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Research Study: Demographic Dividend-Younger India Poised for Economic Boom
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Posted by : thedesk   Jun 16 2007
An interesting research study of how a younger age profile in our country will open the window of opportunity for demographic dividend in the future
As the world sits up and takes notice about India’s economic prospects, it is time to look back at how economic changes in the world in the last few years have changed the way we look at emerging nations, especially India. Emerging nations have experienced brisk economic growth and decline in mortality as well as fertility rates in the recent past. On the strength of an annual population growth rate of 1.7%, the world population grew from 2.6 billion to 6 billion in the fifty years from 1950 to 2000 alone. The population growth rates are expected to drop sharply to under 0.8 % in the next 50 years, but nevertheless, an additional 6 billion people will be added to the world in this period. This has produced age-structural transitions that are rapid and unprecedented in nature. A new issue that has emerged is the demographic dividend in case of some emerging economies, where the balance between working age and dependent populations has shifted favourably towards the former, and therefore there are now more people in the working age population than in the dependent age groups.

For years economists have debated the effect of population change on economic growth rates. It was always propounded that population growth restricts, promotes or is independent of economic growth. Studies in the past focussed upon population size and growth, thereby ignoring that critical aspect of age-structure of a population, which is the percentage composition of different age groups within the overall population. People’s economic behaviour and requirements vary with age, therefore changes in the economic structure can have significant impact on the country’s economic performance . Linkages between population and development had been difficult to establish in a refined manner. However, once the effect of age structural transition is established, this linkage becomes clearer. The composition of demographic structure, dynamics and its interplay with economic growth is an aspect.

The economic growth and demographic dynamics in the case of the Indian economy animate the question as to how closely economic growth is linked to the demographic structure. Let us study the impact of demographic structure and trends upon economic growth in the Indian context and focus upon the demographic factor of age composition besides attempting to draw inference from change in population composition, fertility rates, sex ratios and their effects upon the overall economic growth rate. Population compositions are therefore more relevant to economic growth when age structural transitions between demographic structure and economic growth are linked.

This study has been divided into the following parts:
a) Economic Growth Rate
b) Demographic Patterns in India
c) Relation between Demography and Population Growth
d) What does a favourable demographic structure mean for Economic Growth rate in India
e) Conclusion

Economic Growth Rate

India has experienced steady and then rapid economic growth and the growth rate over the last six decades can be examined in four phases, according to economist Arvind Panagariya. It is evident that after the first stage of achieving growth, the economic growth rate fell in the second phase. It is in the last fifteen years that the growth rate has shown considerable rise, beginning with the changes in the 1980s.

Since the economic reforms of 1991, India has registered a consistently impressive growth rate. However, the Indian economy, after having traversed through forty years of consistently low economic growth rates, began to exhibit impressive growth rates in the late 1980s when liberalisation began cautiously under the then Prime Minister Rajiv Gandhi. Average growth rates in India used to hover around the mark of 3% and 4% between the period of 1951 and 1981. Contrast that with the growth rate in the period after 1980 (this includes a few years before the period of liberalisation) and one witnesses a spurt in the average growth rate. Growth of Gross Domestic Product (GDP) at constant prices in excess of 8.0 per cent has been achieved by the economy in only five years of recorded history, and two out of these five are in the last three years.

This reconfirms the established fact that economic growth rate has registered a substantial rise in the last two decades or so.


A remarkable feature of India’s economic growth has been its ability to maintain a consistent GDP growth for years, despite economic shocks. There has also been a reduction in GDP growth volatility. Alongside economic growth, there has been a slight drop in population growth. That has also helped facilitate an even sharper rise of GDP. If the GDP growth over ten years is examined we find that the economy moved away from the "Hindu rate of growth" of around 3.5 per cent during the first three decades of planned development to a higher growth trajectory of close to 6 per cent from 1996 onwards and it is now poised to move on to a new growth trajectory along which growth could average as much as 9 per cent per annum. To study further the relation between the rising economic growth rate and demographic structure, it is essential to discuss briefly the demographic patterns prevalent in India.

