International Conference on Technology and Business Management

March 28-30, 2011

Indias Demographic Dividend - Issues and Challenges

Arun Ingle P B Suryawanshi inglearun@gmail.com pbsurya@gmail.com Pad. Dr. Vitthalrao Vikhe Patil Foundations Institute of Business Management and Rural Development, Ahmednagar 1. Introduction
India is transforming demographically, in which the population of a nation slows down and life expectancy increases, participation of women in labor force and rate of saving increases. India has its own issues like illiteracy, income disparity, gap between haves and have-nots; etc. This study explores demographic dividend in case of India by studying issues and challenges, the policies to be implemented and lessons to be learned from countries like Japan, Ireland and Thailand. By 2025, India will have over 65% population under working class. This is a unique window of opportunity for deploying resources. This study explores the benefits to be realized and the policies to be implemented; now India is well poised for becoming a super economic power. As all developed nations will have older population by 2026, as their population is aging. It means if India can take the advantage of this situation, by proper deployment of resources, by converting the human potential in to engine of economic growth. This period of demographic dividend is an opportunity for overall growth; its not the guarantee for improving the standard of living. This window of opportunity demands from youth, the right skills and aptitude for employability. Developing nations like India goes through a transition phase, in which the economy shifts from agrarian to industrial production and growth of services sector. Industrial countries have largely completed what is called the "demographic transition"the transition from a largely rural agrarian society with high fertility and mortality rates to a predominantly urban industrial society with low fertility and mortality rates. At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labor force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly this is the first dividend followed by second dividend which is asset accumulation. Demographic transition is the window of opportunity for implementation of development oriented Govt. policies. This one-time gift of the demographic transition is expected to provide lots of opportunities for development and economic gains. During the transition population growth and changes in the age structure of the population are inevitable, if appropriate policies pursued.

2. Demographic Dividend
The debate over relationship between population growth and economic development is there since the much criticized theory of Malthus in 18th century. Economist focused on the size of population and the growth of nation, but the composition of population age structure was not considered until the study of Coale and Hoover (1958), but in recent years, demographers Bloom et al have studied the type of composition of age structure of population and its effect on economic growth and the concept of demographic dividend emerged. Demographic dividend is defined as a rise in the rate of economic growth due to a rising share of working age people in a population. This phenomenon occurs with a falling birth rate and the consequent shift in the age structure of the population towards the adult working ages. It is also commonly known as the demographic gift or bonus or demographic window. With many developing countries particularly in the Asian continent experiencing a rapid decline in fertility, there has been overwhelming optimism that the demographic bonus will take these countries to greater economic heights [Bloom and Williamson 1998; Cyrus Chu and Lee 2000; Mason 1988]. As generally defined, demographic dividend occurs when a falling birth rate changes the age distribution, so that fewer investments are needed to meet the needs of the youngest age groups and resources are released for investments in economic development and family welfare (John Ross, 2004). India is going through this transition phase, now a view has gained ground that what matters is not the size of the population, but its age structure. However large the total population, is seen as an inevitable advantage characterized as a demographic dividend. For India the size of working age population (age15 -60 yrs) will be 63.33 % in 2016 and population having age below 15 years will be 27.73% (National population policy prediction). Given the availability of work and the resulting increased employment opportunities, the scenario 720

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will be positive. As per study of C P Chandrasekhar et al, (EPW, Dec, 9, 2006) everything else remaining the same, the higher the proportion of workers to non-workers, the larger would be the surplus. By 2025, India would have begun to come out of the 'demographic bonus' phase where the growth rate of working-age population exceeds that of total population. India is expected to go through this phase during 202025. Increasing labour productivity, health, safety, saving potential and education standard are prerequisite, for realizing the benefits of demographic dividend.

3. Demographic Dividend for India

The demographic dividend-this phenomenon occurs with a falling birth rate and the consequent shift in the age structure of the population towards the adult working ages. It is also commonly known as the demographic gift or bonus or demographic window. With many developing countries particularly in the Asian continent experiencing a rapid decline in fertility, there has been widespread optimism that the demographic bonus will take these countries to greater economic heights [Asian Development Bank 1997; Bloom and Williamson 1998; Cyrus Chu and Lee 2000; Mason 1988].

