In an interview last week I was asked what is the biggest risk to the India growth story. The term India growth story made me think about a period ten years back when I was just starting up in business journalism as a personal finance journalist.
Back then, every fund manager I met said the same thing—the India growth story is still intact. But no one ever bothered to explain what the India growth story actually was. In fact, for a while I even thought that the fund managers were talking in some sort of a code.
As John Lanchester writes in How to Speak Money: “Practitioners of almost every metier [profession], from plumbers to chefs to nurses to teachers to police, have a gap between the way they talk to each other and the way they talk to their customers or audience.”
Over a period of time I realised that it was much more than that. As Lanchester writes: “There are a lot of things…in the world of money, where the explanation is hard to hold on to because it compresses a whole sequence of explanations into a phrase, or even just into a single word.”
India growth story was that kind of term. In three words fund managers encapsulated a whole sequence of things that that they thought would lead to the
Indian economic growth continuing to remain strong in the years to come. Or if I were to look at it in a cynical sort of way, fund managers wanted to sound like other fund managers. I guess it was a bit of both.
Having said that over the years I have come to realise that one fundamental point behind what has come to be known as the India growth story is the demographic dividend of India. The demographic dividend of a country essentially is a period of two to three decades when the birth rates go down and this leads to a situation where the workforce of the country is growing at a faster rate in comparison to its population.
Sanjeev Sanyal explains this in his book The Indian Renaissance—India’s Rise After a Thousand Years of Decline, where he defines three stages: “In the first stage, there is an increase in the proportion of the young in the population as birth rates stay high but infant mortality declines.”
In the second stage, the birth rates come down and the number of old people in the population increases at a modest pace. In this stage, the workforce of the country increases dramatically. This is the demographic dividend. In the third and final stage, the working population falls and the number of old people goes up.
India is currently in the second stage. As Sanyal writes: “The UN’s projections suggest that India’s working age population will rise from 691 million in 2005 to 829 million in 2015 and 942 million in 2025 before stabilizing at around 1050 million in the late 2030s…By this time, India will have the single largest pool of workers in the world, by passing an aging China. This means that we have entered a phase where the labour supply will be growing at a very rapid pace for a prolonged period of time.”
What this means is that India needs to create jobs and that too at a very rapid rate for the huge number of people that is entering the workforce every year. And that does not seem to be happening. As the latest Economic Survey points out: “The power of growth to lift all boats will depend critically on its employment creation potential. The data on longer-term employment trends are difficult to interpret because of the bewildering multiplicity of data sources, methodology and coverage. One tentative conclusion is that there has probably been a decline in long run employment growth in the 2000s relative to the 1990s and probably also a decline in the employment elasticity of growth: that is, a given amount of growth leads to fewer jobs created than in the past. Given the fact that labour force growth (roughly 2.2-2.3 percent) exceeds employment growth (roughly about 1½ percent), the challenge of creating opportunities will remain significant.”
If this trend continues in the years to come, the demographic dividend can easily turn into a demographic nightmare. And this remains the biggest risk to the India growth story.
Another impact of the demographic dividend is an increase in savings. As Sanyal writes: “When the demographic bulge raises the share of working-age adults in the population, the overall propensity to save rises sharply…The bottled up savings cause a sharp decrease in the domestic cost of capital and a sharp increase in the quantum of resources available to the financial system…In turn, this results in a lending boom, job creation and consequently even more savings.”
In the Indian case, the savings instead of going up, have been falling. In 2007-2008, the financial savings had stood at 11.7% of the gross domestic product (GDP). In 2014-2015, the number was at 7.5%, having stood at 7.2% in 2012-2013. There has been a dramatic fall in financial savings over the years. Further, even though the financial savings have improved over the last two years, the improvement has been at a very slow pace. This dramatic fall in financial savings has primarily been on account of high inflation that prevailed between 2007 and 2013.
In an Indian case given the semi-skilled nature of the workforce, the construction sector could have been a huge creator of jobs. But one reason that doesn’t seem to be happening is because the construction activity in the real estate sector has come to a standstill. This is primarily because real estate prices continue to remain high and hence, unaffordable to a large section of the population.
And all this has me worried. And it irritates me no end when fund managers say: “The India growth story is still intact.” It makes me wonder what they have been smoking.
The column originally appeared in The Daily Reckoning on Sep 16, 2015