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India’s turn to enjoy the opportunity of demographic dividend2 has been repeatedly highlighted by the experts and international organisations alike. At the peak of discussion, it was covered thoroughly by the Economic Survey 2012-13 devoting an exclusive chapter to it. As India’s dependency ratio is declining fast, India will soon reach the peak of enjoying the demographic dividend—the highest economic contribution from the peak of working age (WA) population. It should be kept in mind that demography provides potential opportunity and is not destiny (as the Economic Survey 2016-17 and 2015-16 remind). India needs to optimise the period to fill the great many economic gaps it has been fighting against since decades. Recent studies
point out that India is in different situation today—from waiting to happening of the opportunity of the demographic dividend. And soon India will see the event receding, too—the opportunity must not be missed.
Turning point: Global demographics saw a turning point in 2016—for the first time since 1950, the combined WA population (age group 15–59 years) of the advanced countries declined. As per the projections of the UNO, for the next three decades China and Russia will see their WA declining by over 20 per cent. However, India seems to be in a demographic sweet spot with its WA population—projected to grow by a third over the same period. Economic research of the last two decades has suggested that the higher growth rates in East Asia were driven by demographic changes. Countries with large WA populations appear to benefit more (due to higher economic dynamism) as younger populations:
• are more entrepreneurial (adding to productivity growth);
• tend to save more, which may also lead to favourable competitiveness effects; and
• due to growth, they have a larger fiscal base, fewer dependents and government to support.
Theory suggests that the specific variable driving the demographic dividend is the ratio of the working age to non-working age (NWA) population.
India’s distinctiveness: The comparison of the WA/NWA ratio between 1970 and 2015 (based on the projections of the UNO) for India, Brazil, Korea and China illustrates three distinct features about Indian demographic profile
—having implications for the growth outlook of India and its states:
(i) India’s demographic cycle is about 10–30 years behind that of the other countries. This indicates that India has next few decades as opportunity to catch up to the per capita income levels of the three countries.
(ii) 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.
(iii) India will remain close to its peak of WA and NWA ratio for a much longer period than other countries.
The ‘distinctive’ demographic pattern of India has a cause and
consequence for it—
Cause: All these countries started the post-World War II era with roughly the same very high total fertility rates (TFRs). In China and Korea, TFR then declined rapidly to below-replacement levels (less than two children per female), causing the share of WA population to rise until the early 2000s, then to fall as ageing began to set in. In India, however, the decline in TFR has been much more gradual.
Consequence: India should not expect to see growth surges or growth decelerations of the magnitudes experienced by the East Asian countries due to demographic dividend—and might be able to sustain high levels of growth for a longer time.
Spatial differentiation: India has a 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 WA population. The difference, of course, is that the WA 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, with a rising WA population for some time.
This divide among the states is due to their differentiated TFRs. It means, demographically, there are two Indias, with different policy concerns.
(i) An India which is soon to begin ageing where the elderly and their needs will require greater attention; and
(ii) 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.
Growth impacts: India’s special demographic pattern will have two
important growth consequences:
(i) It seems that the peak of the demographic dividend is approaching fast for India—peaking early 2020s—with peninsular India peaking around 2020 while hinterland India by around 2040.
(ii) The distributional impacts of growth across India will be differentiated, too. The poorer states of today will have growth in their per capita GDP higher than the richer ones. It means, demographic dividend will bring an opportunity for income convergence across the states.
Outliers: The overall encouraging pattern masks some ‘interesting outliers’ which will have their own impacts on the regions and the population residing there.
• Bihar, Jammu and Kashmir, Haryana, and Maharashtra are positive outliers in that they can expect a greater demographic dividend over the coming years than would be suggested by their current level of income. This extra dividend will help Bihar converge, while already rich Haryana and Maharashtra will pull further away from the average level of income per capita in India.
• On the other hand, Kerala, Madhya Pradesh, Chhattisgarh, and West Bengal are negative outliers. Their future dividend is relatively low for their level of income.
This will make the poorer states fall back, unless offset by robust reforms and growth, while the relatively rich Kerala will probably converge to the average as its growth momentum declines rapidly.
The WA population of India is about to plateau. Thus, the boost in economic growth is likely to peak within the next five years. In comparison to the East Asian economies, India’s WA ratio will fall much more gradually—the reason why India may be able to avoid sharp falls in growth (as seen in case of the former). In addition, the sharp demographic differences between
peninsular and hinterland India will generate wide differences in the timing of the peak, as well as opportunities to attenuate demographic imbalances via greater labour mobility. India does not need to wait longer for the time of peaking of demographic dividend—better say the opportunity is “soon-to- recede”. So that this once in a centuries opportunity is not missed, it is high time that requisite reforms, policies and compatible action are all put in place as soon as possible.