Population: India on top, but still a long way to go

India – A unique growth model

A unique combination of democracy, demographics, demand, and digitisation gives India a potent force to take the next step, or rather the next leap, towards becoming a global superpower. Emphasis on structural reforms and agile execution aimed at ease of doing business, building best-in-class physical, virtual, and social infrastructure, and improvement in quality of life is paving the path for robust, sustainable, and inclusive growth.

Unlike China, where the growth model has been largely state-driven and environmentally unsustainable, in India, one can expect growth to be more inclusive and sustainable, driven by entrepreneurship, with the government acting as a facilitator. The vibrancy of the capital markets in India helps in making growth more inclusive.

“Age-old” question

While the change in the population pecking order is recent, it has been on the cards for quite some time. China’s now-discontinued but once controversial one-child policy meant that this change in the population leaderboard would happen sooner or later.

A few months ago, China reported a decline in its population for the first time in decades and brought the focus back on demographics. While an aging China has many implications for the global economy, it also brought into focus potential challenges that could be faced by the elderly, especially in an aging country, where the working age population could be outnumbered by the elderly.

With an inverted pyramid, also known as 4-2-1 problem (4 grandparents and 2 parents being dependent on a single child) and lack of social security benefits, China may be staring at a demographic predicament.

Although India’s population is relatively young (median age of 28 vs 38 for China) and is expected to decline only after 2050, steps in the right direction today are critical to avoid the possibility of a large greying population without adequate means for sustenance.

As ironic as it may sound, the gradual increase in life expectancy (which doubled from ~35 in the 1950s to ~70 now and is expected to increase) makes matters difficult.

India has made significant progress in establishing a social security net in recent years through initiatives like the JAM (Jan Dhan accounts-Aadhaar-Mobile) Trinity and direct benefit transfers. While these efforts have been transformational, they alone cannot fully address the challenges in supporting the needs of a larger aging population.

The recent civil unrest in France against increasing the minimum retirement age for full pension is a case in point. Additionally, the increase in the number of gig workers who do not have access to social security benefits underscores the need for financial planning. Therefore, it is crucial to prioritise the often-neglected financial goal of retirement.

In fact, it would be fair to say that retirement planning is by far the most critical financial goal. Three important aspects stand out.

Firstly, for most people, retirement is a certainty. Secondly, with medical advancement and increasing life expectancy, the number of years one lives post-retirement has increased; however, the number of years is an unknown variable which makes retirement planning critical, yet challenging.

Lastly, since retirement is in the distant future, most people tend to put off retirement planning till it is too late. And even those who do plan, underestimate the impact of inflation (both price and lifestyle) over long timeframes.

The lack of financial preparedness is not restricted to India alone. Globally, too, the retirement-savings gap has widened over the years. According to the World Economic Forum, the retirement-savings gap for eight of the world’s largest economies widened to $70 trillion in 2015.

This is expected to further increase to $400 trillion by 2050. In the US too, a staggering 26 percent of non-retired adults did not have any retirement savings, as per a US Federal Reserve Survey of 2020.

In India, in the absence of similar retirement benefits and with the retirement age lower than most major economies, the most likely avenue for creating retirement corpus has to be through investments in risk assets like equities, provided this is done with a long-term investment horizon.

The “investment” solution

Historically, Indian households have allocated a disproportionately high share of wealth to physical assets. An average Indian household holds the majority of its wealth in real estate and gold, with financial assets accounting for a significantly small component.

This is unusual in the global context. As per the Reserve Bank of India’s Household Finance Committee Report (2017), more than 50 percent of households expect to rely on support from their children during old age, banking on the uncertain income-generating capacity of future generations.

Thus, a large proportion of the nation's wealth locked in largely illiquid assets like real estate does not help either the country at large or investors themselves in their old age.

Recently, the trend has shifted away from illiquid assets towards an increase in financialisation of savings. More importantly, a mix of financial savings has started changing in favour of the capital markets, as reflected in the increase in trading accounts and systematic investment plans.

Despite the recent increase, there is still a long runway ahead, as the overall equity allocation among households in India is less than 5 percent. From a long-term standpoint, equity as an asset class generates inflation-outpacing returns, and equities, especially equity mutual funds, must be the go-to investment avenue for investors to create a retirement corpus over 15-20 years, if not more.

India has an ambition to be a developed country in its Amritkaal. A humongous amount of risk capital is needed to meet India’s ambitious infrastructure development and growth objectives.

Hence, an increase in the depth of the capital market is so critical. Healthy domestic equity flows will also help the government's asset monetisation programme while ensuring that ownership remains with its own citizens.

Even in the startup ecosystem, there is an enormous need for risk capital. While the entrepreneurial ambitions of a young India combined with a funding boom have spelt a golden period for the startup ecosystem, the bulk of this funding has so far been from foreign venture capital firms.

Looking ahead, getting Indian risk capital to fund entrepreneurial ambitions in the country is another goal worth pursuing.

Robust domestic equity flows make the equity market less susceptible to shocks from foreign capital flight – something witnessed last year when inflows in mutual funds helped to counterbalance foreign portfolio investment outflows and kept the Indian equity markets largely resilient.

This had a positive ripple effect on the overall health of the financial markets, and in turn, the macroeconomic stability of the country. Strong domestic equity flows will, in fact, encourage foreign investors to invest more in India as the counterbalancing stability provided by domestic flows can add another positive dimension for those looking to invest here.

Over the years, foreign investors have viewed India as one of the preferred investment destinations owing to a structural growth story at the macro level and a diverse bottom-up stock-picking opportunity at the micro level. Stability provided by domestic flows and greater market depth can provide the third element of interest for global investors to allocate more to India.

Wider participation in the equity markets could enable more equitable distribution of wealth in society as more people would be able to participate indirectly in the nation’s growth story.

An aatmanirbhar Bharat

In view of this, it is imperative that the policy environment remains highly conducive for encouraging investment in equity as an asset class. All said and done, while we focus on indigenisation of various aspects of our economy, we would do well to not overlook the importance of domestic risk capital in making the nation economically and our population financially ‘aatmanirbhar’.

While we have overtaken China demographically, we still have a long way to go on other fronts. For instance, in 2021, China’s per capita income ($12,556) was six times that of India’s ($2,256).

Bewilderingly enough, in 1990, India’s per capita income ($368) was higher than China’s ($318). This divergence over the past three decades could be attributable to China’s focus on manufacturing and infrastructure. Both these aspects have been at the forefront of Indian policymakers’ agenda.

Likewise, India could take other cues from the east and the west, emulate their fruitful measures, avoid their follies, and unlock our true potential.

It is often said that China is growing old before growing rich. While India, on its part, has always been culturally and spiritually rich, it is high time that in this Amritkaal, every citizen also becomes economically rich before growing old, and we regain our old title of Sone ki Chidiya or the Bird of Gold.

(The author is CEO, HDFC Asset Management Company)