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India's demographic sweet spot is real.
India and China both had their working age fraction bottom out at the same level in the 1970s, but China's has already peaked in 2015 and India gets 30 years more.
In my last post, I had laid out a framework for how to think about stock returns in India over the mid term. And the longer that “term” is, the more important economic growth rates become. Over a shorter period of time, more cyclical factors such as profit margins, currency movements and equity multiples matter much more.
To better understand India’s long term per capita growth rates (say over 10-15 years) we will have to better understand three factors:
(1) Demographic and human capital trends
(2) Global technology and macro trends
(3) Indian policy and political trends
Let us examine (1) in this post.
In my last post, I had also ended with a simple graph about India’s real per capita GDP growth rates over the years (with a 10 year moving average), reproduced below:
This shows that a trailing 10 year average per capita growth rates for 2020 would be just short of 6%, for 2010 it was around 5%, for 2000 it was just short of 4%, for 1990 it was around 3%, and so on. It seems that India’s per capita real growth rates have been increasing at about 10 bps per year since the 1970s (and the rolling average shows a clear trend starting around 1980). Just going by that, India’s growth over the next 10 years in terms of real GDP per capita is likely to be 7% or so. Add a population growth rate of slightly less than 1%, and you have a total growth rate of 8%. Of course, linear extrapolation by itself is not necessarily correct. Which is why we have to go much deeper, as we do in this post with demographics.
The most important graph to understand per capita growth trends from a demographic lens is as below, which is the fraction of India’s population that is in the 25-64 age bracket that roughly corresponds with the peak working age for a vast majority of people.
It is indeed very interesting that just around the time India’s per capita growth rate started rising in the late 1970s on a sustainable basis, India’s working age population fraction bottomed out at about 37% and is now around 49%. India should continue growing faster in terms of per capita growth rates ceteris paribus till the 2040s when the ratio peaks around 54%.
Interestingly, China also saw this ratio bottom out in the 1970s and also around 37%, but it increased much faster than India (reached almost 60% around 2015) but is already declining as shown below. That may help partially explain China’s faster growth in the last 40 years as well as its recent slowdown.
While the ratios are key, especially for per capita growth numbers, let us roughly have a look at what that would mean for the aggregates. India will have 200 million more people than China in the 25-64 group (~900M vs ~700M) by the 2040s even as the ‘below 25 + above 64’ populations would be roughly the same for both at ~700M. That is a lot less weight to carry, in economic terms if not sentimental terms, over the next generation for India.
Back to the working age ratios - why are they so important? Because they seem to determine savings and investments (though in the short term they are pro-cyclical) as seen below in the case of India’s Gross Domestic Savings as % of GDP, and hence ultimately growth.
Also, notice that I said “working age ratios” and not “working ratios”. The difference between the two is that those who are in the relevant age group but do not “work”.
But often in a country like India that would include home makers that do work very hard, just that it is not counted. For example, if X tutors Y’s children and Y takes care of X’s old parents that is counted as “working” but not if the two activities happen within their respective homes itself.
What is relevant perhaps a bit more then is the dependency ratios and the human capital formation, at least compared to the formally reported working populations. Not that the latter is not important by itself as more women in the “labour force” (ratio follows a U-shaped curve [p.20-21/28] with India’s adjusted female labor force participation having bottomed out in recent years) besides the socio-economic benefits, is likely to be strongly correlated with faster growth. But it is difficult to tease out that correlation vs causation (whereas with overall population and age numbers it is less so.)
Going back to human capital, India’s literacy rate has increased consistently - especially for the young (and for females), and while serious quality issues certainly remain basic education access is not that significant an issue as it once was.
Pre-teens have near universal literacy and no difference for boys and girls, and even for the 15-24 demographic we are fast approaching universal literacy. Higher education enrollment rations are also improving but not as well as China’s (as the graph below shows.)
Yet while quality is an issue here as well, negative or no growth in inflation-adjusted starting salaries for Indian IT MNCs over the last one or two decades shows that human capital is surprisingly not a bottleneck for now with respect to entry level white collar service jobs (though it is a bottleneck for more complex roles such as product development and senior management, although one must add large entry-level employers have also started their own training programs due to severe lacuna in our various curricula.)
On the public health side, the infant mortality rate has also been falling (so has maternal mortality rates etc.) Also, sanitation coverage has dramatically improved in recent years (as shown in the graph below) along with electricity access (at the village, not house level as of now) and rural roads to expressways, and the next target for mid-decade is piped drinking water across all homes. But let us not delve too deep into that as that would come under the Indian public policy post of me trying to figure out the long term sustainable growth rates for India.
The aim here is just to show not just the quantitative aspects of the Indian demographic sweet spot, but that the qualitative aspect in terms of basic social infrastructure, while still far from ideal, is not as bad as it is sometimes depicted. Remember all those ASER surveys that showed falling schooling scores till recently - many forget those are only for rural districts! Is that any consolation? Hardly. But facts should be treated as facts, neither embellished nor suppressed.
In short, from a demographic standpoint India is likely to see more of the same for the next 20-30 years as it has over the last 30-40 years. Remember, the increasing 10 year rolling average of GDP per capita graph shows almost no clear break or jump because of the 1991 reforms but the dependency ratio having peaked in the 1970s is a clear correlation. Human beings, including “experts” have a tendency to obsess over things they deem important - liberalisation, which they can direct with their jargon - as opposed to blessings or faults that if not “in our stars” then have been at least baked into the cake decades ago.
Of course, economists still worry about whether India can be the “next China” (or even a fraction thereof) in terms of manufacturing exports and so on, but who really predicted in the 1980s that over the next generation it would be computers and a thing called “the Internet” that would directly or indirectly create large parts of the Indian middle class.
Remember that humility is required not just for optimism, but pessimism as well. Apparently that has not yet been understood by many perennial cynics.
In the coming sub-parts we will try to realistically and empirically look at global technology/macro and Indian policy/political trends to determine Indian growth potential before we move on to factors more directly relevant for stock market returns over the medium term.