Sunday, June 26, 2011

The Coming Indian Summer?

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

Copenhagen, Thursday 16 June 2011.

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 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 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.
• 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? “

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 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 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).

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.

India’s Fountain Of Youth

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.

But No One Is Forever Young

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 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 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.

Economic Impacts Of Demography

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. Beyond this, the question is an empirical one of measuring and testing to determine more precise boundaries and frontiers. 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, 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 But So Are It’s Imports – It Runs A Trade Deficit (well, someone has to!). 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 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 Othe r 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 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 While private sector indebtedness is low in India, government debt is high, and very high by emerging economy standards. This year’s budget- deficit target (the total government deficit is around 10% 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 QE2 – aka A Surge In Capital Inflows 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. 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 • 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

You can download the full presentation here.