Source Registrar General of India Graph 2.1 Population of India from 1901-2001

It is evident from the graph that, population growth rate is on the decline since 1991. The population is rising but, will going to stabilize from 2010 to 2020. India's fertility rate - that is, the average number of children a woman expects to have fallen to used to be 3.8 in 1990. This has fallen to 2.9 and is expected to fall further. Since women had high fertility earlier we now have a sizeable number of people in the age-group 0-15 years. (28% as per NPP 2000) A nation's "dependency ratio" is the ratio of the dependent population to the working-age population. In the case of India this turns out to be 0.6. Bangladesh's dependency ratio is 0.7, Pakistan's 0.8, Brazil's 0.5. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan; and, by 2030, India's dependency ratio should be just over 0.4. Reduction in dependency ratio indicate that there will be rise in no of worker population, more women workers will join the working class and saving rate will also increase. This transition is critical for achieving second demographic dividend, which is accumulation of assets. Human beings save most during the working years of their lives. When they are children, they clearly consume more than they earn, and the situation is the same during old age. Hence, a decline in the nation's dependency ratio is usually associated with a rise in the average savings rate.

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Source Registrar General of India Graph 2.2 Falling Birth Rate and Death Rate from 1971-2001

Due to improved health care facilities in India, the death rate is on decline, this indicate that by the year 2016 persons above age of 60 will increase and will be 8.94% of the total population. This demand more serious provision for heath care and social security. See table 2.1.
Table 2.1 Age Composition as % of Total Population Year 1991 2001 2011 2016 Below 5 Years 12.80 10.70 10.10 Between 0-15 37.76 34.33 28.48 Between > 15 - 59 Years 55.58 58.70 63.38 63.33 + 60 Years 6.67 6.97 8.14 8.94

9.7 27.73 Source Registrar General of India

In 2011 around 63.38 % population is coming under working class. Here the major challenge is in front of the Government to create job opportunities for absorbing this population in to productive labor, for gaining first demographic dividend. Population estimated, 400 million between 2000 and 2025, according to the realistic scenario, as much as 86 percent of the total growth would be in the age interval 15-64. This can have a farreaching impact on the economy. Two Harvard economists have recently revived an earlier thesis of Coale and Hoover (1958) that demographic transition could contribute significantly to economic growth (Bloom and Williamson 1998). In the context of East Asia's economic miracle, working-age population there grew at a much faster rate than the dependent population during 1965-90, which provided an opportunity for raising the saving rate and expanding the productive capacity of workers.

4. Issues and Challenges

In case of India the picture of rising portion of working population is very encouraging but, India is having its own issues to deal with ranging from poverty to digital divide. As per 2001 census 61% is the rate of literacy, female literacy is only 47.8% this is the challenge in front of Government of India. Most of the illiterate are living in villages and serving the agricultural sector. Annual rate of Urbanization growth is 2.4%, and 29% of population living in urban area. Now Indian government has increased spending on education to 5 % of GDP in the latest 11th five year plan, this is very progressive move. The education in India should be skill based, so that the employability of students coming out of colleges will increase. There is need for improvement in skill sets, and quality of education. Growing number of workable population needs quality education, healthcare, communication and employment. The rate of unemployment in India is 10%, which is a major issue in front of the government. To realize the demographic dividend more and more jobs needs to be created. Demographic Window is defined to be that period of time in a nation's demographic evolution when the proportion of population of working age group is particularly prominent. Typically, the demographic window of opportunity lasts for 3040 years depending upon the country. Because of the mechanical link between fertility levels and age structures, the timing and duration of this period is closely associated to those of fertility decline: when birth rates fall, the age pyramid first shrinks with gradually lower proportions of young population (under 722

