The Demographic Dividend: Evidence from the Indian States: By Shekhar Aiyar and Ashoka Mody IMF Working Paper http://www.imf.org/external/pubs/ft/wp/2011/wp1138.pdf
Jayachandran/Mint
About a quarter of the projected increase in the world’s working population, age 15-64, between 2010 and 2040 will occur in India. No wonder then that economists are very enthusiastic about the country’s “demographic dividend”. Indeed, some base their optimistic assumptions of India’s economic growth on the increase in the proportion of the population of working age. The working age ratio in the country is set to rise from about 64% currently to 69% in 2040, reflecting the addition of more than 300 million working age adults. This would make India the largest single positive contributor to the global workforce over the next three decades.
Shekhar Aiyar and Ashoka Mody, however, point out that the demographic dividend is not only in the future, but that the country’s economy has been benefiting from it in the last two decades. They compute the demographic dividend at 0.42% in the 1970s, 1.46% in the 1980s and 1.34% in the 1990s. This dividend is the addition to annual per capita growth as a result of the higher proportion of working age population. Based on these results, the authors say that the increase in GDP (gross domestic product) growth during the 1980s and 1990s is not only on account of economic liberalization, but also due to the demographic dividend.
The paper then looks at the divergence in economic growth between the leaders and laggards among the Indian states. The researchers say, “The divergence in per capita income growth between Leaders and Laggards is well known, with the divergence being highest for the most recent period 1991–2001. What may be less well known is that these trends in income growth are mirrored in the demographic data.” For instance, during the period 1991-2001, the laggard states of the Hindi heartland—Bihar, Madhya Pradesh and Uttar Pradesh—all had negative annual growth rates in the working age ratio. In sharp contrast, the leading states in the south and west—Tamil Nadu, Karnataka and Gujarat—all had high positive growth rates in the working age ratio. This is reflected in the much higher growth in their per capita incomes.
The study shows that the demographic dividend in the three laggard states has been much lower than in the three leading states. For example, in the 1980s, the simple average of the demographic dividend for the laggard states was 0.6% per annum and for the 1990s it was zero. For the leading states, the simple average was 3.4% per annum in the 1980s and 4.9% in the 1990s. Incidentally, according to the authors’ calculations, the per capita income growth, net of the demographic dividend in the 1990s in Gujarat, at 0.6% per annum, was lower than Uttar Pradesh’s 1.2% or Madhya Pradesh’s 0.8%.
What of the future? The authors compute that the demographic dividend for India was 1.74% per annum in the 2000s and it will increase to an average of 1.98% per annum in this decade and further to 2.04% in the 2020s, before tapering off in the 2030s. This is the additional growth per annum that the rise in the proportion of working age persons will provide to the economy. The authors also note that while the largest expansions in the working age ratio have occurred so far in the southern and western states, the “bulk of the remaining demographic transition will be concentrated in lagging states, thus raising the prospect of substantial income convergence among rich and poor states”.
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