PremiumMUMBAI : The year is 2007. The monsoon had just arrived in Mumbai and it was pouring cats and dogs. The windows of the Premier Padmini kaali-peeli I am in are stuck and don’t go up beyond a point. By the time I reach the Taj Mahal Hotel in Apollo Bunder, near the Gateway of India, my clothes are wet.
I had gone to cover a press conference about the launch of yet another diversified equity mutual fund scheme.
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Premium Premium Five minutes into the presentation by the fund manager of the scheme, the “IDD slide" came along. A bull market in stocks was on and, to cash in on that, almost every week a new mutual fund scheme was being launched. And almost all the presentations had what I had started calling the IDD slide, where IDD stood for India’s Demographic Dividend.
The demographic dividend of a country is essentially a period of two-three decades when the birth rates go down and this leads to a situation wherein the workforce of the country is growing at a faster rate in comparison to its population. As these individuals enter the workforce, find work, earn money and spend it, the economy is expected to do well and grow at a faster pace than it has in the past.
In the Indian case, the IDD slides told us that nearly 12 million Indians a year, or one million a month, are expected to enter the workforce. This would happen over three decades (largely up to the mid-2030s). As these individuals entered the workforce, the Indian economy would grow at a very fast pace... as fast as China’s, if not faster.
China had grown at 12.72% in 2006 and would end up growing by 14.2% in 2007. Hence, the possibilities in India were endless. The rapid economic growth would pull millions of Indians out of poverty. This was the theory that was sold to us. Things went largely as per plan up until 2011. Since then, things have started to go south and now, in 2019, we have enough evidence to say with reasonable confidence that India’s so-called demographic dividend has started to unravel and is the main reason behind the current economic slowdown. Here’s a breakdown of how India’s dream began to collapse:
The rise of debt
The gross domestic product (GDP), or the measure of the size of any economy, is obtained by adding private consumption expenditure, investment, government expenditure and net exports (exports minus imports). Among those four categories, except for government spending, the situation is dire. Private consumption expenditure constitutes the bulk of the economy. In 2018-19, it constituted 59.4% of the Indian economy.
Click here to see the enlarged version of the graphic
The growth in private consumption expenditure peaked in 2011-12 at 17.53% (see Chart 1). It has largely been on a downward trend since then. In the first six months of 2019-20, for the first time since 2004-05, the growth has fallen to single digits and stands at 7.02% (all growth numbers in nominal terms).
What has been happening with consumption is broadly mirrored by the decline in savings in the economy. The net financial savings of households (their fixed deposits, insurance policies, mutual funds, small savings, etc., minus their financial liabilities) has been falling over the years (see Chart 2). The net financial savings peaked between 2008-09 and 2010-11, when they were greater than 10% of the gross national disposable income (GNDI) in each of the three years.
Since, 2010-11, however, the net financial savings have been falling and in 2017-18, it stood at 6.52% of GNDI. This is at a time when financial liabilities have been on their way up, peaking at 4.28% of GNDI.
What does this tell us? It tells us that since 2011-12, a good part of the growth in private consumption expenditure has been built on the back of higher borrowings by the household sector. People have borrowed more to finance consumption.
The other interesting thing that Chart 2 tells us is that household savings on the whole have also fallen over the years. This basically means that other than borrowing to finance consumption, people have also been spending a greater proportion of their income to finance consumption and, in the process, they have saved a lesser proportion of their income.
The question is why have people been spending a greater proportion of their income and borrowing to finance consumption. The growth rate of per capita GNDI, or the average income available to an Indian for consumption and saving, holds some clues. Growth in per capita GNDI peaked in 2010-11 at 16.94% (see Chart 3). Since then, it has been on a downward trend. In fact, in the last five years, it has grown in single digits. This explains why people have been consuming a greater proportion of their income and also borrowing more to finance consumption.
Also, income-tax data shows us that average salaries have gone up by a mere 4.5% per annum between assessment year 2012-13 and assessment year 2018-19 (income earned in 2017-18). Hence, once we adjust this for inflation, the income in real terms for the salaried class has barely grown. Growth in rural income has also slowed rapidly.
Investment scene gloomy
Investment is the key driver of growth and consumption. The logic is fairly straightforward. Investment creates jobs. Jobs provide income to people. People spend this money, and this boosts consumption and helps other people earn an income as well. These earners subsequently spend their money and provide a further fillip to consumption. So, the cycle works. In fact, this is exactly the logic that the fund manager who I had heard on that rainy day in 2007 had to offer on India’s demographic dividend.
