MOSL: Fuel or Engines (Economy)-How can India reap its demographic dividends?-Labor force participation ratio holds the key

​Fuel or Engines (Economy): How can India reap its demographic dividends?; Labor force participation ratio holds the key

“Fuel or Engines” is our new monthly product, in which we intend to expand our consumption v/s investment theme. This is an extension to our ‘India 2020’ report released in June 2016.

At a time when other major economies are (or will soon be) experiencing an aging population, the opportunity for India to increase its foothold in the global economy is immense, if it is able to exploit its demographic dividends. India’s total dependency ratio – a measure to gauge demographic dividends – has fallen (read: improved) from ~68% in the mid-1990s to ~52% in 2015 and is expected to bottom at ~46% by 2040.

We argue that while a larger working-age population might be necessary, it is not sufficient to reap demographic dividends. The labor force or the share of working-age population looking for work holds the key. During the past decade, while India’s working-age population has grown at 1.9% per year, its labor force has grown at just 0.9% per year, denying the economy of demographic dividends.

Over the next two decades, the larger working-age population must be complemented by a recovery in the labor force participation ratio (LFPR). Nevertheless, higher LFPR will bring with it the challenge of providing sufficient good-quality employment opportunities, without which India will not be able to reap its demographic dividends.