Indias Demographic Trends: Implications for Growth and Capital Markets

1
Indias Demographic Trends Implications for
Growth and Capital Markets

• Mukul G. Asher
• Professor of Public Policy,
• LKY School of Public Policy
• National University of Singapore
• Email sppasher_at_nus.edu.sg
• And
• Amarendu Nandy
• Research Scholar
• Department of Economics
• National University of Singapore
• E-mail g0202344_at_nus.edu.sg

To be presented at Mirae Asset Forum, Seoul, May
9, 2006.
2
Organization

• Introduction
• Brief Overview of Indias Capital Markets
• Demographic Trends
• Growth and Capital Market Implications
• Concluding Remarks

3
Map of India
Source http//www.mapsofindia.com/maps/india/indi
a-political-map.htm
4
Introduction/1

• This presentation examines Indias demographic
  trends and their implications for economic growth
  and capital markets.
• India (2004-05)
• Real GDP growth 7.5
• Manufacturing growth 8.1
• GDS/GDP ratio 29.1
• GDCF/GDP ratio 30.1

5
Introduction/2

• India Nominal GDP (estimated) (USD Billion)/Per
  capita GDP (USD)
• 2005720.3/ 660.9
• 2006 792.3/ 717
• 2007 891.4/ 796
• (Source UBS, Asian Economic Monitor, April 2006,
  p.21.)
• In PPP terms, India currently has the third
  largest GDP in the world, after US and China.

6
Introduction/3

• Indias foreign exchange reserves, as of March
  31, 2006, were US151.0 billion.
• India is a net lender to the rest of the world.
• Indias merchandise trade, 2004 (US Billion)
  (Share in world, )
• Exports 75.6 (0.83)/ (Koreas share 2.77)
• Exports crossed 100 billion in FY2006.
• Imports 97.3 (1.03)/ (Koreas share 2.36)
• Commercial Service Trade, 2004 (US Billion)
  (Share in World, )
• Exports 39.6 (1.86)/ (Koreas share 1.88)
• Indias services, particularly IT, and travel,
  are likely to register strong growth, auguring
  well for increased world share.
• Imports - 40.9 (1.96) /(Koreas share 2.37)

7
Introduction/4

• Indias external sector involvement is at an
  acceleration stage.
• India aims to reach total trade of US500 billion
  (US253.4 billion in 2004) well before the end of
  the decade.
• Full rupee convertibility being considered. But
  it will be a gradual process.
• But large fiscal deficit and high internal debt
  to GDP ratio (80 in 2005) remain concerns.
• Plans to develop Mumbai as a regional financial
  centre (2006-07 Budget speech).
• Indian Depository Receipts (IDRs) are already
  enabling foreign companies to raise funds in
  Indias capital markets. The actual transactions
  however have been limited so far.

8
MARKET PERFORMANCE EQUITY
10330
Sensex as on April 10, 2006 11,662.55
Source Bajpai (2006)
9
CAPITAL MARKET STRUCTURE (Dec 31, 2005)

• 22 Stock Exchanges, 15 Subsidiaries
• Over 10000 Electronic Terminals at over 400
• locations all over India.
• 9253 Stock Brokers and 19407 Sub brokers
• 9644 Listed Companies
• 2 Depositories and 494 Depository Participants
• 127 Merchant Bankers, 57 Underwriters
• 34 Debenture Trustees, 120 Portfolio Managers
• 88 Registrars Transfer Agents, 60 Bankers to
  Issue
• 4 Credit Rating Agencies

Source Bajpai (2006)
10
CAPITAL MARKET STRUCTURE (December 31, 2005)

• Venture Capital Funds
• 34 Foreign
• 69 Domestic
• 39 Mutual Funds And 479 Schemes
• Asset Base US 44.21 bln.
• 882 Foreign institutional investors
• ( As of March 2006)
• Cumulative FII investment - US 43.6 bln

