In many ways, India’s demographics are the envy of the world. As populations in countries such as China, US, and Japan is getting older, India’s population is getting younger.
In theory, this increase in working-age population should generate a “demographic dividend" that can power economic growth. However, according to research by the Reserve Bank of India (RBI), this will depend on India addressing its declining labour force participation rate. In their study, Atri Mukherjee, Priyanka Bajaj and Sarthak Gulati examine how changes in India’s population have influenced macroeconomic outcomes between 1975 and 2017. They find that while overall population growth is associated with lower economic growth, an increase in the working-age population is associated with higher growth.
They argue that higher birth rates hurt labour supply by preventing women from joining the labour force and increasing the number of children in the economy. Rather than population growth, they suggest it is the growth of the working-age population that matters for economic growth.
India’s working-age population is now increasing because of rapidly declining birth and death rates. India’s age dependency ratio, the ratio of dependents (children and the elderly) to the working-age population (14- to 65-year-olds), is expected to only start rising in 2040, as per UN estimates. This presents a golden opportunity for economic growth.
However, this growth will depend on those in the working-age population actually working. The authors highlight that India’s labour force participation rate is declining, especially among rural youth (15- to 29-year-olds) and women. For India to harness the power of its favourable demographics, the authors argue it is critical that this is addressed. They suggest that India’s labour force needs to be empowered with the right skills for the modern economy.
Also read: Demographic Changes and their Macroeconomic Ramifications in India (bit.ly/2Lq6qsh)
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