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India's demographic dividend
Kaushik Basu
By Kaushik Basu
Professor of economics, Cornell University

People at India railway station
India has a big 'working age population'

Nowadays no meeting on India seems complete without a reference to the coming "demographic dividend".

What really is this demographic dividend?

The basic idea is straightforward enough.

In the year 2004 India had a population of 1,080 million, of whom 672 million people were in the age-group 15 to 64 years.

This is usually treated as the "working age population".

Since outside of this age group very few people work, it is reasonable to think of the remainder, that is, 408 million people, as the "dependent population".

A nation's "dependency ratio" is the ratio of the dependent population to the working-age population. In the case of India this turns out to be 0.6.

On this score India does not look too different from many other developing countries. Bangladesh's dependency ratio is 0.7, Pakistan's 0.8, Brazil's 0.5.

Train passengers in India

What is different about India is the prediction that it will see a sharp decline in this ratio over the next 30 years or so. This is what constitutes the demographic dividend for India.

India's fertility rate - that is, the average number of children a woman expects to have in her life time - used to be 3.8 in 1990.

This has fallen to 2.9 and is expected to fall further. Since women had high fertility earlier we now have a sizeable number of people in the age-group 0-15 years.

Benefits of demography

But since fertility is falling, some 10 or 15 years down the road, this bulge of young people would have moved into the working-age category. And, since, at that time, the relative number of children will be small (thanks to the lowered fertility), India's dependency ratio would be lower.

It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan; and, by 2030, India's dependency ratio should be just over 0.4.

This can confer many benefits.

First is the direct benefit of there being a rise in the relative number of bread-winners.

Moreover, with fewer children being born, more women will now join the work force; so this can give a further fillip to the bread-winner ratio.

A more indirect but vital benefit for the economy is the effect this can have on savings.

India women
More women can work with fewer children being born
Human beings save most during the working years of their lives. When they are children, they clearly consume more than they earn, and the situation is the same during old age.

Hence, a decline in the nation's dependency ratio is usually associated with a rise in the average savings rate.

India's savings rate as a percentage of GDP has been rising since 2003. It now stands at 33% which is comparable to the Asian super-performers, all of whom save at above 30%, with China saving at an astonishing near 40% rate.

This savings growth is driven by improvements in the government's fiscal health and a sharp rise in corporate savings.

But even if these factors disappear, the decline in the dependency ratio should enable India to hold its savings and investment rate above the 30% mark for the next 25 years.

Striking example

This theory of demographic advantage has been challenged by some as just that - theory.

One way of evaluating this in reality is to look at the actual experience of other nations.

The most striking example of economic growth being spurred by demography is the case of Ireland.

Ireland's legalisation of contraception in 1979 caused a decline in the birth rate, from 22 (per 1000 population) in 1980 to 13 in 1994. This caused a rapid decline in the dependency ratio.

The phenomenal economic boom in Ireland thereafter, earning it the sobriquet "Celtic Tiger", is very likely founded in this fertility decline. (I am disinclined to concede ground to the competing view that it was caused by Pope John Paul II's visit to Ireland in 1979).

Children in India
India's fertility rate has fallen
One has seen a similar sequence of changes in demographics and the economy in Japan in the 1950s and China in the 1980s.

But even if this happened in some places, will it happen in India?

My expectation is that India will get benefit from higher savings and investment rates and this will continue to fire India's high growth rate.

Beyond that much will depend on how the nation performs on primary and secondary education (to make sure that the larger working-age population conferred by the demographic dividend are an educated lot) and the manufacturing sector (which is needed to create job opportunities for the larger labour force).

What is important to remember is that the demographic dividend is a population bulge in the working-age category.

Like a kill in a python's stomach it will eventually move up, causing a rise in the old-age dependency ratio some three to four decades from now. That is, every demographic dividend comes with an accompanying "demographic echo".

It is in the nation's interest to reap as much as possible from the dividend so that it is robust enough not stymied later by the echo.

This debate is closed. Here is a selection of comments you sent.

