India’s demographic dividend of a large, youthful workforce is being unsettled by a troubled trend: even as the share of working-age Indians climbs to record highs, household savings have fallen to their lowest level in nearly two decades.
This puzzle strikes at the heart of an influential economic theory.
In 1985, Franco Modigliani won the Nobel Prize for his life-cycle hypothesis of household savings. People spread out their consumption across a lifetime: borrowing when young, saving hard through their prime working years and drawing down those savings in retirement.
On a population scale, Modigliani’s theory implies that a country’s saving rate depends less on its wealth and more on how its people are distributed across the life cycle.
A nation with a bulge of prime-age workers should save a lot. Economists Ronald Lee and Andrew Mason later sharpened this insight into what they called the “second demographic dividend”.
The first dividend – the one India routinely celebrates – is the mechanical boost to output per person that comes from a rising share of working-age people. The second is subtler and, crucially, not guaranteed. It materialises only where pensions, formal financial systems and functioning labour markets allow the instinct to save for later life to translate into real, investable wealth.
Set India’s recent...
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