January 31, 2018

The Next Generation of Wealth Creation

We have a better standard of living than our previous generations and the coming generations will have a much more better standard of living. This is a India centric statement and we shall demonstrate this statement with some facts and figures. So Ladies and Gentlemen, please get ready for reading an article which will leave you optimistic for the future.


Terminologies

To start of with, we have our Gross Domestic Product (GDP) which is a widely used measure for the economy. It is basically the value of everything (goods and also services) produced within the country. After the GDP we have something which every Indian is familiar with - Population. While GDP is a measure of a country's economy, the GDP-per-Capita is an average number derived by dividing the GDP with the total population.

India's Statistics


India's Population


India's GDP

India's GDP Per Capita
Since 2002, India's GDP per capital is growing exponentially. Going forward, this number will only increase and we believe - At a faster pace. Lets understand this using simple maths.

India's Future

The GDP

India's Real GDP growth rate (Adjusted for inflation) is ~ 7% and it is estimated to grow at 7% to 8% for the foreseeable future. India is expected to be one of the fastest growing major economies of the world as per various papers, reports and publications. From a GDP of $2.2 Trillion, we will touch $18 Trillion over the next 3 decades (Growing ~ 7% p.a.)

The Population

India's population is expected to grow at a net rate of 1.3% p.a. for the next decade and further slow down over the next few decades. Infact, some reports claim that India's population would start shrinking after 2050-2060. The fertility rates are down from 5.9 in 1951 to 2.3 in 2011 and is expected to slip below 2 in the coming decade. From 1.35 Billion in 2017, our population will increase to 2 Billion over the next 3 decades.

The Wealth Creation

Now when we do the simple math of a $ 18 Trillion economy with a 2 Billion population, we get a GDP-per-Capita of $9,000. In 2016, this figure was ~ $1,750. Though it is better to compute all this is $ terms, for simple understanding let's break it into Rupee terms. We expect India's GDP per capita to increase from Rs 1,14,660 to Rs 5,85,000 over the next 3 decades (We have assumed a $ rate of Rs 65.

What we ignore

What we are ignoring in this computation is that innovation and technology have the power to propel the growth rate of our economy. India's population is shifting from working in the fields to more skilful jobs and India's biggest challenge is to create enough opportunities to absorb this demographic shift of workers. The largest threat here is innovation (Artifical Intelligence, other futuristic technologies) itself.

Having said that, even at $9,000 per head India will still lag most of the major economies of the world (even in today's terms). The below chart shows India's standing when compared to the global average.


The Potential

After India's fabled 1991 tryst with opening up it's economy, one would expect India to have propelled itself to the big league! But China has out-performed India on a massive scale. Just look at the historical GDP Per Capita for India vs China since 1991.

Post 1991 chart of GDP Per Capita growth


If India is able to ape China's rate of growth (or even a bit slower than it) then there will be massive wealth creation for India. This will not be easy as it involves radical measures in terms of economic and political reforms. However, one must note that an increase in GDP most probably will not trickle down to the grassroots proportionately.

What it means for investors

A growing economy will create headroom for booming stock markets. We are just a ~ $2.2 Trillion economy and if we are to indeed grow to $18 Trillion, then over the next 30 years, we can expect $15.8 Trillion of wealth creation. Even if we assume a 100% Marketcap to GDP ratio then $15.8 Trillion of wealth is going to be created.

The wealth creation that you have witnessed in megabaggers like Infosys, Reliance, MRF, Eicher Motors, Maruti, Bajaj Finance, etc over the last 3 decades will be dwarfed by what is going to happen over the next 3 decades! As a long term investor you need to be optimistic and believe in the stock called India.

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