1 India’s Demographic Trends: Implications for Growth and Capital Markets Mukul G. Asher Professor...

1

India’s Demographic Trends: Implications for Growth and

Capital Markets

Mukul G. Asher Professor of Public Policy,

LKY School of Public PolicyNational University of SingaporeEmail : [email protected]

And

Amarendu NandyResearch Scholar

Department of EconomicsNational University of SingaporeE-mail: [email protected]

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

mailto:[email protected]

mailto:[email protected]

2

Organization

• Introduction

• Brief Overview of India’s Capital Markets

• Demographic Trends

• Growth and Capital Market Implications

• Concluding Remarks

3

Map of India

Source: http://www.mapsofindia.com/maps/india/india-political-map.htm

http://www.mapsofindia.com/maps/india/india-political-map.htm

4

Introduction/1

• This presentation examines India’s 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): – 2005:$720.3/ $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• India’s foreign exchange reserves, as of March 31, 2006, were

US$151.0 billion.

• India is a net lender to the rest of the world.

• India’s merchandise trade, 2004 (US$ Billion) (Share in world, %):– Exports: $75.6 (0.83%)/ (Korea’s share – 2.77)– Exports crossed $100 billion in FY2006.– Imports: $97.3 (1.03%)/ (Korea’s share – 2.36)

• Commercial Service Trade, 2004 (US$ Billion) (Share in World, %)– Exports – $39.6 (1.86)/ (Korea’s share – 1.88)– India’s services, particularly IT, and travel, are likely to register strong

growth, auguring well for increased world share.– Imports - $40.9 (1.96) /(Korea’s share – 2.37)

7

Introduction/4

• India’s external sector involvement is at an acceleration stage.

• India aims to reach total trade of US$500 billion (US$253.4 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 India’s capital markets. The actual transactions however have been limited so far.

88

MARKET PERFORMANCE: EQUITY

0

2000

4000

6000

8000

10000

12000

SENSEX

10330

Source: Bajpai (2006)

Sensex as on April 10, 2006: 11,662.55

99

CAPITAL MARKET STRUCTURE (Dec 31, 2005)

22 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


1010

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)

1111

Wide investment choicesWide investment choices Total No. of listed securities Total No. of listed securities 80% of NSE stocks are traded for >100 days/yr80% of NSE stocks are traded for >100 days/yr

Indian Capital market turnover (2004-05)Indian Capital market turnover (2004-05) NSE – US$259 billionNSE – US$259 billion BSE – US$118 billionBSE – US$118 billion

NSE – 3NSE – 3rdrd in total transaction volume [in billions] in 2002, in total transaction volume [in billions] in 2002, 2003 and 2004; but 12003 and 2004; but 1stst in 2005 in 2005

NASDAQ (955), NYSE (933), NSE (424)- Figures for 2004NASDAQ (955), NYSE (933), NSE (424)- Figures for 2004 Retail InvestorsRetail Investors

10 million in 1991 to 20 million by 1999.10 million in 1991 to 20 million by 1999. 4% of all households own shares (15% of urban and 1% of rural)4% of all households own shares (15% of urban and 1% of rural)

Indian Capital Markets/1

Source: adapted from Nageswaran (2006)

1212


Returns from Indian equities at 74% were the Returns from Indian equities at 74% were the highest in emerging markets for the highest in emerging markets for the

FY 04 to FY’06 period.FY 04 to FY’06 period.

