India has one of the youngest populations in an aging world. By 2020, the median age in India will be just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan. Demographics can change the pace and pattern of economic growth. While China’s spectacular growth has already benefited from a demographic dividend, India is yet to do so.

Demographic dividend

Demographic dividend can increase economic growth through six channels. The first channel is through the swelling of the labour force, as more people reach working age. The second channel is the increased fiscal space created by the demographic dividend to divert resources from spending on children to investing in physical and human infrastructure. The third channel is the rise in women’s workforce that naturally accompanies a decline in fertility, and which can be a new source of growth. The fourth is the increase in savings rate, as the working age also happens to be the prime period for saving. The fifth channel is an additional boost to savings that occurs as the incentive to save for longer periods of retirement increases with greater longevity. The sixth channel is a massive shift towards a middle-class society that is already in the making. Growth, education, home ownership, better economic security, and a desire for more durable goods are the cause and consequence of young demographics. But demographic dividend can also transform into a curse, and we examine its impact in Reshaping Tomorrow—Is South Asia Ready For The Big Leap?, World Bank.

Dividend or curse?

The growth benefit of a demographic dividend is not automatic. A lot depends on whether the bulge in working population can be trained, and enough jobs created to employ the 10 million more people who will join the labour force every year. There is mounting concern that future growth could turn out to be jobless due to de-industrialization, de-globalization, and the fourth industrial revolution and technological progress. While digital technologies may enable the creation of new products and more productive jobs, they may also substitute existing jobs. India may not be able to take advantage of these opportunities, due to a low human capital base and lack of skills.

Lack of jobs combined with a demographic dividend will increase the share of the population that is dependent on the working population. This will increase the economic insecurity of the elderly, as there will be fewer people generating wealth.

Whether the demographic dividend promotes growth or transforms into a curse depends on how prepared the states that should benefit from a young population are. Bihar, Uttar Pradesh and other lagging states will experience a much bigger bulge in working population than more developed states like Tamil Nadu. Unfortunately, the less-developed states are also the least prepared to take advantage of the demographic change they will undergo.

Building human capital

Investing more and more efficiently in people will enable India to tap into its demographic divided, and prepare the country for the future. There is a powerful link between these investments and economic growth, stability and security. Investing in people through healthcare, quality education, jobs and skills helps build human capital, which is key to supporting economic growth, ending extreme poverty, and creating more inclusive societies. Human capital is now the fastest-growing component of India’s wealth. It is already the largest component of global wealth. More developed and richer countries have vastly more human capital wealth than developing countries.

India’s human capital base may not be adequate for the future or in a position to benefit from the demographic dividend. India is home to the world’s largest concentration of illiterate people in the world. It has made gains in human development, but challenges remain, including big barriers to secondary schooling, low-quality public services, and gender discrimination. New technology could be exploited to accelerate the pace of building human capital, including massive open online courses and virtual classrooms.

Pursuing a more aggressive education agenda fits very well, not just with countries that will benefit from the demographic dividend, but also with what many governments in rich countries are trying to do, even in its absence. Demographic dividend is a time-limited opportunity, and policymakers should have a greater incentive to redouble their efforts to promote human capital so that it can contribute to economic growth and job creation.

No country can achieve its potential and meet the challenges of the 21st century without the full participation of working population, both women and men. High-quality education is one of the strongest ways for countries to reduce poverty, achieve gender equality, and create more jobs. Building human capital translates into higher rates of economic growth and job creation. Demographic dividend without investments in human capital will be a wasted development opportunity, and it will further widen economic and social gaps, instead of narrowing them.

Ejaz Ghani is lead economist at the World Bank.

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