A large working age population could certainly be beneficial for India - imagine if India could train even 20% of these youngsters in high paying fields such as engineering, medicine or business. However, that's just one of the problems, Indian education system has collapsed for all practical purposes - a vast majority of fresh graduates are not trained to compete on a global scale, which is and will be ever more necessary for the Indian economy. Additionally, good education is available only to the relatively well off. The recent growth of Indian economy is driven by an active service sector, primarily IT and specialised manufacturing, eg automobiles and heavy machinery. The number of jobs created here are not sufficient to support a vast young labour force. Ironically, these "new economy" companies are now struggling to find well trained employees, so much so that in certain software sectors, labour costs in India are almost at par with the USA. While a young labour pool can be a great competitive advantage for a country, a large pool of youngsters with economically useless practical skills and no employment will only increase frustration, crime and social unrest.
Rakshit Gor, USA/India

Prof Basu has written a very enlightening piece. India faces a formidable challenge to avoid getting stymied by "demographic echo" of aging dependant populace. I do not foresee much difficulty in enhancing and maintaining excellence in job creating manufacturing sector. But it is faced up with most disconcerting problems associated with social change. Even among the highly educated professionals it is common enough to observe disconcerting amount of lack of scientific temper. A big proportion of the population may be educated but continue to wallow in ignorance and superstition. Many political leaders instead of being instrumental in forward thinking social change, are themselves prisoners of this regressive malady, in the name of maintaining traditions.
NG Krishnan, Bangalore, India

Will industry develop enough to absorb this "working-age population"? If it doesn't, there will be widespread anarchy caused by disillusioned youth.
Siddarth K, India

Great analysis!
Ved Singh, USA

The theory in black and white looks good and as rightly suggested a dividend could be in the offing. But on a cautious note one needs to remember that for any sustained development, investments in human and social capital are crucial, especially so in health and education. The demographics look good statistically. And unless there are massive investments in rural India and particularly amongst the agrarian masses what we would reap, would be the whirlwind and not just dividends.
Varghese, India

Very well written piece. What I like most about it, is the simple use of the language.
Syamantak Bhattacharya, Cardiff, UK

I agree with Prof Basu and it is heartening to know that India is a young country. On the optimistic side India in a few years shall not face the problems that most Western countries are facing today, in terms of an aging population and huge security social debts. But on the other hand, the young growing population needs to be groomed, and quality education and a whole lot needs to be invested in human resources development.
Arun Dhadwal, Aix en Provence, France

Prof Basu's excellent analysis notwithstanding much depends on how our policy makers envision tomorrow's India. A Professor at Indian Institute of Management commented during a discussion that India Incorporated's gaze is far removed from its millions of poor citizens. There is no time to think about them. I happened to pass a couple of hours in an important office of a senior official in the federal government. The talk was about forward trading, future markets and so forth. It only requires common sense to see that despite the rhetoric fuelled by the communist parties supporting the current government, nothing concrete is being done to improve India's education system. If anything people are trying to implant solutions such as school vouchers that have not achieved unqualified success even in the USA. As I say, it is all about where your gaze is fixed!
Prakash Kashwan, India

Excellent informative analysis
Rohidas Arote, South Korea

Interesting article. Two interesting aspects to growth are taken up. The savings and the investment rate. Also net-exports has a part to play in maintaining the present growth rate at about 9.2%. But is this growth rate creating jobs and effective demand for further growth? The reduction of poverty is a big challenge that faces India. The young population is no doubt an asset per se.
Bharat Barot, Sweden

I have to agree that this potentially productive population may not find its ways into the economic wealth stream and thus India will find itself dealing with a surplus population that will be sitting idle. The education system in India is faltering as it is unable to support the population with credible education. Instead classrooms are way overcrowded (as they were before) but now there is a factor that the classroom sizes in itself will be too big to control. This will indefinitely lead to a higher truancy rate. This leaves me very concerned with the future of the masses in India.
Kalpesh Patel, CA, USA

Any article celebrating India's young workforce needs to also take into consideration the pathetic resource management practices prevalent in the country. It is high time, some thought is given to increasing public utility services benchmarks in a country where a middle-class household has multiple cars but gets tap water for just two hours in a day.
Rajesh Raheja, United Kingdom

Even though the numbers and data presented in this article is right. However the interpretation of the data is grossly flawed. With the advancement of medicine and healthcare, life expectancy will go higher. It will also reduce the number of infants dying at young age as well as mothers dying during child deliveries. Which will result in more people over the age of 60. If the fertility rate continues to decline, it will have a drastic negative effect on the economy of India by 2040- 50. It will result in lot more people over 60 compared to people in working age.
Ritesh Kumar, USA