Corresponding figures : Mexico 52%, Brazil Corresponding figures : Mexico 52%, Brazil 43% and Korea 41% 43% and Korea 41%

1313

Original Source: Annual Econ. Survey 2005-06, MoF, GoISecondary Source: Nageswaran (2006)

1414

As of Feb. 2006 Market CapTotal Domestic Foreign Bil US$

Hong Kong SAR 1,139 1,130 9 1185

Taiwan 696 691 5 485

China -Shanghai 833 833 0 317

Korea 1,628 1,628 0 759

India BSE 4,782 4,782 0 610

India NSE 1,049 1,049 0 568

Malaysia 1,022 1,018 4 193

China - Shenzhen 541 541 0 128

Singapore 671 458 213 282

Thailand 506 506 0 137

Indonesia 336 336 0 93

Philippine 238 236 2 43

Companies Listed

Original Source: Annual Econ. Survey 2005-06, MoF, GoISecondary Source: Nageswaran (2006)

1515

STOCK INDEX FUTURES

EXCHANGEEXCHANGE NUMBER OF CONTRACTS TRADED (Jan NUMBER OF CONTRACTS TRADED (Jan 2006 Year to Year)2006 Year to Year)

Chicago Mercantile Exchange Chicago Mercantile Exchange 34,977,14034,977,140

EurexEurex 16,587,42116,587,421

NSE India 5,760,999

EuronextEuronext 4,711,4224,711,422

Singapore ExchangeSingapore Exchange 2,530,4712,530,471

OsakaOsaka 2,112,7142,112,714

OMXOMX 1,952,6471,952,647

Hong KongHong Kong 1,359,5601,359,560

KoreaKorea 00

Source: FIBVSource: FIBV


1616

SINGLE STOCK FUTURES

EXCHANGEEXCHANGE NUMBER OF CONTRACTS TRADED (Year NUMBER OF CONTRACTS TRADED (Year to year Jan 2006)to year Jan 2006)

NSE INDIA 7,134,199

Euronext Euronext 1,184,0651,184,065

JSE Securities Exchange JSE Securities Exchange 1,158,5091,158,509

Spanish ExchangesSpanish Exchanges 708,722

OMXOMX 609,816609,816

AthensAthens 196,999196,999

Borsa ItalianaBorsa Italiana 43,71943,719

AustralianAustralian 20,23920,239

SydneySydney 2,0072,007

Source: FIBVSource: FIBV


1717

DEBT

Debt : WDMDebt : WDM 1994-951994-95 2005-062005-06

Rs.crRs.cr US $ mlnUS $ mln Rs.crRs.cr US $ mlnUS $ mln

No. of TradesNo. of Trades 10211021 -- 58,08458,084 --

Net Traded valueNet Traded value 67816781 21592159 4,41,9494,41,949 9805898058

Market capitalizationMarket capitalization 1,58,1811,58,181 5039250392 15,55,1715,55,1799

345059345059

Forex rate taken : FY-1994-95 as 31.39Forex rate taken : FY-1994-95 as 31.39

FY-2005-06 as 45.07FY-2005-06 as 45.07

Source: NSESource: NSE


1818

LIFE INSURANCELife insurance Life insurance 1990-911990-91

(2000)(2000)2004-052004-05

Rs.crRs.cr US $ mlnUS $ mln Rs.crRs.cr US$ mlnUS$ mln

Premium Premium IncomeIncome 53385338 297.5297.5 23,057 (as on 23,057 (as on

Jan 2006)Jan 2006)51155115

Ins Premium Ins Premium as % of GDPas % of GDP 0.820.82

--0.820.82

--

Ins premium per Ins premium per capita Unit Rs capita Unit Rs

cr.cr.280280 1.561.56 22382238 497497

Life FundsLife Funds 2347223472 1308313083 3,66,2203,66,220 8167281672

Asset sizeAsset size 2441824418 1361113611 428,452428,452 9555195551

Source: IRDA journals , LIC reports (various issues)Source: IRDA journals , LIC reports (various issues)Conversion rate: FY 1990-91 is 17.94 (INR/ US $)Conversion rate: FY 1990-91 is 17.94 (INR/ US $) FY-2004-05 is 44.84 (INR/ US$), FY-2004-05 is 44.84 (INR/ US$), FY 2005 INR/US $ used is 45.07


1919

BANKING

Category Rs.cr US $ mln Rs.cr US $ mln

Banking1990-91 2004-05

Advances 1,16,301 64828 15,50,132 343938

Deposits 1,92,541 10732521,43,339 (as 21,43,339 (as on Jan 2006)on Jan 2006)