Source Bajpai (2006)
11
Indian Capital Markets/1

• Wide investment choices
• Total No. of listed securities
• 80 of NSE stocks are traded for gt100 days/yr
• Indian Capital market turnover (2004-05)
• NSE US259 billion
• BSE US118 billion
• NSE 3rd in total transaction volume in
  billions in 2002, 2003 and 2004 but 1st in 2005
• NASDAQ (955), NYSE (933), NSE (424)- Figures for
  2004
• Retail Investors
• 10 million in 1991 to 20 million by 1999.
• 4 of all households own shares (15 of urban and
  1 of rural)

Source adapted from Nageswaran (2006)
12
Indian Capital Markets/2

• Returns from Indian equities at 74 were the
  highest in emerging markets for the
• FY 04 to FY06 period.
• Corresponding figures Mexico 52, Brazil 43
  and Korea 41

13
Original Source Annual Econ. Survey 2005-06,
MoF, GoI Secondary Source Nageswaran (2006)
14
Original Source Annual Econ. Survey 2005-06,
MoF, GoI Secondary Source Nageswaran (2006)
15
STOCK INDEX FUTURES

Source Bajpai (2006)
16
SINGLE STOCK FUTURES

Source Bajpai (2006)
17
DEBT
Source Bajpai (2006)
18
LIFE INSURANCE
Source Bajpai (2006)
19
BANKING
Source Bajpai (2006)
20
T2 SETTLEMENT SYSTEM
Source Bajpai (2006)
21
Indian Capital Markets/3

• Commodity Exchanges
• India ranks among the top five producers and
  consumers of major agricultural commodities in
  the world.
• There are 25 commodity derivative exchanges in
  India. Four are national and others primarily
  have local impact.

22
Indian Capital Markets/4

• The Four National Commodity exchanges are
  National Multi-Commodity Exchange of India
• ( NMCE) , National Board of Trade (NBOT),
  National Commodity and Derivative Exchange (
  NCDEX) and Multi-Commodity Exchange (MCX).
• NCME- www. ncme.com
• NBOT- www.nbotind.org
• NCDEX- www. ncdex.com
• MCX- www.mcxindia.com

23
Indian Capital Markets/5

• There are Physical Markets at both state and
  national levels and there are only spot contracts
  and Futures Markets.
• Trading in commodity options and index based
  trading of commodities is currently not
  permitted.

24
Actors In the Physical Commodity Markets
Illustration by T.R.ROHIT, NUS
25
Indian Capital Markets/6

• The total turnover of the 25 exchanges was
• US 133.3 Billion in 2004-2005 and US 44.3
  Billion in 2003-2004.
• This value is estimated to be US 402 Billion in
  2005-2006.
• Thus, Commodity Exchanges are witnessing rapid
  growth.
• Main contributors are Gold, Rice , Oilseeds and
  Wheat.

26
Indian Capital Markets/7

• But greater professionalism , depth and
  sophistication is needed.
• Consolidation is likely in the number if
  exchanges , as has happened with the stock
  markets.
• The FMC as a regulator also needs to acquire
  greater skills and professionalism to be
  comparable to other regulators in financial and
  capital markets such as SEBI.

27
Demographic Trends/1

• Population ageing is usually a much more complex
  process than usually realized.
• It is essential to reflect large uncertainty in
  the demographic projections in policy analysis
  and options.