I disagree. The falling fertility rate is not because of a decrease across the entire economic spectrum. Working middle class families with both parents working are having less children because they cannot afford more. While women working as minimum wage labourers continue to have the same fertility rate that they had 20 years ago. I do not see how this would benefit India at all!
Praveer Kumar, USA

It is indeed a great article to read. But I have a couple of questions concerning the dividend and growth. How will the dividend continue to march north even there is economic slowdown throughout the world or major disaster (tsunami or similar)or a major outbreak of disease. Will it still continue to grow ? Don't forget India has a high HIV positive working population. Will it be able to cope ?
Sanjay Mukhopadhyay, Belgium

This article nicely summarises the benefits of India's current and future demographics. But we need to stop and think the costs of supporting the population. Also, we need to spend more on uplifting the poor as well as increasing the quality of common man's life - which right now seems directly tied to the amount of money one makes.
Sudha, Denver, USA

A very good assessment from Prof. Basu. India needs to develop the education system and more important create some more jobs for them. Otherwise young demographic population is useless.
Kunal Talati, USA

Reduction in dependency rate alone would not help unless food production is increased dramatically (right now it is least growth component in GDP) and productivity is increased in industrial sector. (example, Tata Motors imports parts from China rather than make it in India). Also one important point that should be noted is that the development in India need to be homogeneous across all parts of India rather than concentrate in few places.
R Inguva, USA

Economic ups and downs are part of every country and every civilization. Prof Basu's article re-iterates that fundamental fact. For every one who voiced concerns and cautious optimism: Most countries have always had growth in the following manner (Agriculture --> Manufacturing --> Service sector). Typically, the economic wealth generated has increased in manufacturing first, then the service sector. In the long run, the contribution of agriculture in the overall GDP has always been downwards worldwide. India was very similar to the worldwide trend until the early 1990s, but has deviated from that trend since then because the service sector (typically employing highly educated people) has grown spectacularly. This has generated enormous wealth for those employed (typically well educated people) in that sector. However, the education system which contributes towards ensuring a steady/strong supply of educated people has not kept pace. This is manifested in high growth rates of service sector wages, real estate prices in some Indian cities, longer working hours for service sector employees and extreme shortages of skilled/trained workers in most service sectors even though there is as much as 15-20% unemployment in India. While the above might seem unfair to the agriculture and manufacturing sectors, one must keep in mind that every country has always had some industry/sector lead the growth in the short term. In the medium and long term, economic corrections and political change will ensure that these sectors also enjoy a fair share of the overall growth. Remember, 80% of the population (employed in the agriculture and manufacturing sectors) hold the votes and India is a democracy!
Mahesh Subramanian, India

Good article. The government has to focus on higher education to produce great thinkers and scientists to transform India into a knowledge economy. India largely lives in villages, we have integrate the every one into the mainstream of development to create the synergy which favourable demography offers us. I believe it will be a great challenge and possibility for great opportunity.
Chitaranjan Parija, USA

Insightful article. The key question is whether this new 'working age' group will be born into middle class/city dwellers or into labour class/rural areas. Very few at present make the switch from the latter to the former, and majority of the former leave India for higher studies with their intellectual potential being lost to the nation
V Michael, UK

Demographic dividend can only work when there is productive employment for the 'bulge'; otherwise it may lead to social anarchy.
Ayanangshu, UK

I have doubt about demographic dividend theory. Today India's life expectancy is approximately 62, which means statistically there is no-one beyond the working age of 64. That will change over next few decades. So as the below working age population declines, above working age population will increase, effectively not changing the status quo for several more decades.
Kedar Patankar, USA

Wonderful way of looking at direct benefits and impacts of population control. Nice piece of work.
Umashankar Singh, Sweden

Seems India's enlarging youth have a bright future despite several social pitfalls.
Deepak Pasi, USA

Beyond investments in education and health care, the Indian government should accelerate deregulation and privatisation to fully realise the benefits of the lower dependency ratio that Professor Basu alludes to. Empirically, labour productivity has proven to be much higher in the profit-oriented private sector when compared against the redistribution/allocation oriented public sector. India's historic underperformance (relative to East Asia) in previous decades was not so much the result of a shortage of savings, but the imposition of redistributive as opposed to market friendly policies on the part of the federal government.
Bonnie Mitra, USA