Demographic Patterns in India

Demographic transition may not merely mean changes in population growth. There are changes within the demographic structure, which may have wider implications. The initial fall in mortality rates creates a baby boom generation, in which there are more people among the younger age groups than in previous generations, mainly because survival rates are higher. As education is extended to a larger population, expansion of opportunities for women, income growth and access to family planning facilities show improvement, fertility levels decline due to factors like higher employment rates for women and preference for smaller families. There comes a period when the baby boom generation begins to grow older and if the replacement rate is inadequate, there is a low birth rate coupled with an increasing share of a portion of population that is old and aged.

The percentage distribution of population by age groups for the years 1970, 1980 and 1990 is given below.


(Source: www.indianstat.com )


It is evident from the graphs above that there has been a substantial increase in the working age population over the years. There is also a drop in the percentage of population in the age group 0 - 14. We shall subsequently discuss the implications of the changes in the demographic structure upon economic growth rates.

The Relation between Growth Rate and Demographics

The working age population of a country has an important role to play in the economic growth of an economy. Demographic dividend is a rise in the rate of economic growth due to a rising composition of working age people. This usually occurs late and in that particular transition stage of an economy when fertility rate drops and the dependency rate declines. During this demographic window of opportunity when fertility rates fall and death rates fall, output per capita rises, as there is a surplus that is gained from the reduced numbers and increased production. This surplus can be reinvested, resulting in higher productivity. The magnitude of demographic dividend appears to be dependent on the ability of the economy to absorb and productively employ the extra workers. (Bloom, David)


(Source: Bloom, David and Williamson. “Demographic Transitions and Economic Miracles in East Asia”. The World Bank Economic Review. Volume 12 No: 3, 1998.)

This graph has been used to explain the effect of birth rate and death rate on population growth rates in developing economies. As is evident there is also a non-synchronous rate of drop in mortality rate and fertility rate. The extent of difference between the two and the lag period between the onset of mortality rate decline and fertility rate decline (assuming the former happens earlier than the latter in developing countries) will create a population bulge that will exist for sometime. Therefore for an amount of time, the proportion of working population grows significantly faster than the other non-working portion of the population, especially when the bulge in the population enters the working age population group.

In keeping with the theory that developing countries experience sharp drop in mortality and fertility rates, India experienced a significant drop in mortality rates followed by plummeting fertility rates, which created a substantial population bulge of a younger age group of population that lies between the age groups of 15 to 64.

In India, during the first two decades of post-Independence development, while infant mortality rates fell significantly, fertility rate was more or less stagnant. Subsequently this would have increased the population of young people possibly also because of increased levels of infant survival. India is and will remain for some time one of the youngest countries in the world. A third of India's population was below 15 years of age in 2000 and close to 20 per cent were young people in the age group from 15 to 24. The population in the 15-24 age group grew from around 175 million in 1995 to 190 million in 2000 and 210 million in 2005, increasing by an average of 3.1 million a year between 1995 and 2000 and 5 million between 2000 and 2005. In 2020, the average Indian will be only 29 years old, compared with 37 in China and the US, 45 in West Europe and 48 in Japan.

The result of these trends means that the mortality rate is higher than birth rates. There can be many inferences from this. One of them is that the benefits from medical science kick in at a slower rate in eradicating mortality and infant mortality than consequence of population growth schemes in developing countries. This is so despite the control of mortality rates at higher age groups. The effect of these trends on the dependency ratio has been along expected lines. The total dependency rose initially because of a rise in the child dependency ratio and stagnation in the old-age dependency ratio.

What does a favourable demographic structure means for Economic Growth rate for India?

When large generations reach working age, populations experience what is commonly termed as demographic dividend. It has been indicated through studies that demographic dividend accounts for a third of economic growth. On the other hand, lack of demographic changes account for economic debacle also, as is seen in the case of Africa.

In case of India the child dependency ratio fell to 79 by 1970, as the baby boomer generation moved into working age groups and with old age dependency rising because of marginal drop in death rates. This process is likely to continue into the future and the dependency ratio is likely to fall further to 48 in 2025 because of the fall in child dependency ratio and then rise marginally to 50 by 2050 as the bulge moves forward and better healthcare results in decrease in mortality rates combined with a drop in birth rates.

