India Is The New China: Investing In India's Demographic Dividend
Summary
- China's demographic boom is now calming down while India's is just starting.
- India's population will be bigger than China's in 15 years and its working-age demographic bulge will be bigger and longer lasting than China's.
- India's demographic dividend will add 2% to the GDP for several decades to come.
- We investigate where to invest.
In a recent Seeking Alpha article How To Invest In The Upcoming Chinese Demographic Bust, we outlined how China's 'demographic boom' is winding down and turning into a 'demographic bust', and how this will permanently reduce China's GDP growth rate. We also identified several sectors that are set to counter the trend and actually grow as China's boomers age.
In this paper, we will address India's demographic landscape, identify the sectors that offer the greatest potential for profit from this demographic situation, and discuss the various risks that investing in India presents.
The Demographic Dividend
In the next four decades, the world's population is expected to increase by 2.4 billion people, with the majority of the increase coming from underdeveloped countries. The bulk of this increase is going to be in the 'working-age' cohort, 15 to 60 year-olds.
"This huge boost reflects a delayed demographic transition: declining infant mortality rates are being followed by falling fertility rates. Thus, with children more likely to survive into productive adulthood and fewer children being produced, the share of working age populations will increase." (Aiyar and Mody)
In other words, the ratio of 'working-age' to 'nonworking-age' will continue to increase in underdeveloped countries such as India. Since the working-age cohort is the population that produces, consumes, saves, and invests the most, India's increasing demographic ratio is expected to add 2% per year to the GDP growth rate for the next several decades. (Aiyar and Mody) This is what is meant by the "demographic dividend".
China and India, before the 1980's, had about the same wealth and population profiles, but starting in the 1990's, China's working-age ratio increased rapidly due to a number of factors such as China's "one child" policy, reduced infant mortality, and the effect of centralized planning and control. By the year 2000, this demographic shift had changed China's population pyramid profile and produced a working-age bulge (see charts below), while India's profile remained the same (but bigger). This boomer bulge delivered a huge demographic dividend that was responsible for the now famous Chinese GDP growth rates.
While China's demographic ratio (working-age/nonworking-age) is now declining, India's is just getting started. The charts below show the comparative evolution of China and India during the period 1960 to 2000.
Comparative Evolution of Population Pyramids
(Aiyar and Mody)
The charts below show how the population demographic profiles of China and India will change between 2016 and 2050.
Notice how long-lasting and persistent the Indian working-age bulge is, all the way through to 2050.
(U.S. Census Bureau)
In addition to the demographic shift, there is the expectation that India's population will exceed China's, in absolute terms, by the year 2030. This adds to both the duration, and the magnitude of India's demographic dividend.
We can expect India's demographic dividend to be paying out for at least the next three decades before there is any sign of a slowdown.
What Could Possibly Go Wrong?
Why has India's economy grown so much slower than China's? Indian democracy itself is responsible in a major way for the difference in growth rates between the two countries.
China's political structure gives the government near total control over the economy and society in general. This has allowed it to make and implement long-range plans for economic growth without having to convince and get approval for these plans from any opposing political interests. While this is viewed as a form of undesirable dictatorship in the West, it has proven itself to be an expedient way to grow the economy.
This central control is not available in India, and that fact will continue to be a drag on the pace of economic reform and GDP growth.
The election of 2014 saw Narendra Modi come to power with more legislative control than most of his predecessors. If he is able to use this slightly increased control to enact reforms that support his pro-business tendencies, then the pace of growth should increase (although it will never happen as rapidly as China's).
If, however, he abuses this control and enacts policies that enhance his well-known religious and sectarian tendencies, then the opposite will happen - economically damaging religious riots like those that occurred in Modi's own province of Gujarat in 2002 while he was Chief Minister of that region. There is a risk, as Newsweek recently observed.
Sectarian violence does more than harm innocent Indians. It also discourages foreign investment. Religious intolerance provides skittish investors with another reason to put their money elsewhere.
Education has to be invested in by the government in order for India to take full advantage of the demographic dividend. Approximately 12.4% of 240 million school-aged children in India were able to get through schooling to the college level in 2010 according to the Strategic Foresite Group. This has to be greatly increased or else the demographic dividend could become a demographic disaster; an explosive increase in the number of young people (especially men) unprepared for the future and therefore unemployed, will lead to social and economic instability.
Bureaucracy and the corruption that is endemic in India is definitely a drag on investment. If Modi can't find ways to protect foreign investors from these two cancers, the demographic dividend will hardly materialize.
Now that we have our investment feet firmly planted on the ground, we can start to consider a few of the ways that we can take advantage of the huge potential of India's demographic dividend.
Where Are the Opportunities?
When searching for investment opportunities, we start by looking at what is missing from the Indian economy that is preventing it from taking full advantage of its demographic dividend.
According to Greg Gonsalves of Phoenix Solutions International, which has decades of experience in India, multinational companies that operate in India must contend with and overcome: erratic electricity supply, poor roads, and gridlocked seaports and airports, while at the same time contending with government policy that discourages hiring, and holds back domestic demand for goods.
This infrastructure is foundational to the growth of India's GDP and if it is not improved and expanded, the demographic dividend will be greatly constrained. The first step, therefore, is to invest in the upgrade of this infrastructure.
The best investment opportunities will come from sectors such as construction, thermal and renewable energy, pharmaceuticals, and communications technology.
