Rajeev Malik: Demographic dividend, ha!

An important building block of the current enthusiasm over India's medium-term economic growth prospects is the country's favourable demographic transition. The UN puts the population's median age at around 24.3 years in India, compared to 32.6 in China and 35.1 in Korea. At present, some 63 per cent of India's population is in the 15-64 age-group, while slightly more than 50 per cent is under 25. Over time, however, India's working-age population proportion will swell. The Indian economy is, therefore, poised for a major demographic "bonus". In general, while East Asia's working-age population share will peak around 2010, India's share should continue rising for the next two decades.

Since people of working age have a higher propensity to save than the dependent population, the age distribution of population can significantly affect an economy's saving rate. Saving rates in East Asia are poised to decline in the next two decades as the working-age population share peaks and then declines. However, India will buck the trend thanks to a rising working-age population share.

The rising working-age population share offers Indian policymakers a unique opportunity to capitalise on this demographic dividend to boost economic growth. However, positive results are not a foregone conclusion. As the experience of East Asia showed, favourable economic policies were a prerequisite for absorbing productively the "bulge" in working population so as to boost economic growth.

India's household saving rate has risen from 17 per cent in 1996-97, to 24.3 per cent in 2003-04. Being a late economic bloomer, India's saving-investment dynamics from here will likely follow the virtuous cycle experienced by much of Emerging Asia in the 1980s, with a higher saving rate likely aiding higher investment. The private consumption-GDP ratio therefore is likely to fall, despite the expected consumption boom.

The expected rise in the saving rate will position India to boost investment substantially above the current 26.3 per cent of GDP. A higher saving rate by itself is unlikely to boost India's economic growth. What is critical is that economic policies gainfully employ the increase in working-age population. In the absence of pragmatic policies that improve education, worker skills, and competitiveness, the demographic dividend could become a burden, as those entering the labour force join the ranks of the unemployed or under-employed.

Indian political parties need to be mindful of the changing demographic profile, as a result of which voters under 35 years of age are increasing in number, and hence in influence. Plainly, a key risk to the upbeat India economic story is that governments fail to reform fast enough, resulting in increasing discontent that is expressed in the voting booths.

The writer is vice president and senior economist with JPMorgan Chase Bank, Singapore. Views expressed are personal.