One must take into consideration that in India there is a substantial population below the age of 15, which is a part of the labour workforce. This may change as education improves and thereby moves this part of the working population into the workforce a few years later, that is after they have completed their education. Since there is a part of the population below the age of 15 that is employed and also since in the rural regions, there is a large part of the population that works beyond the age of 60, the dependency ratio in India will be lesser than other countries as the non-working population will be lesser. Add to it the increase in the number of women in the population and the already substantial participation of women in the work force (discussed later in the study) and the overall combined effect on productivity is expected to be larger than what the conventional figures of age structures in the demographic breakdown are expected to exhibit.

Growth Rate of the Working Age Group vs. Growth Rate of Population

Williamson (2001) says that where the growth rate of the economically active sector of the population is higher than the population growth rate, GDP growth rates are higher than when the population growth rate is higher than the growth of the economically active sector of the population. The labour force in India is expected to grow more than the total population by an average of 34% between 1980 and 2010. It is expected to offset the negative effect of population growth and also contribute to a higher rate of economic growth, provided such a window of opportunity is exploited optimally (see table below for comparison between overall population growth rates and working age population growth rates). Considering that the demographic dividend accounted for 25% to 40% of growth for countries like Japan, China, Singapore and South Korea, there is a rationale for expecting greater economic growth in India’s case too (Guha Roy).


Note: Graphs made with the help of population data from www.indianstat.com and censusindia.

It can be seen from the above graph that over the years there has been a steady increase in the proportion of working age population (15 - 64 years) that is also economically productive, as has been mentioned earlier. If we take the present share (year 2000 figures) of working age population into consideration, which is 59.66%, it confirms the observation that the growth of working age population has been consistent. If we extrapolate the growth onto 2015, it is expected that there will be 61% of the population that is in this working age group. It is much higher than the part that is relatively economically unproductive and the population is thus expected to grow younger in the coming years.

It is therefore expected to generate higher economic growth through a higher proportion of working population (14 to 64 years) in the future. There will be a population bulge in 2020. This could be further multiplied due to an enhanced level of human capital or skills. Thus a demographic dividend coupled with a strong GDP growth, will fuel an increase in the savings rate.

Multiplier Effect of Demographic Components on economic growth

Though presence of a favourable age composition in the demographic structure does have a role to play in raising the potential for reaping demographic dividend and therefore greater economic growth, it will also be critical to examine the aspect of sex ratio between males and females in the context of an improving female literacy rate. This will give us further insights regarding the demographic potential such a statistic might hold for future economic growth.


(Sources: Graph made from data available at www.indiastat.com )

The graph above shows the population growth of males and females between 1901 and 2001. It can be seen that the growth rate of women at the beginning was lesser than the growth rate of men. However in the last century, the growth rate of women in India has grown to be slightly more than men. The graph below shows us the changes in the literacy rates of males and female in India. As is evident from the graph below the rate of female literacy growth is growing faster than male literacy growth. While male literacy has grown from 34.5% in 1961 to 64.84% in 2001 (an increase of 30%), female literacy rate has gone up from 13% in 1961 to 53.7% (an increase of 40%) and is still on the increase.

While the increase in female literacy figures also appears high due to the fact that the initial base figures for females would have been lower than men, the implication of this literacy rise and the increase in female-male sex ratio (graph above) upon economic growth rate is that more women are available to join the work force, thereby increasing the potential for a higher rate of economic growth, taking into assumption in the meantime that a large percentage of women entering the workforce each year are from the newly literate groups and also assuming that the socio cultural dynamics prevailing in India allow for greater female participation at work, the study of which is beyond the scope of this study. In this context, it must be mentioned that according to UNDP figures, 42% of women in India are contributing to economic activity, which lends further credence to the argument about female population composition being a demographic multiplier towards propelling economic growth.

The multiplier effect of more literate women in the workforce in the future will boost the potential for achieving higher economic growth. If we examine closely we will find that while there were only 18% literate women in the age bracket of 20-24 years in 1961 (if we consider that age group as an economically productive age group), this percentage increased to 62% by 2001, far outstripping the increase in literate males in the same age group who grew from 49% to 73% during that period.

