Economic Survey 2016-17: Observations on Demographic Dividend

Demographic Dividend refers to a demographically linked economic boost caused by a rise in the working age population {15-59 years or in some cases 15-64 years} and consequent drop in the dependency ratio. A country is expected to reap the demographic dividend when share of its working population is larger than share of its non-working population. India is currently going through a phase of demographic dividend.

Demographic Dividend Across the World

As per UN Population research, during last four decades, the nations in Asia and Latin America have been the main beneficiaries of demographic dividend. On the other hand, the countries in Europe, United States and Japan have got aging population mainly due to low birth rates and low mortality rates {read about Demographic Transition Theory}. Further, China’s one child policy reversed the demographic dividend it reaped since 1960s.

Essential Policy Environment

Demographic dividend does not occur automatically and can be reaped only when there is a boost in the economic activity due to large number of people in work force. Thus, in order to reap the dividend, the countries must be able to provide access to quality education, adequate nutrition and health including access to sexual and reproductive health to its young people.

Given the right kind of policy environment, demographic dividend can help to produce sustained period of economic growth, as it has done in several East Asian Economies in later half of 20th century. The key policy areas which need to be focused include public health, family planning, education and economic policies that promote labour market flexibility.

Further, the demographic dividend is not permanent but just by virtue of a particular phase  when the nation has both increasing number of young people and also declining fertility. This window of opportunity needs to be exploited by the policy makers to make demographic dividend a reality. They need to consider how to optimally seize the window.

Survey Notes: Demographic Dividend for India

The below figure compares the evolution of Working Age (WA) and Non-Working Age population ration between 1970 and 2050 for India, Brazil, Korea and China.

It shows three distinct features of India’s demographic profile:

• First, India’s demographic cycle is about 10-30 years behind that of the other countries, indicating that the next few decades present an opportunity for India to catch up to their per capita income levels.
• Second, India’s WA to NWA ratio is likely to peak at 1.7, a much lower level than Brazil and China, both of which sustained a ratio greater than 1.7 for at least 25 years.
• Finally, India will remain close to its peak for a much longer period than other countries.

The reason of this pattern can be explained on the basis of Total Fertility Rate (TFR) for comparable countries as shown below:

The above figure shows that all these countries started the post-World War II era with roughly the same very high TFR rates. In China and Korea, TFR then declined rapidly to below-replacement levels (less than 2 children per female), causing the share of working age population to rise until the early 2000s, then to fall as ageing began to set in. However, the decline in TFR in India has been much more gradual.

The consequence of this is that unlike East Asian successes, India should not expect to see growth surges or growth decelerations of the magnitudes experienced by the East Asian countries, at least not on account of the demographic dividend. This does not rule out accelerations for other reasons, elated to reforms and strength of domestic institutions. At the same time, India might be able to sustain high levels of growth (on account of the demographic dividend) for a longer time.

A final distinctive feature in India is the large heterogeneity among the states in their demographic profile and evolution. There is a clear divide between peninsular India (West Bengal, Kerala, Karnataka, Tamil Nadu and Andhra Pradesh) and the hinterland states (Madhya Pradesh, Rajasthan, Uttar Pradesh, and Bihar). The peninsular states exhibit a pattern that is closer to China and Korea, with sharp rises and declines in the working age population. The difference, of course, is that the working age ratio of most of the peninsular states will peak at levels lower than seen in East Asia (West Bengal comes closest to Korea’s peak because of its very low TFR). In contrast, the hinterland states will remain relatively young and dynamic, characterized by a rising working age population for some time, plateauing out towards the middle of the century.

This divide in the WA/NWA ratio of the peninsular and the hinterland states can be traced to the difference in their levels of TFR. Demographically speaking, therefore, there are two Indias, with different policy concerns: a soon-to-begin ageing India where the elderly and their needs will require greater attention; and a young India where providing education, skills, and employment opportunities must be the focus. Of course, heterogeneity within India offers the advantage of addressing some of these concerns via greater labour mobility, which would in effect reduce this demographic imbalance.

Consequences

This demographic pattern suggests that peak of the demographic dividend is approaching fast for India. This peak will be reached in the early 2020s for India as a whole; peninsular India will peak around 2020 while hinterland India will peak later (around 2040). This presents an overall good window of opportunity for states in the hinterland in comparison to peninsular India.