A study of demographic and financial changes in India

This chapter demonstrates the role of financial sector in achieving the demographic dividends for the Indian economy. We developed an aggregative macro-econometric model supplemented by sectoral analysis of saving, investment and industrial productivity to explore possible connections. The model highlights the sensitivity of financial development to capital inflow with subsequent implications for the demographic dividends. We show that the benefits of the second demographic dividend in India are critically dependent on a significantly higher accumulation of assets that can be made possible via greater financial depth. In India, the sectoral composition of foreign capital has been biased towards service sectors, particularly banking and finance, albeit the inter-sectoral mobility of capital, however small and restrictive it might be, renders substantial impact on the productivity and employment in the unorganized sector of the country. Notwithstanding such possibilities, the unorganized sector and more broadly the agricultural sector is still largely outside the formal credit network with the institutional credit flow declining over time. We propose that in order to reap the benefits of the demographic dividends, the financial sector policies, especially the banking sector policies, should be geared to bring the rural and informal industrial sector under the banking network much more aggressively. The mobilization of untapped savings and the expansion of lending institutions under strong legal support should crucially facilitate better realization of demographic dividends in India.