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Demographic Dividend: Meaning, Advantages & More

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July 7, 2022


What’s Inside

The world around us is constantly changing. That includes the economy of countries and demographics as well.

India, as a country, has experienced change in terms of the meaning of demographic dividends. This means the age structure of the population has shifted over the years.

The focus of the term demographic division is the overall age structure within a given location and how it shapes the economy. Continue reading to understand the meaning of demographic dividend and the role age plays within it.

What is a Demographic Dividend?

To understand what a demographic dividend is, we need to understand that it relates to the growth of a certain economy.

To put simply, demographic dividend refers to the economic growth potential that arises when a country experiences a relatively large working-age population compared to dependents (children and the elderly). This demographic structure can lead to increased productivity, economic development, and higher living standards under the right conditions.

Where Does Demographic Dividend Take Place?

Although several countries have witnessed positive hikes in terms of their child survival rates, a large percentage of them continue to experience high birth rates. This holds particularly true in the case of countries that aren’t very well developed. As a result, it is rare for these countries to enjoy the economic benefits that demographic dividends constitute.

How Does the Demographic Division Help?

As there is a lower number of people who need to be supported and a greater number of people who can be a part of the labour force, the economy's resources aren’t as burdened as they otherwise would be. This means that these resources can be directed towards other areas such that the country in question’s economy can develop and take conscious measures to provide for the prosperity of its population. 

Why is a Demographic Transition Necessary?

For demographic dividends to be beneficial, a country must experience a demographic transition. This means the country would need to switch its way of life and move away from a predominantly rural, agricultural economy characterised by high fertility and mortality rates. It would have to move towards a primarily urban industrial society with low fertility and mortality rates. 

Understanding the Benefits of Demographic Dividend

At the onset of this transition, fertility rates are likely to dip, which could result in the labour force expanding at a pace that outdoes the population that is dependent upon it. If all other factors under consideration remain unchanged, the per capita income is likely to rise rapidly during this period. This is the first dividend a country receives once it undergoes a demographic transition. 

Types of Demographic Dividend

1. The First Dividend

The aforementioned dividend period ordinarily lasts for a fairly long time which could exceed five years. Ultimately, however, the declining birth rate leads to a dip in the labour force growth. Simultaneously, medical advancements and superior health practices result in the constant expansion of the elderly population. This section of the overarching population can eat into additional income and can curtail demographic dividends.

After all other factors remain equal, per capita income increases at a deceleration rate during this time. This means that the first demographic dividend turns negative. 

2. The Second Dividend

With an older working population geared towards an extended retirement period, a stronger incentive exists to amass assets that can be used to support oneself. It isn’t unusual for these assets to be invested within domestic as well as international investment vehicles. Either way, they contribute to a country’s national income. This spike in national income constitutes the second dividend. It continues to accrue for an indefinite period. 

3. No Guarantees

It is important to note that the benefits associated with a demographic transition aren’t guaranteed or automatic. Regardless of where this demographic transition transpires, the dividend depends on the government implementing the appropriate policies. These policies may need to be implemented within the economy, governance, health, and education among other areas. 

What Impacts the Extent of Demographic Dividend?

Additionally, the extent to which a country receives a demographic dividend depends upon the productivity levels among young adults. This is tethered to the level of schooling that exists within the country, the employment practices that persist and the frequency within which childbearing is carried out. This interspersed with the economic policies that ease the process by which young parents can work, is critical.

Areas Where Demographic Dividends Transpire

The four primary areas wherein demographic dividends can occur within a country have been touched upon below.

  • Economic Growth – The gross domestic product per capita rises owing to a fall in the dependency ratio.
  • Human Capital – As a demographic dividend is associated with lower births, parents can keep aside more resources for each of their children. This means they get to enjoy superior health and educational outcomes.
  • Labour Supply – With a demographic dividend, the number of workers that join the labour force rises. Women also begin entering this workforce.
  • Savings – While the demographic period is in effect, personal savings can grow, which in turn can help stimulate the economy.

