Making the demographic dividend sustainable

With a smaller percentage of the population being dependent today, this is the opportune time to
harness the earning capacity of the nation to ensure smooth consumption trends tomorrow. There
is a need to replace ‘Pay as you go’ and governmental transfer based pension systems with con-
tributory ones that facilitate asset creation. The surge in per capita incomes of today needs to be
harnessed to provide for old age income security tomorrow

India is the second most populous nation with a population of 1030 million according to Census
2001 and is expected to occupy the top spot by 2050. Such facts about the great Indian population
are commonplace but what is lesser known are the seismic changes that our occurring in its age
dynamics.

One of our recent studies analyzed the demographics of the top 112 cities of India (where market
size was used as the key parameter for classification), and the age distribution revealed interesting
insights.

Age distribution in the top 112 cities of India

% of population

24
25
20
20 17
14
15 12
8 % of population
10 5
5
-
0-6 6-18 18-24 24-35 35-45 45-60 >60
years years years years years years years

Source: City Skyline of India, an Indicus Research Product

This diagram shows a ‘youth bulge’ indicating that the working population cohort dominates the
Indian Urban population. The under 18 category is the smallest while the over 45 age band is
larger but lesser in magnitude when compared to the youth bulge.

The other striking feature of the urban age distribution is that the Urban birth rate in the past two
decades has been significantly low. This is perhaps the result of the promotional and motivation-
al measures launched by the Indian government to adopt a smaller family size. Moreover, endo-
genous factors like urbanization and greater participation of women in the urban workforce may
have also played a role in reducing the birth rates.

To understand this distribution and its consequences, we will employ a tool called the ‘depend-
ency ratio’ or DR. As the name suggests it is the ratio of the dependent upon the working popu-
lation. It can also be interpreted as the summation of the young dependency ratio (YDR) and the
old dependency ratio (ODR). Each ratio is prefixed by U to denote ‘Urban’.
 The age spectrum

0-18 18-60 >60

YOUNG DEPENDENTS WORKING POP. OLD DEPENDENTS

The national U-DR (Urban dependency ratio) is in the vicinity of 0.5 indicating that every de-
pendent is supported by two working individuals. The smaller the ratio the better it is, since it
points to an excess of the working population over the dependent population. A ratio exceeding 1
is adverse in nature.

As is evident, Urban India on the whole is young but a region wise disegregation yields interest-
ing results. Though U-ODRs are systematically higher than U-YDRs across India indicative of
the fact that that the right end of the age spectrum (rather than the left end) imposes the bulk of
the dependency burden. This implies that as this population will age, the new working population
will be smaller than it is today. The only exception to this observation is the Northern region
where the U-YDR exceeds the U-ODR, signifying a younger future than the rest of Urban India.

Northern and Western Urban India are the youngest with a U-DR of 0.43 and 0.45. In order to un-
derstand the DR’s better we need to look into its components, namely U-YDR and U-ODR.
Prominence of the U-YDR is a comparatively better situation as this would be indicative of a
younger population in the future. On this very count, the North is comparatively better off with
the U-YDR and U-ODR being nearly equal for this region. This implies that the continued per-
sistence of the youth bulge is assured over the next two decades in Northern India.

The picture in the South and East is the grayest of all with a U-DR of 0.49 and 0.48 respectively.
Moreover, the U-ODR is significant at 0.3 and the U-YDR is small for both these regions.

India is traversing the demographic

gift phase, which is characterized by a
youthful demographic structure, and
consequently favorable dependency ra-
tios

Though regional heterogeneities exist, undeniably India is traversing the demographic gift phase,
which is characterized by a youthful demographic structure and consequently favorable DRs. A
favourable DR in turn implies that the number of breadwinners exceed the number of consumers.
Thus this phase marks a rise in per capita incomes as well.

However it must be realized that the graph is not static, i.e. this youth bulge will eventually age.
To understand this movement, imagine that the age distribution graph is placed on a conveyor belt
that moves left to right. This means that a few decades later, the youth of today will be old and
constitute the old dependent population. Moreover, if current trends in Urban birth rates continue
the working population will not be as imposing as it is today. All this indicates adverse U-DRs in
the future especially U-ODR.
A few decades later, the youth of today will be old and consti-
tute the old dependent population. If current trends in Urban
birth rates continue the working population will not be as im-
posing as it is today. All this points to adverse dependency ra-
tios in future.

To complicate matters, as per capita incomes and health services have improved, life expectancy
has increased and is only expected to rise further. This means that U-DRs will surely worsen due
to the burden imposed by the aged or the U-ODR.

But with a smaller percentage of the population being dependent today this is the opportune
time to harness the earning capacity of the nation today to ensure smooth consumption trends in
the future. There is a need to replace ‘Pay as you go’ and governmental transfer based pension
systems with contributory ones that facilitate asset creation. The Pension Fund Regulatory and
Development Authority needs to be functionalized with immediate effect. Taxation laws need to
be skewed in favour of long-term savings. Correspondingly, avenues for long term savings need
to be developed. Also, foreign and private players ought to be wooed into India, in order to cre-
ate a vibrant pension sector.

Though an average Indian is known to have one of the highest propensity to save when com-
pared to international standards, the problem emanates from the fact that there is a near absence
of long term (exceeding 10 years) saving instruments. On the demand side the adverse effects of
this are evident in the shortage of funds for long term investment and the consequent infrastruc-
tural deficit in India.

India on the whole is younger than most developed nations today and its potential on the global
front is seamless. Partnerships based on India’s supply of a workforce and the technological
wealth of developed nations can facilitate global development.

However the need of the hour is not complacence but proactive policies. The surge in per capita
incomes of today needs to be harnessed to provide for national old age income security tomor-
row. Moreover for global mutually beneficial exchanges to materialize, literacy and advanced
education needs to be consciously propagated.

The demographic dividend of a young population is windfall in nature but can be transformed
into a sustained dividend by initiating timely institutional reforms. The tipping point is now and
governmental policy will shape our future now more than ever.

Ritika Mankar with Amit Sinha

(www.indicus.net)