7th GLOBAL CONFERENCE OF NATIONAL TRANSFER ACCOUNTS 11-12 June 2010: East-West Centre, Honolulu, Hawaii (USA)
Economic effects of population ageing on India’s public finance: Evidence and implications based on National Transfer Accounts M.R. Narayana Institute for Social and Economic Change Bangalore 560072, India 11 June 2010
Research questions • Does population ageing matter for India? • What does public sector contribute for welfare of elderly in India? • How to distinguish and combine the public sector activities as they are related to elderly? • What are the long term economic implications of population ageing on Indian public finance?
Population ageing Percent of total population
Figure 1: Age structure transition in India: 1971-2050 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1971
1981
1991 0-14
2001 15-59
2007 60+
2025
2050
Age structure transition in India: Current status and long term projections (Source: World Population Ageing, 2007, United Nations)
Percent of total population Age structure (Broad age groups: years)
2007
2025
2050
0- 14
31.2
24.5
18.3
15-59
60.7
63.5
61.0
60+
8.1
12.0
20.7
Total population (millions)
1134
1395
1593
Ageing and dependency India's dependency ratio: 2007-2050 70 60 Percent
50 40 30 20 10 0 2007
2025 Total
Youth
2050 Old Age
India’s public sector Indicators
1999-00
2004-05
10.88
8.70
0.69
0.54
1.85
1.48
13.38
11.93
18.36
14.51
58.10
49.71
1. Public consumption expenditure as percent of GDP 1.1. Total 1.2. Health 1.3. Education 2. Public consumption expenditure as percent of total (public and private) consumption expenditure 2.1. Total 2.2. Health 2.3. Education
Public support for India’s elderly 1. Pension schemes for Government employees 2. Contribution to social security of employees in the public sector enterprises 3. National Old Age Pension Scheme (NOAPS) 1995 – Social Assistance Programme 4. Annapurna Scheme 1999 – Eligible old people not covered by NOAPS – 10 kg of food grains supplied free of cost 5. Non-age specific public expenditure programmes (e.g. poverty alleviation schemes, and affirmative actions) 6. Welfare programmes by specific departments for senior citizens (e.g. concessions in bus/train fares, and special interest rate on bank deposits) 7. Insurance schemes for unorganised labourers and small producers (e.g. small coffee growers)
Methodology NTA – for estimation of public sector’s inflows and outflows for elderly and relate them to lifecycle deficit and instruments of financing consumption in 2004-05 – Major database: India Human Development Survey 2004 Budget forecasting model of Tim Miller – for long run forecasting of population ageing effects on fiscal policy
Lifecycle deficit, India, 2004-05 Figure 3: Aggregate labor income, consumption and lifecycle deficit, India, 2004-05
60000 50000 40000
INR (crore=10 million)
30000 20000 10000 0 0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
10000 20000 30000 Age
Consumption
Labor Income
Deficit
75
80
85
90
Main results from NTA estimations LCD for elderly, 2004-05 LCD, income and consumption indicators
Total – All Ages (INR in crore)
Lifecycle deficit (LCD)
260265
Elderly population (Age group: 65+) (INR in crore) 70175
Share of elderly (%)
Consumption share by components within total elderly consumption ((%)
26.96
Consumption
100.00 1844800
103921
5.63
Public consumption
342542
14138
4.13
13.60
•
Education
58795
0
0.00
0.00
•
Health
22805
1347
5.91
1.30
•
Other
260942
12791
4.90
12.31
Private consumption
1502258
89783
5.98
86.40
LCD for elderly • 2.45 percent of India’s GDP in 2004-05 • 8 times bigger than the LCD for young dependents (0-14) • Surplus generating age group: 26-64. This does not include elderly.