Exploring the Opportunities that Exist in India with Demographic Dividend

India stands to benefit from a demographic dividend given the current circumstances it finds itself in. For starters, it is set to have the youngest workforce in the world. The median age applicable here will fall well below that of China as well as other developed countries. 

Next, other countries are set to have a greater percentage of their population fall under an age group that is old and unable to work. This will lead to a decline of 56 million people in their labour force. Individuals who constitute the Indian workforce will be able to fill the gap within the country and overseas and contribute to greater economic growth.

Provided the government makes appropriate moves and the benefits associated with demographic dividends are reaped in India, personal savings stand to grow. This will allow the Indian population to have more purchasing power, which could help the economy grow.

Challenges India Faces in Acquiring Demographic Dividend Benefits

Although the potential for a demographic dividend is vast, India must overcome the following hurdles if it wishes to benefit from it.

1. Dismal Developmental Skills -

Skill development is most pressing as, by 2031, the overall size of the country’s working-age population will dip in 11 Indian states. Next, employment rates among Indian graduates remain dismal at this point. This interspersed with the alarmingly low rating of India on the Human Development Index (or HDI) by the United Nations Development Program, is worrisome. 

2. Poor Educational Levels -

Other areas that India needs to work on are the mean years of schooling its overarching population attends. Low levels of education also impact the unemployment rates which presently remain high in rural as well as urban India. Further, since the expected years of schooling are low, adequate measures need to be taken to combat this. 

3. Underemployment and Associated Plagues -

A large chunk of the country’s population continues to be dependent on agriculture and falls under the troubling categories of underemployed and disguised unemployed. Further, significant parts of the population are employed within the unorganised sector, which is characterised by low wages and a lack of social security.

4. Women Aren’t Adequately Skilled -

Finally, the number of Indian women participating in the labour force has declined as per reports published by the International Labour Organisation and World Bank. Although female literacy levels have risen, it hasn’t given rise to appropriate and marketable skills. Since the Indian market presently lacks flexible policies via which women can attend digital training sessions online, their ability to gain education for contemporary occupations is limited. 

Overcoming Hurdles Associated with Demographic Dividend

For India to successfully overcome the aforementioned hurdles and adequately benefit from a demographic dividend, it needs to increase the funds it spends. Particularly pressing areas it needs to spend on include the health, education, research and development sectors. Additionally, the government needs to direct more funds toward skill development.

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Frequently Asked Questions

1. What does demographic dividend mean?

A demographic dividend can be defined as the economic growth a country experiences due to a population structure change. This is ordinarily linked to a decline in fertility and mortality rates.

2. What is a demographic dividend example?

To understand demographic dividend better, consider the example of a family with fewer children compared to one with several. A family with fewer children can support their children better and provide them with adequate resources related to their health and education. This, in turn, makes them more productive members of society. In contrast, families with several children may not always be able to provide them with the resources they need, resulting in them being less productive members of society. 

3. Why is India called a demographic dividend?

India is called a demographic dividend as it has the youngest workforce in the world. Further, it is in the process of transitioning from a country that is exclusively dependent on agriculture to one that is more urban and industrialised.

4. What stage is the demographic dividend?

The demographic dividend is a phase in a country's demographic transition where fertility rates decline, leading to an increase in the proportion of working-age individuals relative to dependents. This shift usually results in economic growth and development, as the larger workforce generates more income and contributes to the economy. The demographic dividend is generally considered to occur after a period of high birth rates and before an ageing population. Many developing countries are currently experiencing a demographic dividend, while developed countries are already past this phase.

5. What country is an example of a demographic dividend?

Currently, India, West Asia, Ireland, Africa, and East Asia are considered to be examples of demographic dividends.

6. What happens after a demographic dividend?

After a demographic dividend, a country enters an ageing population stage, where the proportion of elderly individuals increases and the proportion of working-age individuals decreases. This can lead to economic and social challenges such as increased healthcare costs and a shrinking workforce. Preparing for this stage is essential, with policies needed to promote economic growth.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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