Last week I highlighted a few larger global trends that are not getting their due attention in the popular market narratives (see Gorillas in the Room). Today, I want to draw the attention of the market participants towards a major India specific trend that shall have far reaching implications for the Indian economy and therefore Indian markets.
“Favourable demographics” has been inarguably one of the major themes of the Indian economy and markets for the past two decades. The latest round of National Family Health Survey (5th Round - 2019-21) highlights that this theme might soon run out of currency and demographic dividend (income) might get replaced by demographic interest (expense).
India to become older sooner than previously expected
The total fertility rate (TFR) for India is already below the replacement threshold. TFR indicates the average number of children a woman is likely to bear during the age between 15 to 49 years. As per the global standards a TFR of 2.1 is considered the benchmark replacement ratio. At this rate of TFR, the population stops growing and new born children just replace the people completing their lives.
As per the latest survey TFR for India was at 2 (below replacement rate) in 2019-20. The TFR was 1.6 in urban areas and 2.1 in rural areas. This implies that the urban population is not only declining but also growing old fast. (Though, immigration from rural areas may show different numbers for the time being).
Rise in use of contraceptives, lower child mortality, higher institutional births, skewed sex ratio at birth (SRB), older age at marriage, and woman empowerment in most states indicates that TFR is likely to fall even further in next decade. The population of India might peak earlier than previous estimates of 2030-35 and also become older sooner than 2050.
The Survey highlights that the population of children below the age of 15 has reduced to 26.5% in 2019-21 from 28.6% in 2016-15. In urban areas the ratio is even lower at 23.1%.
Poor, infirm and obese population rising disproportionately
Bihar, one of the most poor and less industrialized states in the country, had the highest TFR of 3.0 in 2019-21. Though, the TFR for Bihar also reduced from 3.4 in 2015-16 to 3.0 in 2019-20; nonetheless this indicates that the poor population is growing at a much faster rate. The richer states like Goa, Karnataka, Maharashtra, Telengana, Haryana have TFR much below the replacement rate. This implies that economic inequalities may continue to worsen in the near future.
The worst part is that the malnourishment among children is also worsening in most poor states; implying that the proportion of infirm workers may rise disproportionately.
Incidentally, the proportion of “obese” people is rising in all states, but more so in richer states. In Andhra Pradesh, Goa, Karnataka, Telangana, Kerala and Himachal Pradesh, nearly one-third of men and women (between 15-49 years of age) were found to be overweight or obese.
Less number of girl births, but women outliving the men
The Sex Ratio at Birth – SRB- (number of girls born per 1000 boys) has improved only marginally from 919 to 929 in the five year period from 2015-16 to 2019-21. However, the proportion of women in the total population has increased to the highest ever number of 1020 women per 1000 men.
This implies that though the number of girl children is low, the women are far outliving their male counterparts.
When we juxtapose these findings to the statistics like lower education and labour participation rate, and higher dependence ratio for the women in the country, the future picture gets more worrisome. It is important to note that while the number of women mobile users and bank account holders has increased in recent years, the digital divide remains wide. The literacy rate and access to the internet remains much lower for women as compared to men.
Another area of concern is worsening SRB in the relatively richer states like Goa (838), Telangana (894), and Himachal Pradesh (875). Maharashtra (913) is also pretty low. The most literate state Kerala has seen the worst decline in SRB over the past five years. Sikkim, West Bengal, Tripura, Karnataka and Gujarat have seen some improvement in SRB; but Tripura has managed to attain a SRB of more than 1000.
Household infrastructure improving materially
The survey finds that the proportion of households with electricity and improved drinking water sources has increased across all states. The number of Households with an improved sanitation facility has also increased across all states; though significant disparities still exist state wise. Over 99% households in Kerala have an improved sanitation facility, while only 49% households have it in Bihar.
Similarly, the proportion of households using clean fuel for cooking has also increased across nearly all states.
Investment implications
The changing demographic trends will have significant implications for the economy and markets.
As the population grows older and the number of dependents (non-working population) rises, the pressure on the fiscal to support the public will rise and the taxable universe will shrink. Obviously, the incidence of tax on the rich and middle classes will increase.
The consumption patterns of the population will also shift with the median age moving higher on the curve.
The work force will shrink and wage rate inflation will become much steeper. The need for greater degree of automation in manufacturing and delivery of services may continue to increase.
The stocks trading at 60-70 PE multiples, assuming a secular growth over next many decades would need to be reassessed. A fast aging and dwindling urban population with slower income growth rates may not be a good sign for sectors like housing, personal mobility, etc.
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