28
Table 1 Demographic Indicators in Selected
Countries
Source Population Division of the Department of
Economic and Social Affairs of the United Nations
Secretariat, World Population Prospects The 2004
Revision and World Urbanization Prospects The
2003 Revision, http//esa.un.org/unpp, 11
February 2006 350 PM.
29
Demographic Trends/2

• Table 1 provides selected demographic indicators
  for the ten selected countries, and the world, on
  the basis of which the following observations may
  be made
• World population is projected to rise by 2.6
  billion in the next 45 years, from 6.5 billion in
  2005 to 9.1 billion in 2050. Almost all the
  growth will take place in the less developed
  countries.
• India and Chinas collective share in world
  population will decrease from 37.4 percent in
  2005 to 32.9 percent in 2050, though in terms of
  absolute numbers these are going to be
  substantial.
• According to UN estimates, during 2005-2050,
  eight countries are expected to account for half
  of the worlds projected population increase,
  namely - India, Pakistan, Nigeria, Democratic
  Republic of the Congo, Bangladesh, Uganda, United
  States of America, Ethiopia, and China, listed
  according to the size of their contribution to
  population growth.

30
Demographic Trends/3

• Population growth rate will decline by
  mid-century in all the countries. The average
  annual rate of change in population for a 5-year
  period from 2045-2050 hits negative domain in
  China, and most of the OECD economies, excluding
  United States and the UK.
• In 2000-2005, fertility at the world level stood
  at 2.65 children per woman, about half the level
  it had in 1950-1955 (5 children per women)
• In the medium variant, global fertility is
  projected to decline further to 2.05 children per
  woman by 2045-50. The total fertility rate is
  below the replacement rate in practically all
  industrial countries and in many parts of the
  developing countries, such as China.
• Global life expectancy at birth, which is
  estimated to have risen from 46 years in
  1950-1955 to 65 years in 2000-2005, is expected
  to keep on rising to reach 75 years in 2045-2050.
  In the more developed regions, the projected
  increase is from 75 years currently to 82 years
  by mid-century.
• Among the least developed countries, where life
  expectancy today is just under 50 years, it is
  expected to be 66 years in 2045-2050 (United
  Nations, 2005).

31
Demographic Trends/4

• The primary consequence of fertility decline,
  combined with increases in life expectancy, is
  population ageing, whereby the share of older
  persons in a population increases relative to
  that of younger persons.
• Globally, the number of persons aged 60 plus
  years is expected almost to triple, increasing
  from 672 million in 2005 to nearly 1.9 billion by
  2050 (United Nations, 2005). The share of
  elderly living in developing countries will
  increase from 60 per cent in 2005 to 80 per cent
  by 2050.
• In developed countries, 20 per cent of current
  population is aged 60 years or over, and by 2050
  that proportion is projected to be 32 per cent.
  The elderly population in developed countries has
  already surpassed the number of children (persons
  aged 0-14), and by 2050 there will be two elderly
  persons for every child.
• In the developing world, the proportion of the
  population aged 60 or over is expected to rise
  from 8 per cent in 2005 to close to 20 per cent
  by 2050 (United Nations, 2005).

32
Demographic Trends/5

• Increases in the median age, the age at which 50
  per cent of the population is older and 50 per
  cent younger than that age, are also indicative
  of population ageing.
• The world median age in 2005 was 28.1 years, and
  is estimated to be 37.8 years in 2050. India is
  favorably placed with a relatively young median
  population at 38.7 years in 2050, close to the
  world average. In comparison, Chinas median age
  will be close to 45 years.
• The median age in Japan and Korea are already in
  late 30s to mid 40s. Though Koreas median age of
  population (35.1) is lower than that of Japan
  (42.9) currently, it is going to surpass Japan
  quite rapidly. In 2050, Koreas median age will
  be 53.9 years as compared to 52.3 years for
  Japan.
• The pace of ageing in Asia Pacific will give
  relatively shorter time to adjust than was the
  case for the western countries.