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15yrs) and the dependency ratio decreases as is happening (or happened) in various parts of East Asia over several decades. After a few decades, low fertility however causes the population to get older and the growing proportion of elderly people inflates again the dependency ratio as is observed in present-day Europe. The UN Population Department has defined it as period when the proportion of children and youth under 15 years falls below 30 per cent and the proportion of people 65 years and older is still below 15 per cent. Countries Status of Demographic Windows: Europe's demographic window lasted from 1950 to 2000. China : 1990 - 2015. India 2010 - may last until the middle of the present century. Much of Africa will not enter the demographic window until 2045 or later. Societies who have entered the demographic window have smaller dependency ratio (ratio of dependents to working-age population) and therefore the demographic potential for high economic growth as favorable dependency ratios tend to boost savings and investments in human capital. India is following the demographic transition pattern of all developing countries from initial levels of high birth rate - high death rate to the current intermediate transition stage of high birth rate - low death rate which leads to high rates of population growth, before graduating to levels of low birth rate - low death rate. Declining fertility rates have changed the age structure of Indias population, resulting in a bulge in the working age-group. However, recent employment figures indicate that the absorption of the Indian youth into the labour force is not as high as one would expect. This is perhaps due to the poor employability of the workforce, which is severely affected by a deficit in educational attainment and health. By the year 2020, 136 million Indian youngsters will join the global workforce. Compared to this enormous number which accounts 17% of total global workforce, China will add only 23 million people and the USA will increase its working age population by 11 million during this period. Indias total population (currently a little over 1.2 billion) is projected to grow by as much as the total current population of the US. (Source: Demographic dividend by Ian Pool) The United Nations estimates that India will account for almost 26% of the increase in global working-age population over the next 10 years. If the country is able to increase its focus and investment in the education sector, over the next decade India could emerge as the global leader is producing high-school and university graduates. The demographic dividend presents enormous challenges and opportunities for India. In the past two decades, the country has been able to increase its historical rate of 3.0-3.5% GDP growth per annum to the current 8.09.5% range through a combination of economic reforms, globalization and demographics. It is critical that this potential is unlocked because a large population alone is not a sufficient condition to spur growth. Growth can only accelerate if the country can ensure that its young citizens are made productive professionals in the global economy. Bloom et al (2003: 39-42) identify the three most important mechanisms that deliver the demographic dividend: (1) Labour supply, the volume, age-distribution and spatial spread of which are demographic questions but the quality and skills of which are due to education and other factors; (2) savings; and (3) human capital, the quantum of which is essentially also a demographic factor, but the exploitation of which is a function of social and cultural norms and the way public and private sector enterprises, and small/family businesses/farms are organised. They go on to say that the demographic transition has significant effects on investments in human capital, effects of which are the least tangible, but may be the significant and farreaching. Finally they point out that All these mechanisms are heavily dependent on the policy environment (Bloom et al 2003: 41, 42). This last comment underlines the point that the window of opportunity is not just about a gross reduction in dependency as the worlds population shifts from a youthful to a more elderly structure, but the passage through a phase during which the percent at working ages is higher. If labour supply is to become human capital, investments will be necessary, and these may compete with the need for increased savings for the long-term impacts of ageing. This window of opportunity is not a demographic gift but an opportunity to be exploited. The issue of disparities in the regional growth rates and development in India has been attracting attention, particularly in the recent past. The southern states, namely, Andhra Pradesh, Karnataka, Kerala and Tamilnadu, together with Maharashtra, have been doing relatively better, and have clocked a growth rate of about 6.3% per annum in the decade, 1992-2002, while the BIMARU (Bihar, MP, Rajasthan, UP) states have registered a growth rate of only 4.6%. The first set of states has consistently ranked higher than the BIMARU states with respect to the Human Development Indices.

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5. East Asian Miracle

Economic Growth of East Asian countries between 1960 and 1990. This is based on reports of Mason (2003) and Williamson (ibid) and primarily concerns Japan, South Korea, Taiwan, Singapore, Thailand and Indonesia. The national populations grew rapidly and generally still continue to grow substantially although at a reduced rate (and Japans population is expected to begin to decline during the present decade). Most East Asian countries experienced annual growth rates in per capita GDP markedly in excess of that in the USA. Mason makes use of the 'economic support ratio to illustrate the changing size of the workingage population relative to the dependent population (those who are either too young or too old to work). This particular ratio measures the working population relative to the consuming population. Mason refines the ratio to incorporate age variation in productivity and consumption. Mason shows that the economic support ratio for Southeast Asia fell during the 1950s and 1960s. This was the period of the first stage of the demographic transition, illustrated in the graph 4.1 below. Then beginning in 1970 the economic support ratio rose rapidly, and is projected to continue to rise for some time to come. This corresponds to the second phase of the demographic transition illustrated by the graph 4.2 below. Graph 4.1 Graph 4.2 Graph 4.3

These Asian economies were characterized by, maximum use of highyielding crop varieties, and investing massively in the further development of new varieties; low fertilizer prices, increased food supply. In fact food output per capita increased by 36% in Asia and 47% in East Asia between 1963 and 1992 (contrast Latin America, with only a 13% increase and Africa with a decline of 7%). (Mason- 2003)

