Abstract WP21-03

This paper offers a new explanation and prediction of empirical relationship between income and consumption inequalities and demographic dividend in India. The analysis is based on a modified National Transfer Accounts (NTA)-based modeling of First Demographic Dividend with inequality-adjusted Economic Support Ratio (ESR). The model is tested for India by calculating the inequality-adjusted demographic dividend (or growth rate of ESR) from 2005 to 2050. The results show that the economic inequalities have remarkable effects on (i) lowering the age-specific distribution of labour income and consumption and (ii) reducing the size and duration of demographic dividend due to lower growth rate of ESR. In addition, income inequality effects are found to be stronger than consumption inequality effects on reducing demographic dividend. These results imply that the (a) growth effects of FDD are upward-biased if unadjusted for the economic inequalities; (b) attainment of goals and targets of the reduction in inequalities under UN-SDGs 2030 by redistributive economic policies are contributory to the maximization of India’s economic growth through FDD; and (c) economic inequality does matter for India’s demographic dividend. Subject to the availability of data, the modified approach to FDD may be replicated in other developing countries of Asia to establish the generality of results for India.