33
Figure 1
Source Calculated from UN database,
http//esa.un.org/unpp, Last Accessed 11
February 2006.
34
Figure 2
Source Calculated from UN database,
http//esa.un.org/unpp, Last Accessed 11
February 2006.
35
Source United Nations (2002)
36
Demographic Trends/6

• Figures 1 and 2 provide the share of working-age
  population (15-59 years) to total population and
  the share of the 15-24 age group in total
  population respectively.
• Figure 3 provides dynamics of working-age
  population in selected Asia-Pacific and OECD
  countries. On the basis of these figures, the
  following observations may be made
• In all sample countries (except India and
  Philippines), the share of working-age population
  in total population will decline significantly
  between 2005 and 2050. In 2005, in only India and
  the Philippines, the share of working-age
  population was 60 per cent or below but by 2050,
  only these two countries will have the share
  above 60 per cent. In 2050, Japan, Korea, Spain,
  Italy, and Germany will have less than half of
  the population in the working-age category, while
  in other sample countries, the share will range
  between 50 and 60 per cent.

37
Demographic Trends/7

• The largest declines will occur in Japan, Korea,
  and China. The case of Japan illustrates how
  rapidly the demographic trends translate into
  working-age population share. Thus, in 1990
  Japans working-age population share at 70 per
  cent was substantially higher than that of US and
  UK but by 2010, Japans share is expected to be
  much lower and the gap is likely to widen
  significantly (Sanyal, 2005).
• There is a strong case for the rapidly ageing
  northeast Asian countries to explore
  opportunities for expanding their economic space
  with countries such as India (as well as
  Philippines) which will exhibit rising
  working-age population share.
• The OECD countries, particularly UK and US are
  already well-disposed to taking advantage of such
  demographic complementarities.
• Japan and South Korea, and to a lesser extent
  Europe, require a mindset change to find
  innovative yet socially and politically
  sustainable ways to benefit from such
  complementarities.

38
Demographic Trends/8

• The share of the youngest working cohort, i.e.
  those between 15-24 years old, is expected to
  decline in all sample countries by 2050. In 2005,
  four countries (China, Vietnam, India, and the
  Philippines) had shares of higher than 15 per
  cent, but by 2050 in none of the sample countries
  will the share exceed this level. In Japan and
  Korea, the share of this cohort will be below 10
  per cent by 2050. Vietnam, India, and the
  Philippines will have the highest share among the
  sample countries.
• The above overview of the demographic trends
  implies that in many countries the number of
  workers may decline while the median age will
  increase. If these countries are to sustain
  growth, substantial restructuring and taking
  advantage of demographic complementarities with
  countries such as India will be essential.

39
Fig 4 Proportion of Elderly in Population
Source An Aging World, 2001, US Census Bureau
40
Demographic Trends/9

• In 2030, 9 of Indias population, or nearly 130
  million people, will be over 65 years of age. The
  population over 60 years of age will approach 200
  million in that period (Figure 4).
• By 2030, 237 million people, or 16 of Chinas
  population will be over 65 years of age
• The vast numbers of elderly adds a human
  dimension and imposes a significant
  responsibility on the part of those who are
  involved in managing retirement funds and systems

41
Fig 5 Life Expectancy at age 60 Selected Asian
Countries
Source Adapted from Chakraborty (2004)
42
Demographic Trends/10

• Figure 5 provides data on life expectancy at age
  60, which is what is relevant for planning
  retirement financing.
• For India life expectancy at age 60 is 16 years
  for men and 17 years for female. Moreover, this
  is expected to increase rapidly.
• Do current retirement financing schemes in India,
  whether mandatory or voluntary, incorporate these
  longevity trends? It is imperative that they do
  so.

43
Source Dyson (2002)
44
Demographic Trends/11

• The demographic trends representing all-India
  averages do not capture the widely varying
  demographics of various states and regions in
  India.
• Table 2 provides selected Total Fertility Rates
  (TFRs) for various states, on the basis of which
  the following observations are made
• India will also need to contend with regional
  differences in fertility rates, and the sex
  ratios.
• There are wide inter-state differences in
  fertility rates. A closer perusal reveals two
  demographically distinct areas within India a
  North that stays remarkably young over the next
  two decades, and the South which faces rapid
  individual and population ageing in the same
  period. In places like Kerala, Tamil Nadu and
  Karnataka, median age will be approaching a level
  comparable to Europe's in the late 1980s, and
  around 9per cent of population will be 65 or
  older (Japan's level in 1980).