6. Lessons to be Learned
First Demographic dividend usually occurs late in the demographic transition when the fertility rate falls and the youth dependency rate declines. During this demographic window of opportunity, output per capita rises. The demographic dividend played a role in the "economic miracles" of the East Asian Tigers, that the economic boom in Ireland in the 1990s (the Celtic tiger) was in part due to the legalization of contraception in 1979 and subsequent decline in the fertility rate. In Ireland the ratio of workers to dependents improved due to lower fertility but was raised further by increased female labor market participation and a reversal from outward migration of working age population to a net inflow. Africa, on the other hand continues to have high fertility and youth dependency rates, which contribute to its economic stagnation. The magnitude of the demographic dividend appears to be dependent on the ability of the economy to absorb and productively employ the extra workers, rather than be a pure demographic gift. (Bloom, David E. and Jeffrey G. Williamson, 1998, Demographic Transitions and Economic Miracles in Emerging Asia) In the economics literature the parameters of the dividend period are measured by a support ratio, defined by an index the ratio of producers to consumers (weighted to allow for age specific variations in production and consumption). This measure captures how changes in age-structure influence the concentration of the population in the relatively productive ages (Mason and Lee 2006, p.13). Second demographic dividend is possible only for those who successfully managed the first dividend, like the countries in East Asia. (Mason and Lee, 2006; Lee and Mason, 2007; Mason, 2006). The needs and demands of people are changing according to the age and place in demographic transition, for example, health issues are most critical among the young, the old and women at reproductive ages; education policies are directed to the young; labour markets, youth and working age adults; housing, primarily those at parenting ages; and institutional care and income support, the elderly. In shifting the policy emphases from population growth to age-structural changes, analyses more directly address the needs of the policy community. This approach also has another applied benefit: it fits better with planning models that are sector-specific (Pool, 2005). 724

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How much of the first dividend is realized during the demographic window of opportunity depends on key features of the economic life cycle. The productivity of young adults is depends on schooling decisions, employment practices, the timing and level of childbearing, and policies that make it easier for young parents to work. Productivity at older ages depends on health and disability, tax incentives and disincentives, and, particularly, the structure of pension programs and retirement policies. In short, the first dividend yields a transitory bonus, and the second transforms that bonus into greater assets and sustainable development. These outcomes are not automatic but depend on the implementation of effective policies. Thus, the dividend period is a window of opportunity rather than a guarantee of improved standards of living. What can be done for exploiting this window of opportunity, for India (2010 to 2050)? There is a need for flexible labour markets to allow easier entry for young people into the workforce as well as improved flexibility and mobility across sectors. Greater access to quality education, skill enhancement and focus on improving technical capabilities to match with the industry requirements. Higher investments in education, skill up gradation and employability by imparting special training to underprivileged and poor in a society. In East Asia, due to good education, and a liberalized trade environment, the workforce was absorbed into the labour market, which increased the capacity for economic production and growth of GDP. Need for encouraging saving behavior amongst the working age population, by giving various incentives like tax benefits, better returns etc. Increasing age of retirement as longevity is increasing; it will help to reduce the rate of population aging. Pension schemes can be reformed by introducing funded element, in which individuals contribution increases and a capital sum is delivered at retirement. More investment on health and safety and related services, improvement on government spending on health care will results in affordable healthcare. Thus, there are many interactions that increase benefits from the demographic dividend, always assuming that government policies are constructed to build upon the dividend during the window. One careful estimate is that as much as one third of growth in the East Asia Miracles came from demographic dividends. -- (Bloom and Williamson, 1998)

7. India in 2025
The population of India is expected to be around 1.4 billion in 2025. The population size is expected to reach this mark whether India attains the goals of the National Population Policy for 2010 or not. By 2025, India's population would almost be equal to that of Chinas. As per the estimates shown in Table 6.1, the crude death rate in India has declined from about 30 per 1,000 in 1941-51 to 15 in 1971-81 and 10 in 1991-2001, the expectation of life at birth has increased from about 33 years in 1941-51 to about 50 years in 1971-81 and 60 years in 1991-2001. Thus during the last 20 years, the expectation of life at birth has increased roughly by half a year per annum. There also is an indication that the life expectancy has increased somewhat faster among females than males.
Table 6.1 Demographic Indicators from 1951-2001

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As per the projection of demographer P.N. Mari Bhat, the sex ratio of population (females per 1000 males) would marginally increase from 932 in 2000 to 952-954 in 2025. Thus a reversal of the historical trend of falling sex ratio is expected in the twenty-first century. The projected improvement in the sex ratio is directly attributable to the assumption that by 2025, the expectation of life at birth for females would be higher than for males by 4 years. It is estimated that Indias population will increase by 400 million between 2000 and 2025, as much as 86 percent of the total growth would be in the age interval 15-64 years. The age interval of 65 years and over would account for another 11 percent of the growth while the share of the interval 0-14 would be just 3 percent of the total. This should have a far reaching impact on the Indian economy. (P. N Bhatt 2001)