This is a nice article, but, a little optimistic. India is not China or Japan, and one cannot draw parallels with either of these countries.
Balvant Bhagat, Zimbabwe

As Prof Basu has pointed out, it is no doubt that a large working population and a low dependency ratio could be good for India. But this alone would not be sufficient to lift a large proportion of Indian population out of poverty. The aim for India should be to improve the living standards (I mean here that comparable to Western countries) of the whole population, not just a few IT professionals. At present, a vast majority of Indian population depend on agricultural sector. Unless India becomes a massive exporter of high value adding agricultural products - which is highly unlikely considering the population of India - the living standards of these people will not improve significantly. So a far greater emphasis than at present must be placed on expanding the manufacturing and service industries. Even here, Indian economy may continue to grow at 7-9% per annum for many years to come but the real benefits by the whole population would only be seen when the Indian GDP per capita starts inching towards those of the developed nations. For this to happen, India must start focusing on improving education (from primary to University level),infrastructure (roads, electricity, telecoms, ports, airports, irrigation etc), eliminating red tape (one of the root cause for corruption) and creating the environment that encourages investments in the manufacturing and the service industries. Additionally, India must be able to compete globally if it is to become a future economic powerhouse. Whilst India has done very well recently in IT, it must also start focusing on providing high value added services like design and development rather than just writing software for other companies, back room processing work and call centres. To realise that this is the fact at present, one only has to compare the turnovers of Indian IT giants like TCS, Infosys and Wipro with true global giants like Microsoft, IBM, Oracle and SAP. Similarly, in manufacturing the productivity of Indian workers must become comparable to those in the developed nations. India would not gain global competitive advantage by having only a very large pool of workers with lower wages and a low dependency ratio if the productivity of its workers remains well below international standards. Given the right environment it should certainly be possible as a vast majority of Indians living abroad have proved to the world that they are more than capable of competing against the best in class.
Mohinder Singh, Chippenham, UK

One aspect that Kaushik Basu did not go into detail is that with the "demographic dividend" - women will not only enter the workforce in larger numbers but there will be a "sea change" in the empowerment of Indian women in all sectors. But there is a thin line that separates a reduced population and the benefits reaped from it to that of problems that also go with it. A classic example is China's "one child policy" which has created infanticide, spoiled and over pampered sons. There is also the inability of a rapidly growing economy to meet all the jobs necessary, and the worst of all a diminished population whose income may not be able to support the larger population of the aged.
Chrysantha Wijeyasingha, USA

Brilliant analysis. Well thought out and planned investments in education, health-care and improved infrastructure is paramount especially in the rural areas to maximise this demographic dividend. However, this requires a change of mind-set collectively among the politicians to think beyond lining their own pockets.
Krish Kumar, Plymouth, Devon,UK

India is already reaping the demographic dividend. A recent study by HSBC, has determined that in 2005 alone India, created over 9 million new jobs, directly and indirectly. India's pitfall is endemic socialism, that is holding back its true potential. India has to adopt market economy and reforms, with urgency otherwise India will remain in the dole drum. Ireland had to adopt market economy, to unleash the Celtic Tiger.
Swapan, U.K./USA

Excellent analysis by Prof Basu. However I am worried about the demographic echo that is anticipated three to four decades later. As the fertility ratio keeps declining will India become a nation of too many sick and old people? A materialist culture and lack of any social security plan should alert Indian society before it is too late.
Arshad Shaikh, India

I like the way you explained such a complex topic in such an easy to absorb manner. And I echo your thoughts for the benefit of the country. Thanks for this nice article.
Tahir Ali, USA

I agree with Professor Basu's assessment that India's relatively young population is an asset that can support sustained economic growth in the future. However, it is equally important to recognize potential liability and risk associated with having a (largely rural) young population that remains unhealthy, uneducated and under-employed. Unless India makes serious inroads in child/adolescent health and education, and supports new enterprises and employment (not only in its swelling cities but in rural areas as well), the outcome from an economic growth and social stability standpoint can be disastrous.
Akshay Mangla, Cambridge, MA, USA

Excellent article. I always heard of the young demographics of India, but had never heard of "demographic dividend". Kaushik explained it beautifully.
Vinod Reddy, USA



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