475557475557

NPA 50815 (97-98) 13689 45619 10173

Bank rate 12 - 6 -

Prime lending rate

16.5 -10.25% - 10.75%

-

Prime deposit rate

10.75 - 5.25% - 6.25% -

Conversion rate used: FY 1990-91 is 17.94 & FY 2004-2005 is 44.84 (INR/ US$) FY INR/ US $ as 45.07

Source: CMIE, RBI bulletin all scheduled Banks business in India


2020

T+2 SETTLEMENT SYSTEM

DayDay TimeTime Description of Activity Description of Activity

T T Trade Day Trade Day

T+1 T+1 By 11.00 am By 11.00 am Conformation of all trades (including Conformation of all trades (including custodial trades). Facility of an exception custodial trades). Facility of an exception window for late confirmations is made window for late confirmations is made available by the exchanges available by the exchanges

By 1.30 pmBy 1.30 pm Processing and downloading of obligation Processing and downloading of obligation files to brokers / custodiansfiles to brokers / custodians

T+2 T+2 By 11.00 amBy 11.00 am Pay-in of securities and funds Pay-in of securities and funds

By 1.30 pm By 1.30 pm Pay-out of securities and fundsPay-out of securities and funds


2121


Commodity ExchangesCommodity Exchanges India ranks among the top five producers and India ranks among the top five producers and

consumers of major agricultural commodities consumers of major agricultural commodities in the world.in the world.

There are 25 commodity derivative exchanges There are 25 commodity derivative exchanges in India. Four are national and others primarily in India. Four are national and others primarily have local impact.have local impact.

2222


The Four National Commodity exchanges are The Four National Commodity exchanges are National Multi-Commodity Exchange of India National Multi-Commodity Exchange of India

( NMCE) , National Board of Trade (NBOT), National ( NMCE) , National Board of Trade (NBOT), National Commodity and Derivative Exchange ( NCDEX) and Commodity and Derivative Exchange ( NCDEX) and Multi-Commodity Exchange (MCX).Multi-Commodity Exchange (MCX).

NCME- www. ncme.comNCME- www. ncme.comNBOT- www.nbotind.orgNBOT- www.nbotind.orgNCDEX- www. ncdex.comNCDEX- www. ncdex.comMCX- www.mcxindia.comMCX- www.mcxindia.com

2323


There are Physical Markets at both state and There are Physical Markets at both state and national levels and there are only spot contracts national levels and there are only spot contracts and Futures Markets.and Futures Markets.

Trading in commodity options and index based Trading in commodity options and index based trading of commodities is currently not trading of commodities is currently not permitted.permitted.

2424

Actors In the Physical Commodity Markets

Retailers

Wholesalers

Industrial end Consumers

Trading Companies

Warehouse Operators

Producers

Insurers, banks, Brokers, Certifying companies

Transport services (shipping, air cargo, railways, road transport,

and pipeline companies

Illustration by T.R.ROHIT,NUS

2525


The total turnover of the 25 exchanges was The total turnover of the 25 exchanges was US $ 133.3 Billion in 2004-2005 and US $ 44.3 US $ 133.3 Billion in 2004-2005 and US $ 44.3

Billion in 2003-2004.Billion in 2003-2004. This value is estimated to be US $ 402 Billion This value is estimated to be US $ 402 Billion

in 2005-2006.in 2005-2006. Thus, Commodity Exchanges are witnessing Thus, Commodity Exchanges are witnessing

rapid growth.rapid growth. Main contributors are Gold, Rice , Oilseeds and Main contributors are Gold, Rice , Oilseeds and

Wheat.Wheat.

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But greater professionalism , depth and But greater professionalism , depth and sophistication is needed. sophistication is needed.

Consolidation is likely in the number if Consolidation is likely in the number if exchanges , as has happened with the stock exchanges , as has happened with the stock markets.markets.

