The Coming Indian Summer?The Coming Indian Summer?China is grabbing the headlines, but should we perhaps be looking at India instead ?

Edward Hugh - Copenhagen: June 2011

• Unlike China and many Asian growth economies India is largely driven by

domestic consumption, not by exports and capital investment. Given its large

In this presentation I will argue that

• In terms of growth rates and global GDP shares India has been overshadowed

by the rise of China. Yet, in the longer run, at least in terms of the demography,

the future belongs to India. During the coming decade India will steadily convert

itself into one of the key engines of global growth.

domestic consumption, not by exports and capital investment. Given its large

rural population India’s consumption basket has traditionally had a heavy bias

towards food and other essentials, but the share has been declining over time.

Since 2000 the share of food in total consumption has steadily declined while

services, transport and communications have all increased.

• In demographic terms, India is undoubtedly the coming global

powerhouse. The overall number of both young and prime age workers is

growing rapidly and will exceed those in China over the 2025/35 horizon. And

India’s demographic dividend will be operative over a very long period, even as

China’s working population ages and declines.

In Growth Economics, Size Doesn’t Matter?

For 25 years our institutions have mis-analyzed such world development problems as

starving children, illiteracy, pollution, supplies of natural resources and slow growth. The

World Bank, the State Department's Aid to International Development (AID), The United

Nations Fund for Population Activities (UNFPA) and the environmental organizations have

asserted that the cause is population growth - the population "explosion" or "bomb" or

"plague."

Julian L. Simon, 1985: “WHY DO WE STILL BELIEVE that population growth slows

economic development? “economic development? “

The Great False Trail

In 1967 Nobel laureate economist Simon Kuznets , at the behest of the United

Nations, carried out a study of population growth and economic growth using a

data set covering a wide variety of countries since World War II.

The basic methodology, having assembled the data on rates of population

growth and rates of economic growth, was to examine whether - looking at all

the data in the sample together - those countries with high population growth

rates have economic growth rates lower than average, and countries with low rates have economic growth rates lower than average, and countries with low

population growth rates have economic growth rates higher than average.

The study was unable to find any statistically significant evidence that faster

population growth is associated with slower economic growth. Taken on average,

countries whose populations grew faster did not grow slower economically.

Hence was born the idea that population dynamics were not central to economic

growth processes.

Finally, The Truth Revealed, It Is Population Structure That Matters

Turkey 1995 Japan 1990 Japan 2030

Adolescent Middle Aged Elderly

The demographic dividend refers to the rise in the economic growth rate which

occurs due to a rising share of working age people in a given population. The

phenomenon is usually observed towards the end of the first phase of the

demographic transition when the fertility rate has fallen far enough and long

enough for the youth dependency rate to decline. During this demographic

window of opportunity, output per capita rises since simple arithmetic tells us the

population is more productive (as a whole).

So It’s Structure Not Size, You Silly Billy!

Brazil Russia

India China

Right For The Wrong Reasons? The Idea Of BRICS Is JustToo Simplistic

Definitely The Short Term Is All About China

On the global stage, India is still overshadowed by the impressive rise of

China since 1997. According to figures from the IMF the share of global

output for China, India and Brazil respectively are forecast to be 12.2, 2.9 and

3.4 percent in 2015.

But China Is Getting Old Too Fast

By 2040, assuming current demographic trends continue, there will be 397

million Chinese over 65 - more than the total current population of France,

Germany, Italy, Japan, and the United Kingdom combined.

Median Population Age –

A Simple Rule-of-Thumb Measure Of Ageing

Key Point: While population ageing is universal the short term impact will be

much more localised. We may be all headed to the same destination but the

trains in which we are travelling are moving a different speeds.The pace of

ageing varies greatly across countries and regions.

China is an ageing outlier in Emerging Market Terms.

China Will Be One Of The Most Rapidly Ageing

Countries in the 2020s

The ageing problem goes well beyond the confines of the EU or the G7. In

particular China stands out among developing economies, since the degree

of ageing we should anticipate, when viewed in terms of absolute numbers

and velocity, is simply staggering.

It is during the 2020’s that

China’s age wave will arrive in China’s age wave will arrive in

full force. The elder share of

China’s population seems set to

rise steadily from 11 percent in

2004 to 15 percent in 2015, and

then leap to 24 percent in 2030

and 28 percent in 2040. Over

the same period, China’s

median age will climb from 32

to 44.

So In China Both Working Age And Total Population

Will Soon Be Declining and Ageing

China’s ageing is characterised by the unusual speed with which it is occurring. In

Europe, the population over 65 passed the 10 percent threshold back in the 1930s

and is not expected to reach the 30 percent mark until the 2030s, exactly one

century later. China, on the other hand, will traverse this same distance in a single

generation. The magnitude of China’s coming age wave, is simply staggering.

