity
Freedom of speech is seen as important
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Restrained
Fewer people acknowledge being happy
A perception of helplessness: what happens to me
is not my own doing
Lower importance of leisure
Less people actively involved in sports
Higher number of police personnel per 100000
population
In countries with enough food, lower instance of
obesity
Freedom of speech is not a primary concern
United States vs. China
Hofstede’s Cultural Dimensions Model

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Negotiation between Google and China
The Game of Global-Local Balance
• What was China’s main interest? Beyond
improving technology/ technological parity with
the USA - Data Privacy and Censorship? China’s
interests

• How about Google? What were its key concerns?

- Revenue expansion and removal of Data Privacy Google’s
and Censorship clauses interests

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What happened later

• Based on information that came out in the weeks following the launch of Google.cn, it appeared
increasingly likely that Google viewed its first agreement with China, especially on the censorship
issue, as a limited-duration agreement
• Every time that Google’s censorship filters removed information from a user’s search results, it
alerted the user that search results had been removed in accord with Chinese “laws,
regulations, and policies
• Wisely, Google appeared to have left this issue out of the initial license negotiations
• This explained the Chinese government’s response—made indirectly through the state media—
strongly attacking Google’s practice of disclosing the censorship to users
• The state-run China Business Times asked whether it was “necessary for an enterprise that is
operating within the borders of China to constantly tell customers [that it is] following domestic
law?”

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What happened later
In testimony before the U.S. House of Representatives, Google’s VP of global communications and
public affairs described the analytical framework that Google used until the day it sat down across
the bargaining table from China, and the subsequent addition it made to its framework:

“Let me dig a bit deeper into the analytic framework we developed for China. Google’s objective is to
make the world’s information accessible to everyone, everywhere, all the time. It is a mission that
expresses two fundamental commitments:
(a) First, our business commitment to satisfy the interests of users, and by doing so to build a
leading company in a highly competitive industry; and
(b) Second, our policy conviction that expanding access to information to anyone who wants it will
make our world a better, more informed, and freer place.
Some governments impose restrictions that make our mission difficult to achieve, and this is what
we have encountered in China. In such a situation, we have to add to the balance a third
fundamental commitment:
(c) Be responsive to local conditions”
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What happened later
• Google's first foray into Chinese markets was a short-lived experiment
• Google China’s search engine was launched in 2006 and abruptly pulled from mainland China in
2010 amid a major hack of the company and disputes over censorship of search results
• Google had begun to work on a secret prototype of a new, censored Chinese search engine, called
Project Dragonfly. Amid a furor from human rights activists and some Google employees, US Vice
President Mike Pence called on the company to kill Dragonfly, saying it would “strengthen
Communist Party censorship and compromise the privacy of Chinese customers”
• Google suspended the Dragonfly project later
• Would you call Google’s short stint in China a success?

“China welcomes international Internet businesses developing services in China according to the law,” a
foreign ministry spokeswoman told Reuters at the time

Google’s leaders seemed prepared to wait it out. “I personally believe that you cannot build a modern
knowledge society with that kind of [censorship],” Google chairman Eric Schmidt told Foreign Policy in
2012
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Key Takeaways
• An in-depth understanding of cultural differences helps to avoid clashes in negotiation and may
even serve to achieve better overall outcomes
• This understanding of cultures could rest upon published reports or prior experience of dealing.
However, hiring new management personnel is also be a key source of fresh cultural
understanding of a context
• Narrowly focused deal – both parties know what they want and how much they could aim for
• The Hofstede model as a simple yet powerful framework to dimension-alize cultural differences
across countries
• USA is an egalitarian, individualistic society, while China is a collectivist state. Did Google
understand the importance and complexity of China’s collectivist concerns?
• How far is an integration possible is a negotiation requires contextual understanding of the
uncertainty about power and influence

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Demography of India
Is India’s population a demographic disaster
or demographic dividend?
 What is Demography?