8. Conclusions
Benefits of demographic transitions show the rise in the relative number of bread-winners. Due to decline in dependency ratio and participation of women in the work force results in increased GDP and improved standard of living. A more indirect but vital benefit for the economy is the effect this can have on savings. Human beings save most during the working years of their lives. When they are children, they clearly consume more than they earn, and the situation is the same during old age. Hence, a decline in the nation's dependency ratio is usually associated with a rise in the average savings rate. India's savings rate as a percentage of GDP has been rising since 2003. It now stands at 33% which is comparable to the Asian super-performers, all of whom save at above 30%, with China saving at an astonishing near 40% rate. This savings growth is driven by improvements in the government's fiscal health and a sharp rise in corporate savings. The demographic dividend, does not last forever. There is a limited window of opportunity, after realizing the First dividend, if workers are encouraged to save and accumulate pension funds, population aging can boost capital per worker, productivity growth, and per capita income. Thus, policymakers especially will need to focus on establishing financial systems that are sound, trusted, and accessible to the millions who wish to secure their financial futures. With right policy framework for, job creation, skill development of underprivileged, proper health care and establishing strong financial systems, India can capitalize on this opportunity, of demographic transition.

9. References
1. 2. 3. Abraham, V. (2008), Employment Growth in Rural India: Distress Driven, Working Paper 404, Centre for Development Studies, Kerala. Asian Development Bank (1997): Emerging Asia: Changes and Challenges, Asian Development Bank, Manila. Bloom, David E. and Jeffrey G. Williamson, 1998, Demographic Transitions and Economic Miracles in Emerging Asia, World Bank Economic Review, 12: 419 - 455 argue that it accounts for between one forth and two fifths of the miracle. Bloom, David E., David Canning and Pia Malaney, 2000, Demographic Change and Economic Growth in Asia, Population and Development Review, 26, supp. 257-290. Bloom, David E. and David Canning, 2003, Contraception and the Celtic Tiger, Economic and Social Review, 34, pp 229-247. Bloom, David E, David Canning and Jaypee Sevilla (2003): The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change, Population Matters Monograph. Bloom, David E and J G Williamson (1998): Demographic Transitions an Economic Miracle in Emerging Asia, World Bank Economic Review, Vol 12, No 3, pp 419-56. Bloom, David E. and Jeffrey G. Williamson (1998). Demographic transitions and economic miracles in emerging Asia. The World Bank Economic Review 12(3): 419- 555. Bhatt, P. N. Mari (1998). Demographic estimates for post-independence India: A new integration. Demography India 27(1):23-57. Coale, Ansley J. and Edgar Hoover (1958). Population Growth and Economic Development in LowIncome Countries. Princeton N.J.: Princeton University Press. Dyson, Tim and Amresh Hanchate (2000). India's demographic and food prospects: A state level analysis. Economic and Political Weekly 35, November 11. D'Adamo, P. (2004). Understanding the demographic dividend. http://www.developmentgateway.org/ Educational attainment of youth and implications for Indian labour market: an exploration through data, The Indian Journal of Labour Economics, 51, 4, pp 813-830. 726

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14. Globalization and Employment trends in India Indian Journal of Labour Economics, 51(1): 1-23, The Indian Society of Labour Economics, New Delhi. 15. Mason, A. (2003). Population change and economic development: What have we learnt from the East Asia experience? Applied Population and Policy 1, 1: 314. 16. Nasscom reports on education and employability www.nasscom.com. 17. Natarajan, K. S. (1982). Population projection. In Population of India. Country Monograph Series No. 10. New York: United Nations. 18. United Nations (1999). World Population Prospectus: The 1998 Revision. Volume I, Comprehensive Tables. New York: United Nations. 19. Visaria, Pravin and P.N. Mari Bhat (1999). Population growth in south Asia and its consequences, 1990-2051. Paper presented at the national seminar on Economy, Society and Polity in South Asia, held at Institute of Economic Growth, Delhi, November 16-17. 20. Williamson, J, G. (2001). Demographic change, economic growth, and inequality. In Birdsall, N. et al. (2001). Population matters. Oxford University Press.

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