The United States of India

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In 1960, the emergence of the baby-boom generation marked the start of 50 years of economic growth in the United States. The reasons were mainly demographic and economic in nature, but also cultural and political. Nowadays, with baby-boomers retiring, growth in developed economies is slowing and risk-free rates are almost zero.

Successive generations (X, Y and millennials) have been unable to do anything about this slowing trend, and investors are placing many hopes on emerging economies. However, are such hopes well-founded? Brazil is going through a political crisis, Chinese growth is slowing and Russia has been weakened by fall in commodities prices. India, however, has undertaken promising reforms that could help to turn it into an “Eldorado”.

So, does it make sense to compare the US of the 1960s to India of the 2010s? Can young Indians be regarded as new ‘baby-boomers’?

To begin to answer these questions, we will focus on three points in particular: the working population, debt and urbanisation.

First of all, India is the world’s second-most populous country, with 1 235 million people living in its 29 states

India’s age pyramid is fundamentally different to those of developed economies, with a significantly higher proportion of young people. This, in fact, is India’s main asset and one already familiar to investors. The number of births rose from 1920 to 1995 (see Exhibit 1), accelerating in the 1950s with the green revolution, when the Nehru government instituted intensive farming that raised India to food self-sufficiency. So we have a large group of young individuals whose consumption is set to expand as they go through the different stages of life. Consumption and spending are expected to peak no earlier than in 2040 – 26 years from now (see the method used in the previous article, “Please mind the generation gap”). In comparison, 1960, the United States was still 47 years from the baby-boomers’ peak in spending, in 2007.

Exhibit 1: The evolution of India’s birth rate from 1910-2015 in millions, demonstrating a significantly positive upward trend


Source: World bank as of October 2016

Let’s move on now to the first point we mentioned above – the working population, defined as the number of persons between 15 and 64 years of age and available to work. This is a major indicator, given that it constitutes both the driver of a country’s value creation and its future consumers and taxpayers. In 2015, India’s working population totalled 860 million and will continue to rise until 2040, whereas China, for example, has just peaked (see Exhibit 2). Likewise, from 1960 to 2010, the US working population rose constantly compared to its total population.

Exhibit 2: Trends in population growth between the ages of 15-64 as a percentage of the total population


Source: United Nations, World Population Prospects, the 2015 revision

Both developed and emerging economies are seeing lower birth rates and longer lifespans, but the gaps are tending to narrow

Between 1960 and 2014, life expectancy rose from 69 to 79 years in the US, and from 54 to 68 in India. 620 million Indians were younger than 25, while only 73 million were older than 65. So the ratio of young to old is 8 to 1 in India but just 2.2 to 1 in the US (it was 4.9 in 1960). This has major repercussions on the economy and, in particular, the direction of public spending.

Let’s now move to our second point: what is the impact of an ageing population on public spending?

Developed economies are spending more and more on their ageing population’s pensions and healthcare. This is funded in part by higher taxes, but also by new debt. The US public debt burden rose from 54% to 105% of GDP between 1960 and 2015, according to the IMF, vs. 65% currently in India. So India has some leeway in funding its development through debt in the coming years.

While India’s GDP has risen by an average of 7% in the last three years, its share of global GDP is still very low, at 5%, compared to 20% for the US. India’s economy is relatively healthy, as Indians are able to save, and India is growing strong with relatively low public debt.

Exhibit 3:


What about urbanisation, the third factor we mentioned above?

Research published by Christian Dustmann in “Migration: economic change, social challenge” shows that the increase in the number of city-dwellers compared to the population at large and the pace at which this increase is occurring have a major impact on GDP growth. For example, when a farmer leaves the countryside to become a taxi driver in the city, he doubles his consumption of goods and food without having acquired any additional qualification.

Urbanisation has occurred linearly over time (see Exhibit 4, left chart) in the US and Europe but is now accelerating. It took the US 50 years for the proportion of its population that is urbanised to rise from 50% to 70% (in 1970), whereas it took Europe 30 years and will probably take China 20 years if its growth rate holds at 6%.

However, the increase in GDP is exponential to the rate of urbanisation (see Exhibit 4, right chart). When the US reached an urbanisation rate of 70% in 1970, per capita GDP in purchasing power terms had risen from USD 5 552 to USD 15 030**. India’s urbanisation rate is not comparable with the US’s 1960 level (65%) as it is only 31%, with a per capita GDP of USD 3 371**! So India’s potential per capita GDP growth looks considerable – and more rapidly accessible than in the past.

Exhibit 4: Trends in urban populations as a percentage of the total populations


However, the situation is not all rosy

Although India is a democracy it is marked by wide social inequalities and suffers from a lack of infrastructure and social safety nets. Moreover, Indians often complain of a bureaucracy that slows their country’s development considerably. Even so, the government of Prime Minister Narendra Modi now looks determined to remove these obstacles in a favourable environment of low commodity prices.

In conclusion, based on the above three points and from a Western point of view, India now offers the same potential as the United States in the 1960s. These similarities are found even in the development of the movie industry. American movies in the 1960s were of a “Kiss Kiss Bang Bang”, action-filled nature. Its capital, Hollywood, has over time become a powerful and structured industry as well as a vector for projecting American culture abroad.

Meanwhile, Bollywood movies, made mainly in Mumbai, are now exported to Southeast Asia and the Middle East. They are often musical comedies featuring song and dance routines. Just as Americans dream through their major Hollywood productions, the new baby-boomers dream and project themselves onto the screens of Bollywood.

In both the economy and cinema, the “United States of India” looks as though it has a great future ahead of it.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, portfolio transaction, liquidation and custody services for funds invested in emerging markets may carry greater risk.

Fabien Benchetrit

Senior Portfolio Manager, Model-driven Cross Asset, THEAM

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