“Demography is the scientific study of human population, which includes the study
of changes in population size, composition and its distribution”

What is demographic transition?

Demographic transition is a process involving the transition from a young-aged
population structure (high birth and death rates) to an old-aged population
structure (low birth and death rates)
Stages of Transition
Stage 1 -
• Birth Rate and Death rate are both high. Population growth is slow and fluctuating.
• Typical of Britain in the 18th century and pre-independent India.
Stage 2 - Early Expanding
• Birth Rate remains high. Death Rate is falling. Population begins to rise steadily.
• Typical of Britain in 19th century and post-independent India.
Stage 3 - Late Expanding
• Birth Rate starts to fall. Death Rate continues to fall. Population rising.
• Typical of Britain in late 19th and early 20th century; India at present is at the beginning of this
stage.
Stage 4 - Low Fluctuating
• Birth Rate and Death Rate both low. Population steady.
• Typical of USA; Sweden; Japan; Britain, etc.
Three phases of demographic transition India is at the
beginning of this
stage USA, Japan,
DEMOGRAPHIC DIVIDEND STAGE Sweden,etc.

High birth rates and Birth rate declines and

declining death rates
Population of the 0–14
age group is high
High youth dependency
ratio
child population reduces
 Due to high past
fertility, high growth rate
in working population
Lesser youth
dependency ratio
Transition of age structure
transition due to ageing of
population
Population of the elderly
goes up, thus old-age
dependency ratio is high

Stage 2 Stage 3 Stage 4

What determines the duration of the demographic dividend stage?

The duration of the demographic dividend stage depends on the schedule of fertility decline
in the country. For instance, if the fertility decline is slow and steady, this phase may even
pass unnoticed, as in the case of western countries. However, in the case of developing
countries, such as India, the sharp decline in fertility implies that this stage may last
around 40 years
Demography of India: Terminology
Growth Rate of Population: When the crude death rate is subtracted from crude
birth rate the net residual is the current annual growth rate.
• There is a close relationship between the growth rate and population increase.

Growth rate
= Crude birth rate (CBR) – Crude death rate (CDR)

CBR: The annual number of live births per 1,000 people.

CDR: The total number of deaths per year per 1,000 people.
Demography of India: Terminology
Age Composition:
0 – 14 29.5%
15 – 60 62.5%
60+ 8%

• Dependency Ratio: The proportion of person above 65 years of age and children
below 15 years are considered to be dependent on the economically productive.

𝐶h𝑖𝑙𝑑𝑟𝑒𝑛 0 − 14 + 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑚𝑜𝑟𝑒 𝑡h𝑎𝑛 65 𝑦𝑒𝑎𝑟𝑠

Total dependency ratio = × 100
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 15 − 65 𝑦𝑒𝑎𝑟𝑠
 Discussion on the reading
Demographic transition, savings, and economic growth in China and
India
Dependency Ratio
• Dependency Ratio: The proportion of person above 65 years of age and children
below 15 years are considered to be dependent on the economically productive.

• With similar growth environments, it is likely that the economy with lower
dependency burden will present itself with higher chances of economic growth
• A lower dependency burden allows for higher savings and investment in physical
and human capital, and thus contributes to sustained economic growth
Population as a Demographic Disaster
• Poverty, unemployment, and low level of HD
• Land fragmentation and lower productivity
• Environmental and ecological consequences
• Urbanization
• Food security
Population as a Demographic Dividend
• United Nations Population Fund (UNFPA) defines demographic dividend (DD) as the
growth potential that results from shifts in a population’s age structure.