India Has A Much Stronger Demographic Profile Than China

In India the whole demographic transition is much more balanced. While the proportion

of population in the under 14 age group declined from 41 per cent in 1961 to 35.3 per

cent in 2001 (that is, by 5.7 percentage points), the proportion of population in the age

group 15-59 increased from 53.3 per cent to 56.9 per cent (that is, by 3.6 percentage

points). The proportion of those over 60 increased from 5.6 per cent to 7.4 per cent

(that is, by 1.8 percentage points).

India’s Fountain Of Youth

The increase in the 15-34 age-group population has been quite dramatic:

from 174.26 million (31.79 per cent) in 1970 to 354.15 million (34.43 per

cent) in 2000. The youth segment of the population is projected to peak

at 484.86 million in 2030.

But No One Is

Forever Young

According to UN Population Division projections the youth segment (15-34 years) of

the Indian population starts to decline in absolute terms after 2030, it started to fall as

a proportion to the total population in 2010. But proportionately the rate of decline is

marginal (from 35.4 per cent in 2010 to 34.5 per cent in 2020, to 32.4 per cent in

2030). However after 2030 the rate of decline will accelerate (to 29.7 per cent in 2040,

to 26.6 per cent in 2050). But even given this there will still be a massive 441.1 million

people in the group in 2050.

This demographic evolution will have important implications for the labour

market. India's labour force, which was estimated at 472 million in 2006, is

expected to be around 526 million in 2011 and grow to 653 million by 2031.

The labour force growth rate will be higher than the rate of increase in total

population until 2021. According to Indian government estimates, 300 million

young people will enter the labour force between now and 2025, by which time

approximately 25 per cent of the global labour force will be Indian.

In The Moden World Ageing Is A constant

Phenomenon

Population ageing is a global phenomenon, driven by movements

in fertility rates and life expectancy. Ageing essentially comes in

two waves, which could loosely be called the first and second

demographic transitions.

During the first transition fertility falls from very high levels to

replacement levels, the proportion of those in the working age replacement levels, the proportion of those in the working age

groups rises constantly, while life expectancy increases such that

the population in the 65 to 80 age group steadily increases.

During the second transition, fertility in many countries falls well

below replacement level and stays there for several decades. Life

expectancy rises such that the over 80 population becomes a

significant part of the total population and the working age

population goes into permanent decline in both absolute terms

and as a proportion of the total.

As far as we are able to understand the mechanisms involved at this

point, population dynamics have major economic impacts and these

can be categorised under four main headings:

i) demographic processes affect the size of the working age population, and

through this channel the level of trend economic growth – for better or worse

- in one country after another

Economic Impacts Of Demography

ii) through “life cycle effects” demographic processes affect patterns of

national saving and borrowing, and with these the directions and magnitudes

of global capital flows

iii) through the saving and borrowing path demographic processes can

influence values of key assets like housing and equities

iv) through changes in the elderly dependency ratio, demography influences

pressure on the sustainability levels of sovereign debt, producing significant

changes in ranking as between developed and emerging economies.

Youth – And Economic Growth – Do Not Spring Eternal!

Still, Is India Now Headed For Double Digit Growth?

The Importance Of The Prime Age Groups

Estimates of the exact age

extension of the different groups

vary, but 25-40 would be a good

rule of thumb measure of the

borrowing range, 40 to 55 for the

peak savers, and 35 to 50 for the

prime age workers.

The key groups are prime savers,

prime borrowers, and prime

productive workers. Where these

actual age brackets lie, and the

extent to which they may overlap,

is still a subject of some

controversy,

Beyond this, the question is an

empirical one of measuring and

testing to determine more precise

boundaries and frontiers.

One of the key points to grasp, is

that the proportion the

population which is to be found

in one of the ‘prime’ age groups

at a given moment in time, is

absolutely critical, and much

more important for

understanding the processes at

work than the mere size of the

working age population.

In an ongoing process of trial and error calibration, Claus Vistesen

and I have recently been working with the age groups 35-54 and 25-

39 as proxies for the prime age (peak growth) and prime borrowing

age groups, respectively. On these measures, India comes out among

the economies with largest combined increase between now and

2030.

India’s Win-Win Profile

Yet One More Time India And China’s Paths Cross

Credit driven expansions in China will soon get harder and harder to come

by, while in India the key group doesn’t peak until the mid 2030’s (should we

be worried about a housing bubble??) and even then only tapers off slowly.

As A Result Consumption In India Is Strong

And Fixed Capital Investment Doesn’t Reach Chinese Proportions

India’s Exports Are Growing Fast

India's merchandise exports rose sharply in

May, helped by a surge in shipments of

engineering and electronic products, giving

the government a good start towards

achieving its export aim for this fiscal year.