Literacy Rates for Men and Women


(Source: www.indiastat.com )

Impressive demographic growth rate by itself may not directly translate into higher economic growth. Age distribution potential creates supply side potential and it then depends upon the policies of the government as to how that potential is then converted into actual growth. There are additional advantages that India will begin with as it steps in to take advantage of the window of opportunity. Ever since India liberalized its economy, there have been substantial inflows of FDI, growth of private entrepreneurship, a favourable BoP situation and increased trade. The favourable climate for international trade and foreign investment has increased employment opportunities and thus creates a potential for absorption of the excess workforce that the demographic structure will present in the future.

Conclusion

Economists have always debated over the effect of population change on economic growth rates. It was earlier believed that population growth either restricts, promotes or is independent of economic growth. Studies of the critical aspect of population like age-structure have since revealed that percentage compositions of different age groups in the overall population are linked to economic growth. People’s economic behaviour and needs vary with age, therefore changes in the economic structure can have a significant impact on the country’s economic performance.

If India is to take optimum advantage of a favourable demographic age structure and convert it into a demography driven economic boom through the absorption of a greater workforce into contributing towards economic growth, it needs to go forward with some of the current policies like openness to trade and investment, liberalization, growth of private entrepreneurship and employment opportunities.

Needless to say, liberalised policies will create new employment opportunities that will enable the workforce to increase productivity. According to a Goldman Sachs report, India is expected to grow the fastest amongst the BRIC countries for the next 30 and 50 years. Though this may be a subject of debate and speculation, economic growth can certainly receive a boost by capitalizing on this demographic advantage.

If the window of opportunity available when the population bulge enters working groups is to be translated into a meaningful acceleration in economic growth, it must be endeavoured that policies help generate optimum employment opportunities for the excess labour force so that the added productivity results in a substantially greater rise in economic growth.

There are other vectors that affect economic growth and can be significant in optimising the advantage gained by a favourable demographic structure that has a higher number of people amongst the working age population. Poor macroeconomic management and poor governance can waste away the potential for additional productivity created by a bigger working force and a smaller dependent population. There also needs to be reallocation of labour across sectors to spur diversity of growth. There are critical factors like trade balance, liberalisation, education that have a more direct impact on economic growth rate than a favourable demographic structure.

The window of opportunity that has been provided to India by the availability of a younger workforce coupled with increased male and female literacy, education and a smaller dependent population must be taken maximum advantage of. Economic growth will depend in the future on how such an intersection is maximised to its full potential.

Sources:
1. Bloom, David and Canning, David. Harvard Study Initiative for Global Health Study series. “Problem on the Global Demography of Aging”. “Global Demographic Change: Dimensions and Significance”. Working Study No1, 2005. (http://globalhealth.harvard.edu/WorkingStudys.aspx)
2. Bloom, David, Canning, David, Sevilla, Jaypee. 2003. The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change)
3. Committee for International Cooperation in National Research in Demography, Paris. 2005. CICRED Policy Study. Number One. “Policy Implications of Age Structural Changes”. http://www.cicred.org/Eng/Publications/pdf/Policystudys/pp1.pdf 4. Kelkar, Vijay S. Narayanan Lecture, Australian National University. “Ïndia: Growth on The Turnpike”. 2004
5. Bloom, David and Williamson. “Demographic Transitions and Economic Miracles in East Asia”. The World Bank Economic Review. Volume 12 No:3, 1998
6. Bloom, David and Channing. “Why China’s Economy Has taken Off Faster Than Indian Economy”. June2006
7. Chandrashekhar CP and Ghosh, Jayati. The Hindu Business Line. “India’s Potential Demographic Dividend”. 17 Jan 2006.http://www.thehindubusinessline.com/2006/01/17/stories/2006011701531100.htm
8. Chandrashekhar, CP. Frontline. Volume 23 Issue 01, Jan14 - 27, 2006. “Does Demography Advantage India” http://www.flonnet.com/fl2301/stories/20060127004010500.htm
9. Graphs made with the help of population data from www.indianstat.com and censusindia courtesy www.indianstat.com
10. Goldman Sachs Global Economics :Study 59 . Report.Dreaming up with BRICS - The path to 2050.,,