Demographic Window Of 25 Years- Will It Be a Dividend Or Disaster For India?

Chennai: With a large young population, India has its demographic window open for the next 25 years. To harness this demographic dividend and become an advanced economy, India needs a healthy, educated and skilled population. It must address skill gaps, ensure adequate industrial demand, create quality jobs and adopt the right policy measures, says Sarbartho Mukherjee, Senior Economist, CareEdge Ratings. Otherwise, India also risks falling into the middle-income trap that has ensnared several Latin American countries.

India is the world's most populous country and we often hear about the demographic dividend. What exactly is a demographic dividend and what conditions are necessary to benefit from it?

The demographic dividend refers to the economic gains that a country can achieve when a large proportion of its population is in the working-age group. However, it is more appropriate to first think of it as a demographic window because the dividend is not automatic. The demographic window is simply the opportunity created by favourable population dynamics. Whether India actually earns the dividend depends on the quality of its human capital. That means people must be healthy, educated and equipped with relevant skills. At the same time, industry must be able to absorb this workforce by creating quality jobs. Government policies on healthcare, education, skilling, industrial development and employment generation will ultimately determine whether India converts this demographic opportunity into sustained economic growth. It is also important that the economy gradually moves up the value chain so that workers are employed in higher-value, more productive jobs rather than remaining concentrated in low-productivity occupations.

You mentioned that India currently has a demographic window. Where exactly does the country stand today?

India is currently in the early-to-mid phase of its demographic window. Broadly, this favourable phase began around 2010-13 when the country's dependency ratio started declining significantly. India's dependency ratio is expected to bottom out around 2039-40 before gradually rising again as the population ages. This means India has roughly another 20 to 25 years to fully utilise this opportunity. If we fail to create productive employment and build high-quality human capital during this period, we risk missing a once-in-a-generation opportunity. Countries that fail to capitalise on this phase often fall into what economists call the middle-income trap, where per capita incomes stagnate without reaching high-income status.

Could you explain the middle-income trap and what lessons India can learn from other countries?

The middle-income trap occurs when a country experiences rapid growth initially but is unable to sustain productivity improvements required to become a high-income economy. Several Latin American countries, including Brazil, Venezuela and Bolivia, experienced favourable demographics but failed to translate them into long-term prosperity because of policy shortcomings, inadequate investments in human capital and weak industrial transformation. On the other hand, East Asian economies such as Japan, South Korea and Taiwan invested heavily in education, healthcare, technology and export-oriented manufacturing. They created high-value industries that generated productive employment and steadily increased incomes, eventually becoming advanced economies. India's challenge is to follow the East Asian path rather than the Latin American experience.

What did the East Asian economies do differently?

One of the biggest differences was sustained investment in human capital. These countries spent significantly on education, healthcare and skill development while simultaneously building globally competitive manufacturing industries. They created millions of productive jobs in sectors such as electronics, automobiles and advanced manufacturing, enabling workers to continuously upgrade their skills and incomes. Government policies remained focused on industrial competitiveness and technological advancement. In contrast, countries that failed to harness their demographic opportunity generally underinvested in education and healthcare while also struggling to generate sufficient high-quality employment.

India continues to face high youth unemployment. Is unemployment or underemployment the bigger concern?

Both are concerns, but underemployment and informality are equally serious challenges. A large share of India's workforce remains employed in the informal sector where productivity and wages are significantly lower than in the formal economy. Similarly, disguised unemployment remains widespread, particularly in agriculture and family enterprises, where several individuals may be counted as employed despite contributing very little to output. While these workers technically have employment, the value addition per worker remains low, limiting income growth and overall economic productivity. Unless more workers move into productive formal employment, India's demographic advantage cannot be fully realised.

A growing number of young people are entering gig work. Does this help or hinder India's demographic dividend?

The gig economy has emerged as an important source of employment and is likely to become even more significant in the future. However, policy support is essential. Gig workers require minimum wage protection, social security benefits, insurance coverage and better working conditions. Today, many gig workers face income uncertainty and lack career progression. At the same time, artificial intelligence is likely to fundamentally transform the gig economy. Instead of being concentrated mainly in ride-hailing and food delivery services, gig work is expected to expand into digital activities such as AI model training, data annotation, quality testing and data cleaning. These higher-value digital tasks could create substantial opportunities for India's young workforce, provided they receive the necessary skills and policy support.

That would require significant upskilling of the workforce, wouldn't it?

Absolutely. The transition towards AI-enabled work cannot happen without large-scale skill development. Young workers need training in digital technologies, AI-related tasks and emerging occupations. Continuous learning and reskilling will become increasingly important because technology is changing the nature of work much faster than before.

The government has introduced Production-Linked Incentive (PLI) schemes to promote manufacturing. Have these schemes created sufficient employment?