• DD is a window of opportunity opens up towards the development of a nation as a

consequence of rapid demographic transition (from high to low birth and death rates)
• It is NOT necessarily based on the concept of labour abundance
• It refers to CHANGES in population age structure and dependency profile

Factors that contribute to the DD:

a. Lower fertility rate b. Fall in dependency ratio c. Growth in labour productivity
DD: India’s Opportunities and Challenges
• Interestingly, India is currently in a phase where the population is relatively young;
it will witness continual decline in the share of dependents (children and elderly),
which will also provide an opportunity to harness the demographic dividend

India’s Challenges:
• Low and falling labor force participation rates (LFPR) of women
• Heavy dependence of workforce on informal sector
• Labor absorption in service sector is disproportionate to its share of GDP
• Lack of preparedness for post-DD phase
Demographic Dividend Phase: Cross-Country
Demography and Economic Growth
Supply side impact
• Y/N = Y/L × L/N
• Y=output, N=population, L=labor force
• Higher LFPR (particularly of women)

Demand side impact

• Saving-effect of falling dependency ratio
• Higher consumption to income ratio of young population
• Composition of investment effect
 DD and Economic Growth
• Dependency Ratio   Higher savings and investments in physical capital  labour
productivity (LP) gains via increased capital/labour ratio or ‘capital deepening’
• Households more likely to invest in human capital, which will also favourably impact
LP
• Reduced fertility rates  female labour force participation 
•  savings and wealth  improved entrepreneurial and risk-taking capacities of
economic agents and  economic growth
 DD and Economic Growth
PAST EVIDENCE:
• Huge developmental consequences for large, populous countries (China, India)
• 1/3rd of the economic miracle of East Asian countries (including China) attributed to
DD (Bloom and Williamson, 1998)
• Cross-country studies have observed a positive association between age structure
transition and economic growth (Bloom et al. 2003; Bloom et al. 2006; Behrman et
al. 1999; Andersson 2001; Kelley and Schmidt 2005; Choudhry and Elhorst 2010;
Wei and Hao 2010; Feng and Mason, 2005)
• In fact, the Chinese economy witnessed unforeseeable growth during the transition
phase, though the demographic process will now contribute to the faster ageing of
the Chinese population
 Discussion on the Case

Modern India
A snapshot of the pre-1991 and post-reform India
Phases of Industrial Growth in India
Phase I – High Growth Phase 1951 to 1965
• This covered the period of beginning the first three five-year plans – 17 industries were reserved for
the public sector; period of price stability (incl. food grains)
Phase II – Industrial Deceleration and Structural Retrogression 1965 to 1980
• This covered was marked by industrial deceleration and structural retrogression – Growth rate  from
9.0% p.a. during Plan 3 to 4.1% p.a. in Plan 4; however industrial growth rose to 10.6% in 1976-77
excl. which industrial growth averaged 3.7% - policies blamed
Phase III – The Period of Industrial Recovery 1980-81 to 1990-91
• This period was marked by industrial recovery – infra spending  from 4.2% p.a. to 9.7% p.a. by 1979-
85; Government exp. on services 
Phase IV – Reforms Phase 1991 onwards
• Covered the post-reform period, i.e. the period 1991-92 onwards – The worst industrial growth was
observed in 1991-92; Indian Industrial growth  to 6.1% in 1996-97 lower from 13% in the previous
year – perhaps due to credit squeeze, thus slowdown of 1996-97 to 1998-99 not seen as industrial
recession
Phase IV: The Post Reform (1991-92 onwards)
Major liberalization measures to promote performance of the industrial sector:
• wide-scale reduction in the scope of industrial licensing
• simplification of procedural rules and regulations
• reductions of areas exclusively for the public sector
• disinvestment of equity of selected public sector undertakings
• enhancing the limits of foreign equity participation in domestic industrial
undertakings
• liberalization of trade and exchange rate policies
• rationalization and reduction of customs and excise duties and personal and
corporate income tax etc.
Problems and Obstacles to Industrial Development
in India
• Poor capital formation
• Lack of Infrastructural facilities
• Poor performance of the agricultural sector
• Gaps between targets and achievements
• Dearth of skilled and efficient personnel
• Industrial Sickness
• Regional Imbalances
• Poor performance of the public sector
• Concentration of Wealth etc.