What is dependency ratio? Discuss the impacts of falling or rising dependency ratio upon saving and investment rates.
Dependency ratio measures the percentage of dependent people who are not in working age on number of working people. For example, in the recent decades, working age population” is increasing in India that is less dependency ratio. This ratio helps to shows the ratio of economically inactive compared to economically active
Rising of dependency ratio decreases saving and investment because of the following reason:
- Decreases the savings and investments because more number of people depend on less income.
- With increase of dependency ratio, Government also increases spending money on social schemes like providing pensions etc.
- Due to pressure on government finances, government may increases tax rates which led to reduction in disposable income.
Falling dependence ratio will increases saving and investment because of the following reasons:
- Dependency ratio decreases means availability of more number of work force in the country which automatically increases production which in turn increases savings and investment.
- Working age group is always interested in savings rather than consumption. Therefore, decrease in dependency ratio is usually associated with a rise in the average savings rate. For example, due to increase in working age population, India’s savings rate as a percentage of GDP has been rising since 2003. It now stands at 33% which is highest when compared with most of the Asian Nations.