45
Demographic Trends/12

• If UP, MP, and Rajasthan make more rapid progress
  in reducing TFR, India could reach replacement
  rate level of 2.15 between 2015 and 2020.
• As China is taking measures to increase its TFR,
  even by 2050, China could still remain country
  with the largest population.

46
Demographic Trends/13

• The high fertility rates in the Northern states
  (constituting about 44 percent of Indias total
  population) tend to increase Indias weighted
  total TFR. For India to stabilize its population
  by 2020, lowering fertility rates in these states
  will need to be given special attention (Dyson,
  2002).
• The southern states like Kerala, Tamil Nadu, and
  Andhra Pradesh have already reached the
  replacement fertility rate, while other states in
  the South are expected to reach by 2010.

47
Demographic Trends/14

• Differing demographic trends within India have
  important implications for domestic outsourcing
  strategies and opportunities. While labor
  mobility within India is high, it is not perfect.
  So, businesses and government organizations in
  states with low fertility rates, as well as those
  with high rates, need to strategize to take
  advantage of domestic demographic
  complementarities.
• This has far reaching implications for the way
  business and government organizations structure
  their workflows, human resource development, and
  IT and other infrastructure.
• The flow of professionals will impact the states
  from which out-migration is occurring, as well as
  the states receiving them. It will be important
  for states to create conducive conditions in
  which professionals can find desired living
  conditions and amenities, as well as room for
  professional and family development.
• Implications of these require considerable
  research than has been the case so far.

48
Demographic Trends/15

• To summarize, India is entering demographic gift
  phase. The challenge will be to actually
  translate this gift into competitive advantage
  as Southeast Asia and China have done.
• This will require increasing employment
  elasticity with respect to GDP through
• Labor market reforms (particularly modernizing
  the existing labor laws to reflect Indias
  economic policies and trajectory)
• Educational and human resource development
  policies
• Improving productivity (particularly in
  agriculture, rural areas, and in government
  organizations)
• Encouraging financial innovations and more
  sophisticated risk management strategies leading
  to development of financial and capital markets.
• Urgently introducing professionalism in all
  governmental organizations tasked with
  implementing labor legislation (EPFO, Employees
  State Insurance Corporation and others). The aim
  should to ensure that the costs these
  organizations impose on the rest of the economy
  are commensurate with the benefits of the schemes
  they administer.

49
Growth and Capital Market Implications/1

• Indias current demographic phase will tend to
  increase savings to GDP ratio from the current 28
  per cent of GDP to between 30 and 35 per cent of
  GDP.

50
Growth and Capital Market Implications/2

• In conjunction with increased FDI (official goal
  is to increase annual flow from US8 billion in
  FY06 to US 12 billion in FY07), the investment
  to GDP ratio will also rise significantly to
  around 32 percent of GDP.
• India is also attracting private equity and
  portfolio flows in a significant manner. Indian
  corporates are also increasingly investing
  abroad, and attempting to become global
  companies.
• India has traditionally intermediated its savings
  into investments in relatively efficient manner,
  though more progress in this direction is
  required.
• This above augurs well for sustained high
  economic growth (official goal is to sustain
  annual real GDP growth of between 8-10 per cent).

51
Growth and Capital Market Implications/3

• Indias capital markets and corporate governance
  practices are also becoming internationally
  competitive and robust.
• In particular, more sophisticated risk management
  strategies, including development of corporate
  debt markets and commodity exchanges is being
  contemplated.
• One of the positive implications of the
  demographic trends would be the increasing size
  and sophistication of the pensions market.

52

Growth and Capital Market Implications/4

• Estimates of the pension market in India are not
  robust.
• But India's demographic advantage , rising life
  expectancy , strong growth and the emerging
  saving opportunities ( Such as the NPS) suggest
  that the market will grow strongly.