Aggregate public sector inflows, India 2004-05 Public age reallocations
Public net transfers Inflows
Total – All ages (INR in crore)
Inflows for elderly (Age group: 65+) (INR in crore)
Share of inflows for elderly (%)
0
-19542
0.00
445888
19276
4.32
•
In-kind transfers
342542
14138
4.13
•
Cash transfers
103346
5138
4.97
Aggregate public sector outflows for elderly, India, 2004-05 Public age reallocations
Total outflows – All ages (INR in crore)
Outflows for elderly (Age group: 65+) (INR in crore)
Share of outflows for elderly (%)
Outflows
445888
38818
8.71
Taxes
504622
43704
8.66
Direct taxes
141235
22227
15.74
Income tax
49268
1050
2.13
Corporation tax
91967
21177
23.03
Indirect taxes
363387
21704
5.97
•
58734
4886
8.32
•
Other revenues
Per capita inflows (INR)
Figure 2: Per capita public sector inflows, India, 2004-05 7000 6000 5000 4000 3000 2000 1000 0 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Age (years) Per capita in-kind transfers
Per capita cash transfers
Per capita public inflows
Figure 3: Per capita public outflows, India, 2004-05
2000 1000 0 INR
-1000 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 -2000 -3000 -4000 -5000 Age (years) Per capita direct taxes
Per capita indirect taxes
Per capita other revenues
Figure 4: Per capita net public transfers, India, 2004-05 3000 2000 0 -1000
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
INR
1000
-2000 -3000 -4000 Age (years)
INR
-2,500 -3,000 -3,500 -4,000 -4,500
Age (years) Asset-based Reallocations
Asset income
Saving
90+
-1,000 -1,500 -2,000
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0 -500
0
Figure 5: Per capita public asset-based reallocations, India, 2004-05
Financing elderly consumption Extent of financing consumption (%) Sources of finance 1. Labor income
32.47
2. Public sector age reallocations
-29.27
• Public transfers
-18.80
• Public asset-based reallocations
-10.47
3. Private sector age reallocations
96.80
Main conclusions • Net public transfers to elderly are strongly negative, because the taxes paid by the elderly substantially exceed the benefits they receive. Or, outflows from the elderly are greater than those required to fund transfers because they pay both interest on previously accumulated public debt and paying off that debt. • The heavy burden on the elderly is attributable in part to India’s tax system and partly on the absence of programs that provide specific and universal support to the elderly.
Budget forecasting model The model aims at forecasting the impact of population ageing through the fiscal policy instrument, viz., taxes, expenditure and debt, from 2005 through 2100. The model uses the age profiles of labour income and public sector inflows in 200405
Three policy scenarios • The Unsustainable Scenario - Public debt above 80 percent of GDP – financing new fiscal burden of population aging by public borrowings or through the issuing of new debt. • The Baseline Scenario - a combination of fiscal policies (i.e. tax and debt), which prevent an explosion of public debt or attain the sustainable level of debt • The Rapid Growth of Health Spending Scenario health spending per beneficiary is assumed to grow 1% faster than labor productivity.
Assumptions •
• • •
•
Aggregate labor income is derived using a fixed age shape of labor earnings which shifts upward over time at the growth rate of labor productivity, combined with a forecast of the population by age. GDP is derived by assuming a fixed ratio of GDP to aggregate labor income. Government revenues are assumed to be derived from taxes on labor income and are expressed as a fraction of GDP Aggregate government expenditures by Education, Health, Pensions, Poverty, and General Government Services are derived by using a fixed age shape of program benefits which shift upward over time at the growth rate of labor productivity, combined with a forecast of population by age. Rates of productivity growth, the interest rate, and the inflation rate are assumed to be unaffected by levels of government debt and taxation and the distribution of government spending.
Figure 6: Debt as percent of GDP, India, 2005-2100 160% 140%
Percent of GDP
120% 100% 80% 60% 40% 20% 0% 2000
2010
2020
2030
2040
Unsustainable
2050 Year Baseline
2060
2070
2080
Rapid Health $$
2090
2100
Figure 8: Budget composition in the Baseline Scenario, India, 2005-2100 60%
50%
Percent of Budget
40%
30%
20%
10%
0% 2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
Year Education
Health
Pensions
Poverty
Government Services
Debt servicing
Figure 9: Budget composition in the Rapid Growth in Health Spending Scenario, India, 2005-2100 60%
50%
Percent of Budget
40%
30%
20%
10%
0% 2000
2010
Education
2020
Health
2030
Pensions
2040
2050 Year
Poverty
2060
2070
2080
Government Services
2090
2100
Debt servicing
Table 10: Per Capita Net Public Transfers, India, 200405 (with age-specific cash transfers) 3000 2000 INR
1000 0 -1000 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 -2000 -3000 Age (years)
Figure 11: Budget composition in the Rapid Growth in Health Spending Scenario, India, 2005-2100 (with age specific public cash transfers) 50% 45% 40%
Percent of Budget
35% 30% 25% 20% 15% 10% 5% 0% 2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
Year Education
Health
Pensions
Poverty
Government Services
Debt servicing
Main conclusion In the absence of universal social security expenditure for elderly (e.g. old age pensions), the forecasting results in all the scenarios do not show the direction of population ageing effects on India’s public finance in India.
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