Of course jobs cannot be created without a rise in investment. But the investment scenario in the Indian economy is deeply worrying. Investment to GDP ratio peaked at 35.81% in 2007-08, in the year before the financial crisis. It fell over the next few years only to rise again to 34.31% in 2011-12 (see Chart 4). This happened primarily because of an increase in government expenditure in the aftermath of the financial crisis, along with inducements that encouraged public sector banks to lend more to industry. It was in these years that public sector banks ended up disbursing loans to many projects, which eventually turned into bad loans. The country is still bearing the cost of the bullishness of those years.
In 2010-11, new investment projects worth ₹ 25.73 trillion were announced. In 2018-19, this was down to ₹12.1 trillion or 46% of the 2010-11 figure. During the first six months of 2019-20, new investment projects worth just ₹2.12 trillion have been announced.
When it comes to investment projects which have been dropped, the situation appears even more grim. In 2010-2011, investment projects worth ₹4.04 trillion had been dropped. In 2018-19, projects worth ₹20.74 trillion were dropped. During the first six months of 2019-20, projects worth ₹7.89 trillion have already been dropped.
All this clearly tells us that corporate India is clearly not interested in investing at this point of time. Like consumers, they have very little confidence in the economic future. In this scenario, it is not surprising that the unemployment rate among the youth has gone up significantly. According to the National Sample Survey Office’s Periodic Labour Force Survey, the rate of unemployment among 15-29 year olds was at 17.4% in 2017-18, having jumped from 5% in 2011-12.
The Centre for Monitoring Indian Economy provides us with more recent unemployment data. In January 2017, the rate of unemployment among 15-19 year olds, 20-24 year olds and 25-29 year olds, was 27.34%, 21.65% and 8.73%, respectively. In November 2019, the rate was at 40.92%, 39.23% and 10.03%, respectively.
What also needs to be emphasized is that between January 2017 and November 2019, the labour force participation rate has gone down from 45.26% to 42.37%. The labour force participation rate is the proportion of working-age population that is employed or actively seeking employment. With the rate falling, what it tells us is that many people have even stopped looking for jobs. Even after this, the rate of unemployment has increased.
Hence, job creation is not happening and without job creation what will the million individuals entering India’s workforce every month (our so-called demographic dividend) do?
Dashed dreams
It is safe to say now that India’s demographic dividend is collapsing. Some state governments are dealing with this by reserving jobs for locals and, in the process, hoping to narrow down the pool of people who are eligible for jobs within the state. Andhra Pradesh is one such state. Maharashtra’s newly formed three-party government has such plans as well. This is basically a race to the bottom which puts the entire idea of India at stake.
Union finance minister Nirmala Sitharaman recently said that the economy was not in a recession. And she is right, given that recession is a situation where the GDP (the size of the economy) contracts for two consecutive quarters. Having said that though, the promised acche din is not going to come soon either.
So, what is the need of the hour? As economic history clearly suggests, no nation has gone from a developing one to a developed country without making gains on the exports front.
In India’s case, exports of goods and services peaked at 25.43% of GDP in 2013-14. In 2018-19, exports had fallen to 19.74% of GDP. The country’s export capability has crashed big time.
For Indian manufacturers to be able to compete internationally, reforms are required on the land, labour, and tax fronts. The government has recently reduced corporate income-tax rates. Over and above this, even to compete within the country, the Indian entrepreneur needs to pay a fair price for electricity and freight. Currently, the cost of cheap electricity for farmers is being borne by industry. Along similar lines, railway passengers are subsidized at the cost of freight. The taxes on aviation fuel have ensured that air cargo rates in India are among the highest in the world. The turnaround time in many government-run ports is also too long.
The goods and services tax (GST) system is in a mess. India’s experiment with a multi-rate, complicated GST continues. The ability of tax authorities of different kinds to harass entrepreneurs and individuals continues to remain high. Our primary education system in particular and the education system in general, except for a few elite schools and colleges, continues to produce people with very poor competence in reading, writing and basic maths. Finally, both the justice and the police systems need rapid reform.
There is nothing new about any of these points. What needs to be done for India to grow at a pace of 8% or more, on a consistent basis, is well known. The trouble is each of these reforms challenge a legacy system which is in place.
We have time till 2035 to cash in on our demographic dividend. We are more or less in 2020 now, and 2035 is just a little over a decade-and-a-half away. After that horizon year, India will start aging and the benefits of the dividend will start to fade.
Vivek Kaul is an economist and the author of the Easy Money trilogy.
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