How big is India’s demographic dividend? Evidence from the states

Shekhar Aiyar, Ashoka Mody, 5 April 2011

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An increase in a country’s working-age ratio can raise its rate of economic growth, resulting in a “demographic dividend”. Workers are more productive and save more than dependants. In addition, the fertility decline that is the source of the changed age structure may act directly to induce a larger female labour supply (Bailey 2006) and increase attention to primary education and health (Joshi and Schultz 2006). Cross-country evidence for such a dividend is strong, but contingent on favourable economic policy environments (Bloom and Canning 2004).

India, a demographic latecomer relative to the mature industrial economies and East Asia, is in the midst of a major transition in age structure. The country’s working-age population as a share of the total population has risen substantially over the last three decades. This process is set to continue over the next 30 years or so, during whichIndia will gain about 300 million workers (UN 2009). During these years, India will be – by an order of magnitude – the largest single contributor to the global workforce. By contrast, the working-age ratio in China is projected to fall substantially in the decades ahead. For those engaged in the sport of India-China comparisons, these diverging trends offer the best hope for India to catch up with its neighbouring powerhouse (Kelkar 2004, Economist 2010).

What do the state-level data show?

In recent research (Aiyar and Mody 2011), we compile data on the changing state-level age structure of India’s population, using successive rounds of the decadal census. Grouping selected states into “leaders” (high-growth states, typically from the south and west of the country) and “laggards” (low-growth states, largely concentrated in the Hindi-speaking heartland) reveals some interesting patterns (Table 1).

Table 1. Demographic evolution and income growth in selected states

The divergence in per capita income growth between leaders and laggards is well known. Not so well known is the fact that this was mirrored in demographic trends. The working-age ratio has grown much faster in leaders. In the decade 1991-2001, the widening gap relative to the laggards reached 8.7 percentage points.

Econometric analysis reveals that both the initial working age ratio and the growth rate of the ratio are significant contributors to per-capita income growth. This result is robust to correction for inter-state migration (the concern being that the estimated relationship reflects workers migrating across state borders in response to growth differentials rather than a demographic dividend).

Moreover, the relationship survives the introduction of numerous control variables drawn from the general growth literature and previous studies of convergence across the Indian states (Aiyar 2001, Purfield 2006). Controls include proxies for education, health, and financial depth, as well as policy variables such as land and labour reforms. Perhaps surprisingly, we find little empirical evidence for complementarities between demographic variables and various facets of social development or the policy environment. It is possible that some of the social preconditions for a demographic transition may themselves generate the ability to benefit from it.

The dividend already accrued

Applying the regression estimates to past data allows us to calculate the demographic dividend to date. To be precise, we calculate the additional growth in annual per-capita income arising from changes in the age structure, relative to a counterfactual in which the age structure remains fixed at the 1961 level.

We find that India’s demographic dividend has already been substantial (Table 2). In the two decades before the 2001 census, changes in the age-structure of the population added between 1% and 1.5% per annum to per capita income growth. Put another way, demographic change accounted for about 40% of the observed growth in per-capita income in these decades. This was the period when India began its economic liberalisation. It was also the period when India’s GDP broke free of its old “Hindu rate of growth”. Unsurprisingly, the growth acceleration is often attributed exclusively to economic reforms. But the demographic evidence suggests that changes in the age structure of the population may have been an equally important, if much overlooked, part of the story.

Table 2. India’s past age distribution and demographic dividend

Our calculations also suggest that the states that led India’s economic take-off were precisely those buoyed by the largest demographic dividend (Table 3). Thus, average per-capita income growth in the 1980s and 1990s in the leaders far outstripped growth in the laggards: 3.4% and 4.9% per annum versus 2.5% and 0.6% respectively. But net out the demographic dividend, and the growth performance was much more finely balanced. Thus in the 1990s the gap between the two groups was much smaller than suggested by the gross figures, while in the 1980s net average growth in the leaders was lower than in laggards.

Table 3. Demographic dividend, selected states

Future possibilities

We can also apply our regression estimates to independent projections of India’s future age structure to calculate the dividend going forward. The calculations suggest that the demographic dividend will peak over the next two decades, adding about 2 percentage points to annual per-capita income growth (Table 4). Subsequently, as the working age ratio stabilises from about 2030, the dividend will decline, while remaining positive.

Table 4. India’s coming demographic dividend by decade

There are no projections of the age structure by state, but our analysis suggests that future demographic changes should promote income convergence. The states in the south and west of India have already undergone the major part of their demographic transition, while the laggards have not. Considering that the average 2001 working-age ratio among the leaders was 62.1% versus 53.4% in the Laggards, it seems very likely that the bulk of the projected large increments to India’s working-age ratio will come from the laggards. Sustained growth acceleration in India’s poorest states may now be feasible.

Indeed, this process may already have started. Consider Bihar, the worst of the laggard states. From 2001 through 2009, Bihar’s per-capita income grew at an average rate of 6.2% per annum, representing a tremendous acceleration from about zero in the previous decade. This impressive economic performance has been attributed, especially in the latter part of the decade, to the good governance and developmental focus of the new state administration. While the reforms implemented have undoubtedly been instrumental in Bihar’s turnaround, it is also likely that Bihar’s working-age ratio has risen from its very low level of 52.5% in 2001 and hence contributed to the growth acceleration. The Census of 2011 will reveal the extent of such an increase.

The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

References

Aiyar, S (2001), “Growth Theory and Convergence across Indian States”, in Callen, T, P Reynolds, and C Towe (eds.), India at the Crossroads: Sustaining Growth and Reducing Poverty, IMF.
Aiyar, S and A Mody (2011), “The Demographic Dividend: Evidence from the Indian States”, IMF Working Paper 11/38.
Bailey, M (2006), “More Power to the Pill: The Impact of Contraceptive Freedom on Women’s Labour Supply”, Quarterly Journal of Economics, 121.
Bloom, D and D Canning (2004), “Global Demographic Change: Dimensions and Economic Significance”, NBER Working Paper 10817.
Economist (2010), “China and India: Contest of the Century”, August 21-27.
Joshi, S and P Schultz (2004), “Family Planning as an Investment in Development: Evaluation of a Program’s Consequences in Matlab, Bangladesh”, Mimeo, Yale University.
Kelkar, V (2004), “India: On the Growth Turnpike”, Narayanan Oration, Speech delivered at the Australian National University, Canberra.
Purfield, C (2006) “Mind the Gap: Is Income Growth in India Leaving Some States Behind?”, IMF Working Paper 06/103.
United Nations (2009), “World population prospects: the 2008 revision”, Department of Economic and Social Affairs, Population Division, New York.

 

Topics: Development, Labour markets
Tags: demographic dividend, growth, India

Senior Economist, International Monetary Fund