Demographic Dividend in India

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International Development
ISSN 1470-2320

Working paper Series 2012
No.12-128

The Demographic Dividend in India:

Gift or curse? A State level analysis on
differing age structure and its implications for
India’s economic growth prospects
Vasundhra Thakur

Published: April 2012

Development Studies Institute
London School of Economics and Political Science
Houghton Street
London
WC2A 2AE UK

Tel: +44 (020) 7955 7425/6252
Fax: +44 (020) 7955-6844
Email: d.daley@lse.ac.uk
Web site: www.lse.ac.uk/depts/ID

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Abstract

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The age structure of a population plays a key role in promoting economic growth through an increase in the ratio of the working age population. This positive influence is conditioned on the presence of good policies and institutions. India is experiencing an unprecedented increase in the working age ratio and this is being hailed as India’s opportunity to undergo faster growth. This paper shows that the age structure is not homogenous throughout the Indian States. Whether India will be able to capitalize on its favorable age structure depends on how well the BIMARU states are able to reform their economy.

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CONTENTS
1. Introduction

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2. Relationship between Demographic Change and Economic Growth 3. Theoretical Background

3.1 The Demographic Transition Theory
3.2 Theoretical Estimation: Age Structure and Economic Growth

4. Indian Demographic Trends
5. Empirical Estimation

5.1 Data Description and Summary Statistics
5.2 Empirical Evidence: Age Structure and Economic Growth

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6. The Future of the Indian Demographic Dividend

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7. Limitations and Extensions

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8. Conclusion

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Bibliography
Appendix
Appendix I: Stata Output Tables
Tables
Table 1: Summary Statistics over States and Time
Table 2: Growth Rate of Working Age Ratio of Select States
Table 3: Growth in Per Capita Income of Select States
Table 4: Working Age Ratio of Select States
Table 5: Regression Results
Table 6: Demographic Indicators India 2001:2025
Table 7: State Characteristics and Demographic Dividend in 2001 Table 8: State Characteristics and Demographic Dividend in 2026 Table 9: Percentage distribution of India’s Working Age Population by State Figures

Figure 1: Change in Working Age Ratio over time in select States

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Section 1: Introduction

The influence of population on macro-economic performance has long been debated upon by social scientists. Of the many aspects of population change, it is the size and growth rate of a population that has been at the fore of the debate. An emerging dimension of demography that has now entered the debate is the influence of age structure on economic growth. An increase in the share of the young working age group can be beneficial for growth because such people are more productive and contribute more to the economy. Due to the positive effects of an increase in the working age group, this bulk in the age structure is also called a ‘demographic dividend.’ However, there is nothing automatic about this dividend, if complementary institutions and policies are not in place, this dividend could turn out to be a ‘curse’ rather that a ‘gift’ because a large cohort of young unemployed people can turn into an economic disaster (explained in greater detail in next section). Given that the dimension of age structure has only recently got attention, comparatively few papers have been published which empirically analyze the phenomena. An influential paper by Bloom and Canning (2004) undertakes a cross-country analysis from 1965 to 1995. They find that a favorable age structure has a positive impact on income growth provided that the country has a high degree of openness to trade. Several papers have focused on a single country analysis. Estimates show that around one-third of the East Asian miracle can be...
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