53
Table 3

• India NPS Projections

Cashmore, N., Leckie, S.H. and Pai, Y (2005),
Asia Flow of Funds, Hong Kong CLSA.
54
Growth and Capital Market Implications/5

• Much of this pension wealth is expected to be
  intermediated through capital markets.
• Indias financial and capital markets are well
  developed. The mutual fund fee and distribution
  tolls are internationally competitive (See Table
  4).

55
Table 4
Source Cerulli Associates (2005), Asian
Distribution Dynamics 2005, New Cerulli
Quantitative Update.
56
Lowest transaction cost in the world
In basis points
Impact cost at NSE reduced from 0.27 to 0.1
between 2001-03
Source Nageswaran (2006)
57
Growth and Capital Market Implications/6

• Mumbai as a global financial centre (vision
  outlined in the 2006-07 budget speech)
• Favorable factors
• Human Capital
• Growing Stock of domestic savings and foreign
  inflows
• Sound regulatory mechanisms and institutions
• Time zone
• Growing and sophisticated product range
• Challenges
• Mumbais infrastructure
• Full convertibility of the rupee
• Absence of foreign firms listing on NSE and BSE
• Limited access by foreign firms and governments
  to Indias capital markets
• Limited depth of domestic financial institutions
• Relatively small participation of local players

58
Growth and Capital Market Implications/7

• The demographic trends will also have important
  implications for the annuity markets and for
  health insurance.
• The NPS has mandated annuities at age 60.
  However, asset-liability mismatch in provision of
  annuity remains an important challenge. So do the
  methods and instruments for addressing the
  longevity and inflation risks.
• India shares this challenge with many other
  countries.
• Indias morbidity patterns are also changing from
  communicable to lifestyle diseases.
• India is also at the early stages of the
  introduction of medical technology which has the
  potential to raise health costs.
• India is officially encouraging health insurance.
  But adequate database for actuarially sound
  pricing is lacking.
• There are also inadequate third-party payment
  mechanisms and absence of strong regulation.

59
Growth and Capital Market Implications/8

• Longer life expectancy will also require
  developing instruments for financing long-term
  care.
• The above suggests that both life and health
  insurance industries are likely to provide
  significant business opportunities, as well as
  challenges for public policy.
• As is well known, the longer life expectancy has
  opposite implications for life insurance costs
  (which become lower) and annuity and health care
  costs (which become higher).
• In India, penetration rates for all three are
  low.
• With rising incomes and realization that
  individuals will need to shoulder a larger burden
  of financing retirement, the insurance industry
  is expected to receive a boost.

60
Concluding Remarks

• India is in a favorable demographic phase, which
  has the potential to increase its trend rate of
  growth and depth of its financial and capital
  markets.
• These effects however are not likely to be
  automatic. Rising working age population share
  also implies the need to shift the balance
  between preserving existing jobs and creation of
  new jobs towards the latter. This will require
  reforms in several areas, including in fiscal
  systems, and labor markets.
• India has demonstrated that once the public
  policy focuses on a particular area, it is able
  to attain a fair degree of success in addressing
  the challenge.
• There is therefore room for optimism that India
  will be able to manage its demographic
  transition, and take advantage of favorable
  demographic phase.
• Those who are willing to look at India with a
  21st century mindset and set aside their cold war
  attitudes and preconceptions will reap
  substantial benefits. Early-comer advantage will
  be high.

61

• References
• Bajpai, G.N. (2006), Resurgence of Indian
  Financial Markets and Trends in Regulation,
  Presented to Sanmar Group, Chennai, March 10.
• Nageswaran, A. (2006), Indian Capital Markets,
  Asia Pacific Business Summit, 12 13 April
  2006, Grand Hyatt, Singapore
• MCX Education center _at_ www. Mcx.com