India’s Age Structure Transition, Sectoral Labor Productivities, and Economic Growth: Evidence and Implications Based on National Transfer Accounts

Abstract

Using the new methodology of National Transfer Accounts, this paper quantifies the economic impacts of age structure transition and productivity growth rate on India’s economic growth over the period 2005–2050 by formal and informal sectors. Growth effects are captured by the first demographic dividend (FDD) and distinguished by sector-specific (a) productivity age profiles, (b) relative and absolute labor productivity growth rates, and (c) population distribution for the benchmark year during 2004–2005. Empirical results show that in the presence of these sector-specific differences, growth effects are higher and the sources of lower and slower FDD are attributable to lower productivity levels, growth rates of productivity, and growth rate of effective number of producers in informal sector. Further, throughout, growth effects of productivity are found to be stronger than the age structure transition. Sensitivity results show that growth effects can be remarkably higher at an annual rate of 17 % if benchmark output can be doubled in the informal sector, or FDD can be sustained up to 2050 if India’s productivity profile in formal (and informal) sector has a comparable shape with that of Japan/USA (and Philippines/Indonesia/Nigeria). Overall implications show that stronger policy efforts are required for improvement in productivity levels and growth in informal sector to maximize long-run economic growth through FDD. These new results and implications may be of relevance for formulation of age-structure and informal sector related growth promotion policies in other developing countries of Asia, Latin America and Africa.