The FMC as a regulator also needs to acquire The FMC as a regulator also needs to acquire greater skills and professionalism to be greater skills and professionalism to be comparable to other regulators in financial and comparable to other regulators in financial and capital markets such as SEBI.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.

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Table 1: Demographic Indicators in Selected Countries

Country

Total population

Medium Variant (Millions)

Average Annual rate of change in

population(%)

Total Fertility Rate

Median Age (yrs.)

Life Expectancy at Birth

(both sexes) (yrs.)

2005 2050 2000-2005

2045-2050

2000-2005

2045-2050

2005

2050 2000-2005

2045-2050

India 1103.4 1592.7 1.55 0.32 3.07 1.85 24.3 38.7 63.1 75.9

China 1315.8 1392.3 0.65 -0.35 1.70 1.85 32.6 44.8 71.5 78.7

Philippines

83.1 127.7 1.84 0.37 3.22 1.85 22.2 37.9 70.2 78.6

Vietnam

84.2 116.6 1.37 0.18 2.32 1.85 24.9 41.3 70.4 78.9

Others:

World 6464.8 9075.9 1.21 0.38 2.65 2.05 28.1 37.8 65.4 75.1

Japan 128.1 112.2 0.17 -0.49 1.33 1.85 42.9 52.3 81.9 88.3

Korea 47.8 44.6 0.44 -0.85 1.23 1.77 35.1 53.9 76.8 84.4

German

y

82.9 78.8 0.08 -0.17 1.32 1.85 42.1 47.4 78.6 83.7

France

60.5 63.1 0.41 -0.13 1.87 1.85 39.3 45.5 79.4 84.8

United

States

298.2 394.9 0.97 0.38 2.04 1.85 36.1 41.1 77.3 82.4

United

Kingdo

m

59.7 67.1 0.34 0.17 1.66 1.85 39.0 42.9 78.3 83.5Source: 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;

3:50 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 China’s 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 world’s 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


– 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, China’s median age will be close to 45 years.

– The median age in Japan and Korea are already in late 30s to mid 40s. Though Korea’s 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, Korea’s 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

Working Age Population (15-59 yrs.), Current and Projections, Selected Countries

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Countries

Per

cen

t

2005

2050

Source: Calculated from UN database, http://esa.un.org/unpp, Last Accessed: 11 February 2006.

http://esa.un.org/unpp


34

Figure 2

Population Aged 15-24, Current and Projections, Selected Countries

0.0

5.0

10.0

15.0

20.0

25.0

Countries

Perc

en

t

2005

2050

Source: Calculated from UN database, http://esa.un.org/unpp, Last Accessed: 11 February 2006.



35

Figure 3: Dynamics of working age population in selected economies Population aged 15-59 for selected Asia-Pacific economies 1950-2050

China

Asia

Pacific

Japan

Republic of Korea

India

40

45

50

55

60

65

70

1950 1975 2000 2025 2050

Years

Per

cen

tag

e

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 Japan’s working-age population share at 70 per cent was substantially higher than that of US and UK; but by 2010, Japan’s 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


– 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

28.325.8

24

23.521.1

20.520

19.516.4

1614.8

13.210.9

9.49

7.7

0 5 10 15 20 25 30

JapanGermany

FranceUK

AustraliaRussia

USAS.Korea

ThailandChina

SingaporeBrazil

IndonesiaMalaysia

IndiaPhilippine

2000 2030

Source: An Aging World, 2001, US Census Bureau

40


• In 2030, 9% of India’s 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 China’s 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

21

19

18

16

17

16

16

16

25

22

21

19

19

18

17

17

0 5 10 15 20 25 30

Japan

Singapore

Thailand

China

Malaysia

Philippines

India

Indonesia

Male Female

Source: Adapted from Chakraborty (2004)

42


• 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

Table 2: Selected Population Projection Fertility Assumptions for India, Grouped by Region

Registrar General’s projections

Assumed TFR Region/State Population

2001 (millions) 1996-01 2011-16 TFR=2.1

(Year) South

Kerala 31.8 1.62 1.60 1988 Tamil Nadu 62.1 1.87 1.65 1993 Andhra Pradesh 75.7 2.27 1.78 2002 Karnataka 52.7 2.54 2.01 2009 Maharashtra 96.8 2.51 1.97 2008