The simplest and broadest way to invest in India's infrastructure expansion is through the ETF, India Expansion Fund (NYSE: INXX).
India Infrastructure Fund ETF
This investment seeks results that generally correspond (before fees and expenses) to the price and yield performance of the INDXX India Infrastructure Index. Under normal circumstances, the fund will invest at least 80% of its net assets in Indian infrastructure companies included in the INXX underlying index and generally expect to be substantially invested at such times, with at least 95% of its net assets invested in these securities. The INXX underlying index is a maximum 30-stock free-float adjusted market capitalization-weighted index designed to measure the market performance of companies in the infrastructure industry. The fund is non-diversified.
The India Infrastructure Fund has been beaten down along with the majority of emerging market funds, but we see it as an opportunity to enter the sector at a relatively low level.
Two individual companies that are invested in India's infrastructure are Applied Materials (NASDQ: AMAT), and AES Corporation (NYSX: AES).
Applied Materials
Applied Materials is a strategic partner and an enabler of the semiconductor and solar manufacturing ecosystem in India, and works with various stakeholders towards enabling a robust semiconductor and solar manufacturing ecosystem. Applied Materials' mission in India is to grow and sustain a broad portfolio of innovative equipment, service and software products, engineering and designing services. Currently, India, which is Applied's second largest resource pool outside the US, supports the hardware engineering and software engineering functions in the company, works on cutting edge innovation on materials science and engineering and performs many functions from back-end IT support, to Global Information Services and customer interface.
AES Corp.
AES is the only global power company with a continuous presence in India since 1992 demonstrating its long-term commitment to the Indian power market. AES was invited to Odisha, India, in 1992 to develop the Ib Valley thermal power plant soon after Government of India allowed private participation in the power sector. In 1998, AES participated in an international competitive bid process and was the successful bidder for 49% stake in Odisha Power Generation Corporation (OPGC) along with its management control.
In the pharmaceutical space, Dr. Reddy's Laboratories (NYSE: RDY) is a way to invest in the rapidly growing pharmaceutical infrastructure of India (see Seeking Alpha article).
Dr. Reddy's Laboratories
Dr. Reddy's Laboratories operates as an integrated pharmaceutical company worldwide. It operates in three segments: Global Generics, Pharmaceutical Services and Active Ingredients (PSAI), and Proprietary Products.
Infosys Limited (NYSE: INFY)
Infosys Limited - along with its majority owned and controlled subsidiaries - is a leading global consulting and IT services firm. The company provides end-to-end business solutions that leverage technology. The company provides solutions that span the entire software life cycle encompassing consulting, technology, engineering, and outsourcing services. In addition, the company offers software products and platforms. Infosys was started in India and is therefore heavily involved in India's economy.
Manufacturing, especially in the communications equipment industry, has already started to ramp up with Nokia (NYSE: NOK) and Nokia Siemens Networks setting up their manufacturing plant in Chennai.
Ericsson (NASDQ: ERIC) has set up GSM radio Base Station Manufacturing facility in Jaipur.
Motorola (NASDQ: MSI), and Foxconn (OTCPK:FXCOF) have set up large manufacturing plants in Chennai.
LG Electronics (NYSE: LPL) has set up a plant for manufacturing GSM mobile phones near Pune.
Finally, the broad-spectrum ETF, Power Shares India Portfolio (NYSE: PIN) is a good way to invest in India without having to rely on individual investments. Unlike other Indian ETFs which tend to be overly invested in the financial industry, PIN is well balanced.
The investment seeks results that generally correspond (before fees and expenses) to the price and yield of the Indus India Index (the "underlying index"). The fund invests substantially all of its assets in a wholly-owned subsidiary located in the Republic of Mauritius, which in turn invests at least 90% of its total assets in securities of Indian companies that comprise the underlying index, as well as American depositary receipts ("ADRs") and global depositary receipts ("GDRs") based on the securities in the underlying index. It generally invests in all of the securities in proportion to their weightings in the underlying index.
In conclusion, the Indian demographic dividend is going to be bigger and longer-lasting than the Chinese demographic boom of the last thirty years, and even after weighing the risks, investing in India over the next several decades should be very profitable for the investors willing to commit to the long-term. The potential overwhelms the risk.
Sources:
Aiyar and Mody, "The Demographic Dividend: Evidence from the Indian States", IMF working paper.
Bandow, Doug, "Narendra Modi is Running out of Time to Reform the Indian Economy", Newsweek, Dec. 5, 2015
Gonsalvez, Greg, Phoenix Solutions International, personal communication.
Raj, Anumita, "India's Demographic Dividend", Strategic Foresight Group, September, 2011.
Supporting Documents
This article was written by
During my 44-years of investing, I have come to understand that the only constants in the stock market are fear and funds (money), and that Modern Monetary Theory (MMT) provides the best description of how money moves through the economy.
In partnership with David Huston, we search for and analyze repetitive sentiment and fund-flow-based patterns in the stock market's price history, and offer a Marketplace service, Away From the Herd, that reports our findings and allows subscribers to replicate the trades we are involved in for our own accounts. My four decades of experience in the market have taught me to not trade "for the sake of trading". Identifying, and staying with the primary trend is key to wealth accumulation. We use a variety of investment instruments such as stocks, ETFs, and options to take advantage of opportunities as they arise.
Disclosure: I am/we are long PIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.