The PLI scheme has certainly generated investment and employment, but not on the scale India requires. Government estimates suggest that the scheme has created roughly 14 lakh direct and indirect jobs while attracting substantial investments into manufacturing. However, India's employment challenge is much larger. According to the Economic Survey, the country needs to create nearly 80 lakh non-agricultural jobs every year until 2030. It is also important to remember that the primary objective of the PLI scheme is to strengthen domestic manufacturing rather than directly create jobs. Employment generation is a positive by-product, but much broader industrial expansion is necessary to meet India's labour market needs.

Do Indian graduates possess the skills that industry requires today? Has the education system kept pace with technological changes, particularly after the pandemic?

There continues to be a significant mismatch between education and industry requirements. India's education system still focuses heavily on theoretical learning, whereas employers increasingly seek practical and industry-relevant skills. According to the India Skills Report, only around 55 per cent of graduates are considered employable. That leaves nearly half of graduates without the skills required by employers. Government initiatives such as Skill India and the PM Internship Programme are steps in the right direction, but they need greater scale and funding. Vocational education, practical training and stronger industry-academia collaboration are essential to bridge this gap. At the same time, technology is altering the balance between labour and capital. Increasingly, productivity gains are coming from capital and automation rather than labour. Therefore, India must also focus on labour-intensive sectors such as tourism, MSMEs and the creative or orange economy, which are relatively less vulnerable to AI-led disruptions.

The pandemic disrupted school education and led to higher dropout rates. Have we fully recovered?

There is no comprehensive official data conclusively showing whether all students who dropped out during the pandemic have returned to school. However, preliminary evidence suggests that the contribution of demographic factors to GDP growth, which declined during the pandemic, has begun recovering. While this is encouraging, India still needs to significantly increase investments in education and healthcare. Compared with countries such as China and advanced economies, India's public expenditure on these sectors remains relatively low. These two sectors are the foundation of human capital development, and without stronger investments, it will be difficult to fully utilise the demographic opportunity.

Government spending on health and education continues to remain relatively low. How important is increasing this expenditure?

It is absolutely critical. India currently spends around 4-5 per cent of GDP combined on health and education, whereas countries such as China and several advanced economies spend much more. Improving educational outcomes, healthcare access and research capabilities requires sustained public investment. These are long-term investments that directly influence workforce quality, productivity and future economic growth.

India's female labour force participation remains among the lowest in major economies. How can improving women's participation boost economic growth?

India's female labour force participation is estimated at around 34-35 per cent, significantly below countries such as China, the United States and Vietnam, and also below the global average. Increasing women's participation requires supportive public policies, including affordable childcare, better healthcare, safe transportation, gender-neutral parental leave policies and flexible work arrangements. Interestingly, female labour force participation is particularly low in urban India, indicating substantial untapped potential. Bringing more women into the workforce would not only increase overall labour supply but also raise household incomes and consumption. If India can increase female labour force participation to around 50 per cent, it could potentially add between 0.5 and 1 percentage point to annual GDP growth.

Artificial Intelligence is changing workplaces rapidly. Is AI a threat to jobs?

AI should not be viewed purely as a threat. Like every major technological revolution, it will create disruption during the transition phase while also generating new opportunities. AI increases productivity and acts as a disinflationary force by lowering costs and improving efficiency. Some existing jobs, particularly in sectors such as IT services, may undergo restructuring, but AI will simultaneously create entirely new industries and occupations. India is well positioned to benefit because of its large English-speaking and digitally connected workforce. Alongside AI-driven employment, sectors such as MSMEs, healthcare, tourism and the creative economy will continue to generate substantial labour demand.

Many developed economies are ageing rapidly. Can India's young workforce benefit from this demographic shift?

Yes. Ageing populations in Europe, Japan and several other advanced economies will create growing demand for healthcare professionals, nurses and geriatric care workers. The World Health Organization estimates that the world will require millions of additional nurses over the coming decade. India already has a strong presence in global healthcare services and can further strengthen its position by training workers for international healthcare markets. While AI may reduce labour demand in some industries, healthcare and elderly care remain sectors where human skills will continue to be indispensable.

Looking ahead to 2047, are you optimistic that India will successfully harness its demographic dividend? What are the three most important policy priorities?

I remain optimistic about India's journey towards becoming a developed economy. However, success will depend entirely on policy execution. The three most important priorities are significantly increasing investments in healthcare and education, strengthening research and development, and creating far more productive jobs across manufacturing, services and emerging industries. India's spending on research and development remains below one per cent of GDP, far lower than many advanced economies and China. Greater investment in innovation, combined with quality education and employment generation, will determine whether India transforms its demographic window into a lasting demographic dividend.