North

Gujarat 50.6 2.73 2.11 2014 Rajasthan 56.5 3.91 3.06 2048 Uttar Pradesh 174.5 4.75 4.05 >2100 Madhya Pradesh 81.2 3.99 3.27 >2060 Bihar 109.8 3.92 2.93 2039 Punjab 24.3 2.65 2.11 2019 Haryana 21.1 3.25 2.47 2025

East West Bengal 80.2 2.56 1.99 2009 Orissa 36.7 2.64 2.01 2010 Assam 26.6 2.82 2.17 2015

All INDIA 1027.0 3.64 2.52 2026

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


– 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


– The high fertility rates in the Northern states (constituting about 44 percent of India’s total population) tend to increase India’s 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 India’s 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

• India’s 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


• In conjunction with increased FDI (official goal is to increase annual flow from US$8 billion in FY06 to US$ 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

• India’s 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

• 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.


India: NPS Projections

Year Mandatory

members

( millions)

Accumulation of mandatory

Contributions

( US$ Million)

Voluntary

members

( Millions)

Accumulation of

Voluntary Contributions

( US$ million)

Total Asset

Accumulation

( US$ Million)

2010 4.30 6 57 36 42

2015 8.55 26 85 150 176

Table 3

Cashmore, N., Leckie, S.H. and Pai, Y (2005), “Asia: Flow of Funds”, Hong Kong: CLSA.

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• Much of this pension wealth is expected to be intermediated through capital markets.

• India’s financial and capital markets are well developed. The mutual fund fee and distribution tolls are internationally competitive (See Table 4).


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0.1-0.30.25-0.5500.1-0.45Money market

0.5-0.91.0-1.250-2.250.6-1.25Balanced

0.4-0.70.45-100.5-1.05Bond

0.50.8-1.252.251.0-1.25EquityIndia

na0.175-0.20.8-1.20.6-1.2Money market

na0.2-0.250.75-1.51.5-2Balanced

0.075-0.120.175-0.20.8-1.20.6-1.2Bond

0.15-0.30.2-0.250.55-1.81.5-2EquityChina

0.25-0.75na3.0-4.00.5-0.8Capital-guaranteed

0-0.20.1-0.350-3.00.3-0.8Money market

0.3-0.60.3-0.63.5-4.51.0-1.25Balanced

0.2-0.50.25-0.71.0-4.750.65-1.0Bond

0.25-0.750.4-0.74.0-6.250.8-1.65EquitySingapore

0-0.750-0.080-30.7-1Capital-guaranteed

0-0.250.1-0.50-5.250.25-0.5Money market

0.15-0.750.3-0.55-6.250.7-1.25Balanced

0.15-0.50.2-0.75-5.250.65-1.5Bond

0.15-0.750.2-0.75-6.250.8-1.75EquityHong Kong

Trial Fees to BanksOther Fees Front-End FeesAnnual Mgmt FeesFund TypeCountry

Mutual Fund Fee and Distribution Tolls, 2005 (% of AUM)

Source: BT, Aug 10, 2005Source: Cerulli Associates (2005), Asian Distribution Dynamics 2005, New Cerulli Quantitative Update.

Table 4

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Lowest transaction cost in the world

0102030405060708090

Brokerage Reg. Fee Custody Clearance Stamp Duty Others

In b

a sis

po

ints

Impact cost at NSE reduced from 0.27% to 0.1% between 2001-03

Source: Nageswaran (2006)

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• 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:• Mumbai’s infrastructure• Full convertibility of the rupee• Absence of foreign firms listing on NSE and BSE• Limited access by foreign firms and governments to India’s capital markets• Limited depth of domestic financial institutions• Relatively small participation of local players

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• 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.

• India’s 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.


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• 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.


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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.

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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 @ www. Mcx.com

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