Without structural changes to economy, India risks its demographic dividend

Can a country get rich before it gets old? That is one of the fundamental questions in the studies of development. Each country goes through a demographic transition, in which a certain level of per capita income — associated with better natal care and more accessible health services — increases the birth rate and stimulates population growth, both of which come down after a few decades as behavioural patterns change and fertility declines. This interim period of fast population growth is one in which countries have a favourable dependency ratio; the working-age population is large, when compared to those who must be supported. A surplus can be built, and, if invested properly at macro level, it increases overall wealth and brings the country close to upper-income status. This has been the development process followed by countries around the world in the past century, especially in East Asia. 

 

India entered this phase in 2019, when the population between 15 and 64 began to dominate the number of children and the elderly. As this newspaper has shown, the country will retain this profile for another 30 years, at which point the ongoing decline in fertility rates catches up with the existing age distribution. This means that the current working-age population bears the responsibility of transitioning India to developed status, or “Viksit Bharat”. This requires high and sustained growth in gross domestic product (GDP). During the equivalent period for China, GDP growth was, on average, 9.3 per cent. For India, growth since 2019 has been modest. This period was of course scarred by the pandemic. Nevertheless, the figures suggest that India’s growth is about 3 percentage points or so slower than China’s in the equivalent period. There was once a time when Indian policymakers aspired to double-digit growth; but now a certain complacency, or even pessimism, seems to have set in. The 2025 Economic Survey said that 8 per cent growth was needed for the achievement of Viksit Bharat. India seems a long way from achieving that growth rate on a replicable, steady basis. 

 

The most crucial difference between India and the other nations that might have achieved higher growth during their demographic transitions is the quality of human capital available. Fast growth puts enormous demands upon a workforce: They need life-long reskilling, as the economy moves through various frontier sectors and up the value chain. People who begin in agriculture move to low-end manufacturing, then higher-margin production, and might conclude their work life supporting the high-value services sector. This represents increasing productivity, increasing per capita income, and high GDP growth. But in India, the latest data suggests that this process of structural transformation might actually have reversed — agriculture has increased its share of relevant employment. 

 

The government must address this problem, given that the demographic transition is already here. It must support the working-age population in increasing their human capital, and promote the structural transformation of the economy. Primary education has seen under-investment and poor regulation, and consequently learning outcomes have been poor; this needs to be addressed. Migration from low- to high-productivity geographical regions and industrial sectors must also be promoted and supported. The skills mission has been complex and detached from industrial reality, and needs wholesale reform. And finally, more women must be encouraged and enabled to work outside the home.