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Shyamal Banerjee/Mint.
Shyamal Banerjee/Mint.

Gaining from demographic dividend

If relevant policies that effectively capitalize on resources of country are in place during this phase, the economy can greatly benefit. Lack of such policies can turn demographic dividend into big disaster

Like several socio-economic factors that influence a country’s development, demographic dividend is perhaps one of the most important ones to understand. Demographic dividend is the advantage a country gets when its labour force or working population outgrows the number of people who are dependants. These dependants could either be children, homemakers, and/or elderly people who don’t contribute towards a country’s gross domestic product (GDP) growth. The higher per capita income at this time leads to greater savings and growth of the country as a whole.

In the near future, India will be the largest individual contributor to the global demographic transition. The US Census Bureau predicts that India will surpass China as the world’s largest country by 2025, with a large proportion of those in the working age category. Over the next two decades, the continuing demographic dividend in India could add about 2 percentage points per annum to India’s GDP growth, according to a paper by Shekhar Aiyar and Ashoka Mody (read it here: http://goo.gl/4vyFC7).

Demographic dividend is more of an opportunity rather than an assurance of better standards of living. If relevant policies that effectively capitalize on the resources of the country are in place during this phase, the economy can greatly benefit. The lack of such policies can turn demographic dividend into a big disaster. One such country that recently went through a demographic disaster is Portugal. The economic meltdown that affected most of Europe and the Americas also caused a demographic decline in this country. Due to a weak government, ineffectively implemented policies and a declining birth rate, Portugal still hasn’t managed to come out of recession.

Here are some of the advantages for investors.

Financial services space should do well: With the economy growing, banking and financial services are the first ones to demonstrate the growth. All forms of loans grow in demand. Due to more disposable income, families go for better standards of living and leverage their loan capacity to get there. Corporate loans also rise in numbers, given the better returns on business. With inflation being tamed, loans become cheaper and financial institutions become more profitable. Banks also gain from covering more households. With minimum balance guidelines in place, all customers who join the workforce become eligible for creating bank accounts and, thus, contribute to available credit offered through the banks. Investors can buy mutual funds in this space and/or invest in direct equity of companies that have given consistent rate of return.

Retirees to have adequate growth opportunities: People who are in retirement phase for the next few decades and/or those who are about to enter the retirement phase soon, should get adequate growth opportunities for their investments. With markets doing well, they would get opportunities to allocate a part of their corpus to low- to medium-risk investments, giving them a returns kicker to beat inflation. All fixed income portfolios can be diluted with some market risk driven equity investments through the mutual funds route.

Infrastructure should grow substantially: Given the focus on infrastructure revival, this space is set to grow stupendously. Increase in foreign direct investment in defence and rail infrastructure is just the beginning. Creating business supportive environment is crucial to foreign and domestic investments. And additional production of electricity, roads, ports, high-tech telecommunication network and Internet connectivity, which were cast-starved, are set to take off. Policy and governance will continue to be key in this space. Investors can target specific infrastructure-based mutual funds and/or direct investment in related companies that have strong managements and balance sheets, and good business models.

Affordable housing is set for high growth: India faces acute shortage of affordable homes. As the earning population increases, their first emotional investment would be buying their first home. Housing that is made affordable by regional metrics will be the key to realizing such dreams. With some support from the government, this space can drive the real estate sector upwards, giving better returns and rental yields. With an increasing work population, the office space segment is also likely to grow as domestic and foreign companies look for opportunities to buy such spaces. A reasonable asset allocation to real estate should give good returns and inflation hedge.

Healthcare, pharmaceutical and fast-moving consumer goods (FMCG) to benefit: As the working population increases, so does consumption, and lifestyle diseases. Investors could focus on dividend-paying stocks, and build a portfolio consisting of average or high yielding stocks that have an ability to grow dividends. Dividend income helps avoid selling a large part of stocks in the portfolio during a market downturn. Such stocks can, in fact, become a source to derive retirement income. Dividend paying instruments provide growth that compensates for the erosion in purchasing power of the investor’s portfolio.

Let’s remember that demographic dividend is not inevitable. It is a phenomenon that is time sensitive and depends on the creation of and capitalization of opportunities in a socio-economic environment. It is imperative for the government to recognize the phenomenon and lay out reforms and guidelines that would enable the country to be on a consistent growth trajectory and thereby investors to build their wealth.

Amit Kukreja is chief financial planner and founder, WealthBeing Advisors.

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