Winners and Losers in India's 'Population Problem'

Last week, we wrote about India's population problem.

No, it's not what you think. India does not have a population explosion problem as we have been repeatedly told.

Instead, India's problem is that it's population will peak much sooner than anticipated...and then decline. In other words, India could grow old before it grows rich.

Here's an excerpt from last week's piece...

• The data says India's 'replacement rate' has fallen below the level needed to maintain the population.
  
  The replacement is the rate at which the population can replace itself from one generation to another.
  
  The fertility rate is the number of children a woman is likely to have. The fertility rate of 2.1 is termed as the 'replacement rate'.
  
  In 2021, India's total fertility rate fell to 2.0.
  
  All this means that India's population will peak much sooner than anyone anticipated, by 2060, at about 1.6 billion.
  
  India's population is close to 1.4 billion today. So the data has made it clear that for the next four decades, population growth will be slow. In fact, the rate will keep falling until it reaches zero around the year 2060.
  
  Then population growth rate will turn negative.

You can read the article here.

Fast Growth Needed

The need of the hour is effective economic reforms that brings rapid growth and wealth creating opportunities to the people of the country. India has a narrow window of opportunity of about 30-40 years to transform itself into a developed nation.

Otherwise, India will be stuck in what economists call the 'middle-income trap'. In this state, a nation's population peaks and shrinks well before it becomes rich. Brazil is a good example of a country stuck in the 'middle-income trap'.

We must demand the best from our politicians and business leaders if India is to overcome this trap and make the transition to a developed nation.

But what can we do with our own money?

Can we take actions to ensure a wealthy life for ourselves and our families despite a less favourable demographic situation in India?

Yes, we can.

In this editorial, we look at the sectors that will benefit from the changing population trends. We will also highlight some sectors to avoid.

First, the big winners...

Real Estate

Developers in India are in a tricky situation in the long term.

A nation in which population growth is rapidly decelerating might not be the best place to grow.

But this is only half the story.

India will get older and wealthier at an ever increasing rate. People will demand premium, comfortable living spaces. Not to mention second homes/vacation homes.

One needs to only look to China's massive real estate boom despite it's rapidly declining population growth to understand the potential in India.

Thus, real estate companies that pivot from low-income housing to premium housing will do very well.

Another niche segment that will do well is senior housing.

India will overtake China as the most populous nation in a few years. With each passing year, our large population will get older. At some point in their lives, many people will think of living in a comfortable place after retirement.

Enter senior housing. Companies focused on this niche have a massive tailwind going for them which will last several decades.

Richa Agarwal, our smallcap guru, has recommended the stock of a company, which operates in this very profitable niche, to subscribers of her smallcap recommendation service Hidden Treasure.

High-End Consumer Retail

A large population which is not as young as it used to be, will choose to spend more on products that are 'classy' as opposed to 'trendy'.

Trends are all the rage among India's youth today. That won't be the case 15 years from now. Premium products that cater to specific needs of discerning customers will be the rage then.

Consumer brands - fashion, electronics, accessories - that recognise this shift will slowly but surely develop a base of loyal premium customers. These companies will dominate the retail sector over the next 2-3 decades in India.

On the other hand, brands that continue to focus on the youth and/or low-income segment 10 years from now, will struggle to grow their profits. They will face increasing competition in a stagnant market.

Travel & Tourism

This will be a huge growth industry in India's future.

Covid-19 will seem like a distant memory when an older and richer population begins spending big money on luxury vacations.

This is something that might seem like an alien concept for many investors today. After all, we think only rich people go on luxury vacations.

It's hard for ordinary Indians to imagine a middle class family going on a luxury cruise. But there is nothing unusual about this. It happens all the time in the developed world.

One only needs to look at the spending patterns of people in richer countries to see how this will play out in India.

Of particular interest to investors should be companies that are going the extra mile to deliver customised experiences for travellers.

Plain vanilla tourism will soon be a thing of the past in India. That day will come sooner than you think.

Technology

This one is obvious but very important.

Today ,the tech sector in India is dominated by IT services firms. Think Infosys, TCS, and the like.

But India's tech sector 15 years from now will look a lot different.

The big IT services firms will likely still be around. But they will face huge competition from a growing number of newer companies.

These companies are just startups today. As you read this, promoters of these startups may be worrying about getting investors to back their vision.

But some of them will make it past the initial growth stage. And a few of them will inevitably become world leaders in their niche.

Far sighted investors in these stocks will become very wealthy indeed.

Healthcare

The younger the population, the healthier it is on average. This is assuming of course the infants are taken care of.

But as a nation gets older, the healthcare needs of its population goes up. The older we become, the more we depend on the pharma industry. This is sad but true.

Just look at the gigantic size of the healthcare sector in the developed world. That will tell you all you need to know about the wealth creation potential of these companies.

Covid-19 may have brought these firms into the spotlight but they have a very bright long-term future as well. It's just a matter of finding the right stock and holding on to it.

Now let's examine a couple of sectors that are not as promising as one might think...

Education

EdTech is a rage today but this won't be the case in the future.

It's only a matter of a few years before the numbers of children filling up India's schools will peak and then decline.

That doesn't mean these companies won't make money, but they will be facing a headwind to their growth. And only the best will survive.

The industry itself will likely not deliver superlative profits after this decade.

FMCG

This might seem odd but it's a natural result of a slowing population.

Sales of FMCG firms are closely related to the population of a country. This is because FMCG firms sell staples, i.e. food and basic consumer items.

With population growth slowing down, their profits will be increasingly driven by higher-priced items.

But there is a limit to how much they can raise prices. This headwind will play its role in preventing FMCG firms from becoming a high-growth industry in the future.

Conclusion

So these were some of the sectors that are likely to do well beyond this decade...and some that may not do so well.

If you are a long-term investor interested in putting together a retirement portfolio, we strongly recommend you consider India's demographics.

Population trends will give you a good idea about investment ideas you could bet your retirement on.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...