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 data against that framework, and something clearly does not add up.

The country’s share of the working-age population has climbed steadily from around 58% at the turn of the century to nearly 65% today, and it is projected to keep rising into the 2040s.

By Modigliani’s logic, household savings should be rising in step. Instead, they have moved sharply in the opposite direction, sliding from a peak of roughly a third of disposable income around 2010 to about a fifth today.

It indicates that India’s economic growth is increasingly powered by household consumption rather than by savings channelled into productive investment, such as capital formation, industrial expansion and infrastructure development.

More Indians are working, but fewer are saving, and that gap is being bridged by borrowing. In effect, the country is forfeiting its second demographic dividend before it has had the chance to bank it.

Why isn’t the life-cycle theory working as advertised? Three explanations stand out.

The first is a missing wage dividend.

The theory assumes that middle-aged workers sit at the peak of their productivity and income. In India, real wage growth across large parts of the informal sector has been weak. Female labour force participation remains among the lowest of any major economy. A significant share of the working-age population is either underemployed or absent from the paid workforce altogether.

When a country experiences a demographic bulge, but employment is insecure, poorly paid or low-quality, households struggle to save. As consumption outpaces income, the gap is increasingly financed through borrowing.

The second is weak institutions.

Households accumulate financial resources for retirement only when they have access to credible, accessible and trusted savings instruments. In India, for instance, the Employees’ Provident Fund and Public Provident Fund are trusted, state-backed retirement instruments. However, formal pension coverage is modest and social insurance for informal workers is patchy.

Nearly 87%-90% of India’s workforce is engaged in informal employment, thus excluded from the Employees’ Provident Fund scheme. The Public Provident Fund is open to any resident Indian regardless of employment status, but voluntary participation is low, likely held back by limited financial literacy.

The third is debt-financed consumption.

Household liabilities have crept up over the same period, 2021-’25, driven by unsecured retail credit, credit cards, and consumer-durable financing, even as households financial assets, such as bank deposits and small savings, have failed to keep pace with liabilities.

This has caused net financial savings to decline, leaving households increasingly dependent on borrowing to sustain consumption.

This shift shows up clearly in regulatory concerns. In late 2023, the Reserve Bank of India expressed concern over the boom in unsecured personal loans and credit card debt. By requiring banks to hold more capital against these loans, it made such lending costlier. It sought to slow the rapid expansion of consumer credit, an indirect signal that household borrowing, and potentially spending, was outpacing income growth.

Consumption is being financed with debt rather than sustained by savings, and the domestic pool of capital available to fund investment is shrinking relative to demand. Household savings have long been India’s primary source of domestic capital, financing investments in infrastructure businesses, and industrial expansion. A structurally lower savings rate, paired with a heavier debt load, shifts the burden of financing investment onto government borrowing.

India must now earn its second demographic dividend: by increasing quality employment and female participation so that prime-age incomes peak, by building both public and private pension instruments that informal workers can trust, and by monitoring the composition of retail credit as closely as its volume.

Otherwise, India risks spending the next two decades consuming a dividend it never bothered to save for.

Neha Jain is an assistant professor (economics) at the Delhi Technological University.

Srinivas Goli is an associate professor at the International Institute for Population Sciences, Mumbai, and author of A Treatise on Families in Contemporary India. Views are personal.

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