World population has breached the eight billion mark. Though the population has increased in absolute terms, it is characterised by demographic transition which provide economic opportunity or disadvantages to economies, depending on which phase of the demographic transition there are in.
To illustrate, the ‘baby boomer’ phase for advanced economies such as the US, Germany and Japan was around 1950-64. Consequently, in 2022, the share of the old-age dependency ratio in Japan, Germany, and the US is approximately 70, 54 and 52 per cent, respectively.
India had its baby boom experience during 1980-1994, which led to a gradual increase in its working-age population. The share of this population (aged 20-60 years) to the total was about 44 per cent in 1980 , which will increase to about 55 per cent in 2022 and peak at around 58 per cent in 2032.
India entered the demographic dividend phase around 2010, when the share of the working-age population was about 51 per cent, and will continue to enjoy the benefit till 2056, with the ratio projected at 54 per cent. Globally, between 2021 and 2052, India will have the highest share it terms of working-age population.
Dependency ratio
However, during this transition phase, India’s old-age dependency ratio will rise to around 35 per cent in 2050 from the current 19 per cent. The benefits from the demographic dividend will fade away when the country’s baby boomer generation starts retiring. The dependent population will need to be supported by the state, or we may see a decline in investment spending to compensate for it. Hence, in the next 25-30 years India can reap the economic benefits of demographic dividend, provided appropriate policies are put in place.
The rise in the working-age population will provide India with abundant supply of labour, which will have a bearing on investment and production capacities. Domestic output will witness healthy growth if excess labour force is absorbed in productive sectors.
Regarding inflation, the general premise is that workers produce more than they consume; whereas, the dependent population only consumes, and does not produce. Hence, a rising working-age population would imply more production than consumption in the next 25 years, and this could cause inflation to fall. Also, it will also cause the wage rate to decline due to excess labour supply, leading to lower cost-push inflation.
From the fiscal consolidation perspective, a rising working-age population and a declining dependent population concomitantly would mean increased tax revenue due to higher economic output and, at the same time, less pressure on the government to support an ageing population.
Individuals save during their working-age to finance their consumption during retirement. Hence, a rising working-age population could see the savings rate going up.
To reap gains from India’s demographic dividend phase, apart from flexible labour market policies, appropriate macroeconomic and financial reforms are needed to encourage savings and for efficient allocation of capital.
The government has already rolled out policies and schemes for boosting skills among the youth, entrepreneurship, etc.
While these aim to make India ‘Atmanirbhar’, effective implementation is necessary to help the domestic manufacturing and services sectors aborb the excess labour force. Also, substantial investment in higher education and research and development would be required to enhance the skills of the large cohort entering the labour market in the next three decades.
Aggressive forward-looking policies, along with technology push, are imperative to take advantage of the demographic dividend.
Gar is faculty, and Rai is Research Scholar, IIT Ropar, Punjab