India's exports in May jumped 56.9% year-

on-year to $25.9 billion and totalled $49.8

billion for the first two months of the fiscal

year that started on April 1, up 45.3%,

Commerce Secretary Rahul Khullar said at a

But So Are It’s Imports – It Runs A

Trade Deficit (well, someone has

to!).

Commerce Secretary Rahul Khullar said at a

press conference Friday.

However, May imports surged 54.1%

to $40.9 billion, touching the highest

level in four years and raising worries

of a widening trade deficit. The trade

deficit was at $15 billion in May - the

widest since August 2008

As we have seen, the demographic dividend refers to the period in the

demographic transition in which the working age share of the

population increases. In India’s case, this period is going to last all the

way up to 2040. This is shown then in the fact that the peak growth

age group (35-54) will continue growing all the way through to 2040.

Generally, the conclusion on India’s demographics based on current projections

is that the demographic dividend is set to be stretched over a long period.

Yet We Should Always Remember - Nothing Is Automatic

Despite the widespread perception of India as a country of thriving

entrepreneurs, the cost of starting a business is in fact vastly greater

than it is in many other key global economies, even those on a

comparable income level.

Endemic Inflation

India’s current inflation problem is largely a structural one, in large

part due to supply side rigidities and low capacity slack in key sectors.

This evidently increases the risks that headline inflation will feed into

core prices, since unlike in many developed economies, India’s

inflation is, in part, a demand driven phenomenon.

Of the main components of the wholesale price index, only food

manufacturers have seen an unprecedented in inflation since 2008 while

increases in industrial and manufacturing input prices have been large but

far more modest.

On The Other Hand The Central Bank Does Respond

Governor Duvvuri Subbarao said on May 3 inflation

will stay at an “elevated level” until September as he

raised the central bank’s repurchase rate by half a

percentage point to 7.25 percent. Monetary tightening

in India will slow growth this year and help ease

inflation to 6 percent “with an upward bias” by March

31, 2012, Subbarao said. India’s economy may expand

“around 8 percent” in the year through March from “around 8 percent” in the year through March from

8.6 percent in the previous 12 months, he estimated.

And is willing to sacrifice growth

for inflation discipline. Since part

of the issue is strong internal

demand growth Subbarao has

some chance of success.

At The Same Time Governance In India Is A Concern

This year’s budget-

deficit target (the

total government

deficit is around 10%

of GDP) is “difficult to

While private sector indebtedness is low in India,

government debt is high, and very high by emerging

economy standards.

of GDP) is “difficult to

achieve,” Chakravarthy

Rangarajan, chairman

of the Prime Minister’s

Economic Advisory

Council, told reporters

in Mumbai on June 2.

As A Result India Has Trouble In The Current Account Department

India reported a current account deficit equivalent to 9.7 Billion USD in the

fourth quarter of 2010. India is leading exporter of gems and jewelry, textiles,

engineering goods, chemicals, leather manufactures and services. India is poor

in oil resources and is currently heavily dependent on coal and foreign oil

imports for its energy needs. Other imported products are: machinery, gems,

fertilizers and chemicals. Main trading partners are European Union.

Of Course, Part Of The Problem Is Caused By The Usual Culprit

Net private capital inflows to

emerging market economies

will keep growing this year

and next to reach $1.1 trillion

in 2012, attracted by

economic growth above 6

percent in those countries, a

banking industry group said.

QE2 – aka A Surge In Capital Inflows

banking industry group said.

The Washington-based

Institute of International

Finance today also raised its

estimates for 2011 inflows by

$81 billion to $1 trillion to

reflect higher forecasts for

Brazil and China.

“The strength of capital flows is still

presenting policy challenges in a number of

emerging economies, especially those already

facing pressures from rising inflation, strong

credit and asset price growth and rising

exchange rates,” the IIF wrote in its research

note.

We Should Never Forget India Is Still An Emerging Economy

• Despite many difficulties India has remained a democracy since independence

• Human rights are by and large respected

• Institutional quality is improving

• The central bank is becoming more and more independent• The central bank is becoming more and more independent

• Corruption is still a BIG problem, but this has solutions

• India is a country of individuals, of creativity and strong entrepreneurial spririt

• Lastly, a professional bias: India produces economists of extraordinary quality

And Finally………

Demography We Know Isn’t Everything

But It Sure As Hell Is A Large and Significant Part Of The Picture

“If you look at the world, it would inevitably appear India’s growth is preordained. The

world needs working hands. The world needs back offices. India seems to be a natural

fit…We are producing a workforce which is not only for India, but a global workforce.”

Sunil Bharti Mittal, founder and chairman of New Delhi-based Bharti Enterprises

Thank You For Your Attention