Demographics and Capital

India is among the youngest population in the world with a median age below 30. While the net addition to the working population is the highest in the last decade (2000-2010) but the overall working age population will continue to rise until the early 2030s. Simultaneously, it is also adding significantly to its old (60+) population which will be more than its addition to the working age population.

The cycle of capital creation / consumption is the simply the following:

•  0- 20/25 years: Parents spend the child’s food, clothing, education, travel etc. This category is a net consumer of capital;
• 25-35/40 years: This is a category which has begun to work and is borrowing for its first car loan, to purchase a house and is a net consumer of capital again from the system. In India till the early 1990s this cycle never played out as young adults were less mobile living in joint family systems plus retails loan availability was extremely restricted. This is also the segment which is the primary consumption driver;
• 35/40 to 60 years: This is the saving class which is in essence providing capital to all other demographic categories;
• 60+ years: This category is essentially in retirement and drawing upon its savings over the last 20-30 years.

Simply put Indian economy will continue to import savings, despite its high savings rate, for a very long time as both the youth and the old continue to expand relative to its mature working population. Most of the German population is currently in their 40s and one can witness the savings bulge. Urbanization, infrastructure and consumption imports will all need foreign capital.

The Indian currency was Rs.8.4 in 1975, Rs. 17.5 in 1990, Rs.44.9 in 2000, Rs. 45.73 in 2010 and Rs.60 now per USD. Given this continues propensity to import savings and relative high inflation to the developed world, rupee will be in secular decline, except for unusual duration experienced in 2000-2010 when the external environment was extremely benign followed by easy money by the Fed.

As we look into the next 2 decades the Europeans, Russians, Japanese and Canadians will be experiencing a massive surge in the number of retirees. The Americans will continue to have reasonably good demographics as the baby boomers are replaced by the next generation in 8-10 years and by 2020 even the Chinese median age will cross the American median age. In this environment the global availability of capital will decline over the next few decades. This is the period when the need in India for global capital will continue to rise. Having said this, given the pension imbalance in the developed world the last 5 years of low interest policies have created, the need for higher currency adjusted return on capital will continue but this will be counter balanced to an extent by increasing Fed rates. The basic reason for economic slowdown in India over the last 3 years is its inability to keep the investment cycle going which is in turn dependent to a large extent on availability of foreign capital.

In this backdrop, political stability and policies that create a conducive investment environment is critical if we seek to achieve our national aspirations and benefiting from positive demographics. We are probably the country receiving the highest remittances (again savings) globally which means we export a lot of talent. Do we always want to keep exporting talent or use our people to enhance India’s productive capacities?