Home >Opinion >Population-age ratio and monetary policy

How critical is the population-age structure of an economy to the effectiveness of monetary policy? Not very, if one were to go by the Reserve Bank of India (RBI), which, in its recent bimonthly monetary policy report, has identified six key factors that are likely to affect domestic inflation going forward. These include crude prices, global financial developments, household inflationary expectations, house rent allowance (HRA) revisions, revisions in the minimum support price (MSP), and good monsoons. However, a recent Bank for International Settlements paper by Mikael Juselius and Elod Takats, The Enduring Link Between Demography And Inflation (, offers an interesting counter-perspective, at least as far as advanced economies are concerned.

Using long-panel data for 22 advanced economies over the period 1870-2016, the authors find a positive correlation between the share of dependent population and inflation, while working-age population share is negatively correlated with inflation. An increase in the proportion of dependants—by increasing consumption rates and lowering the savings rate—can be expected to increase inflation, while the reverse is expected to happen when the working-age population increases. Moreover, the degree of inflation tolerance and monetary policies of any central bank are also a function of political economy considerations such as the proportion of youth in the population, who, as borrowers, may prefer inflation, unlike the old, who, as savers, may dislike it.

The authors dismiss the role of conventional “endogenous inflation drivers", especially inflationary expectations, in advanced economy contexts. In recent years, however, managing inflationary expectations has emerged as a critical success factor in inflation management in diverse countries like Japan and India.

Is there something Indian policymakers are missing? How does India’s large working-age population, constituting its so-called demographic dividend, impact monetary policy?

In India, over 2000-2017, working-age population has risen. But unlike in the case of developed economies (as posited by Juselius and Takats), the domestic household saving rate (relative to consumption) has fallen instead of rising.

Despite this, inflation has fallen due to active inflation management by the RBI. This implies that the pressure on monetary policy has been considerable. To ease that pressure and take advantage of the rising working-age population, job creation and the resultant generation of net savings is critical.

Employment data for the period January-April 2017 and January-April 2018 ( reveals the challenge that could be posed to monetary policy by the lack of adequate job creation. Thus, while the working-age population in India grew by 2% in January-April 2018 over January-April 2017, the employment rate in the working-age group has fallen—albeit marginally—over the period (from 95.3% to 94.4%).

Such a marginal decline masks the marked decline in the proportion employed in the younger 15-24 cohort. Here, the employment rate has fallen from 79.8% to 72.9% over the relevant period.

From the monetary management perspective, however, more worrisome is the decline in labour force participation rate in both the 15-24 age group and in the 65+ age group by 0.5% and 7.2%, respectively, in this period. The decline in labour force participation rate in the 15-24 age group becomes more pronounced when compared with the pre-demonetization period—from 31.7% in January-April 2016 to 23% in January-April 2018.

A decline in the labour force participation rate in the 15-24 age group implies a systematic dropping out of youth from the job market. From a policy perspective, it is critical to understand the reasons for such a phenomenon. One such reason may be more youth opting to pursue higher education, which may have a favourable impact on increasing the skilled labour force.

Alternatively, the dropped-out cohort may comprise those not in employment, education or training (Neet), with socio-economic ramifications for productivity improvements and social stability in the long run. More importantly, a rise in the proportion of Neet, with its low current and future saving potential, renders the job of monetary policy in controlling inflation more difficult.

Similarly, the large decline in labour force participation rates among the elderly reduces their overall income and increases consumption proportionately, again posing inflationary challenges.

The ramifications of population-age structure on monetary policy in the context of emerging economies have been relatively ignored by policymakers. Job creation would be an important mediator variable in this context, providing one more compelling reason why the government needs to pay attention to this political hot potato. Understanding lower labour force participation rates among the young and older cohorts, as also creating more productive jobs, may hold the key to reaping the demographic dividend for monetary management purposes.

Policymakers need to recognize the genuine opportunity that our demographic dividend presents to mitigate inflationary concerns and reduce the reliance on excessive monetary management over time.

Tulsi Jayakumar is professor of economics and programme head, PGP-FMB, at the S P Jain Institute of Management and Research, Mumbai.

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