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There have been many debates in the past if the population of India is an asset or a liability. Simply put ʹ
it͛s both. Purely from an economic stand point of view, many have argued, the skilled, productive work
force is clearly an asset, where it could be utilized and unskilled population is clearly a liability.As we all
know, the Solow growth model has more to it ʹ how relationship between capital stock (saving,
investments), population growth, and technological progress affect the level of an economy͛s growth
and output over a period of time.

Three major elements of economic growth are ʹ Labor, Capital and Technology. If we consider Labor
alone, the relationship between Labor and Output looks somewhat like:

Chart1: Relationship between Output and Units of Labor Inputs

Let us note that output always increases when units of labor increases, however, it increases less after a
certain point of time.

What would be the effects of capital and technology on the growth? A higher saving rate in the
beginning increases the capital stock and hence a higher growth rate is normally seen in rising
economies. Exactly what happened in Germany and Japan after the World War II. Economies like India
are at a stage now where we attract capital stock (higher saving rate, investments) and hence feed the
growth. We are definitely at a stage where investment exceeds depreciation. However, as we also know
from Japan, a high saving rate alone cannot sustain a growing economy ʹ which begs us to discuss about
the Golden Rule Level of Capital, where in we achieve the steady state of economy.

Policy makers normally have a tough job to decide the Golden Rule Level of Capital. Without getting into
many technicalities, the macroeconomic indicators depict that India is doing a fair job of maintaining a
Golden Rule Level of Capital ʹ where we see one of the highest consumptions in the last 6 decades.
Low population like in the US and Europe is a great asset too ʹ combining with right amount of capital
stock and great amount of technology. Technological innovations make it possible reduce the cost of
goods, transfer value across the globe and make the labor force more productive.

Coming back to where we started our discussion ʹ India has succeeded, at least for now in utilizing the
population as an asset. The growth numbers speak for itself. We could possibly learn both from
Germany and Japan ʹ how to sustain a steady state economy and how we could influence a more
productive labor over a period of time. If we don͛t manage this well, population would turn into a
liability in the long run.

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