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 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Figure 1: Age structure transition in India: 1971-2050 1971 1981 1991 2001 2007 2025 2050 0-14 15-59 60+
Age structure transition in India: Current status and long term projections (Source: World Population Ageing, 2007, United Nations) Age structure (Broad age groups: years) Percent of total population 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 Percent 70 60 50 40 30 20 10 0 2007 2025 2050 Total Youth Old Age
India s public sector 1. Public consumption expenditure as percent of GDP Indicators 1999-00 2004-05 1.1. Total 1.2. Health 1.3. Education 2. Public consumption expenditure as percent of total (public and private) consumption expenditure 10.88 8.70 0.69 0.54 1.85 1.48 2.1. Total 2.2. Health 2.3. Education 13.38 11.93 18.36 14.51 58.10 49.71
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 10000 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 20000 30000 Age Consumption Labor Income Deficit
Main results from NTA estimations LCD for elderly, 2004-05 LCD, income and consumption indicators Total All Ages (INR in crore) Elderly population (Age group: 65+) (INR in crore) Share of elderly (%) Lifecycle deficit (LCD) 260265 70175 26.96 Consumption 1844800 103921 5.63 Consumption share by components within total elderly consumption ((%) 100.00 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 Total All ages (INR in crore) Inflows for elderly (Age group: 65+) (INR in crore) Share of inflows for elderly (%) Public net transfers 0-19542 0.00 Inflows 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 Other revenues 58734 4886 8.32
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
INR 2000 1000 0-1000 -2000-3000 -4000-5000 Figure 3: Per capita public outflows, India, 2004-05 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Age (years) Per capita direct taxes Per capita indirect taxes Per capita other revenues
INR 3000 2000 1000-1000 -2000-3000 -4000 Figure 4: Per capita net public transfers, India, 2004-05 0 0 510 15 2025 30 3540 45 5055 Age (years) 60 6570 75 8085 90
INR 0-500 -1,000-1,500-2,000-2,500-3,000-3,500-4,000-4,500 Figure 5: Per capita public asset-based reallocations, India, 2004-05 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+ Age (years) Asset-based Reallocations Asset income Saving
Financing elderly consumption Sources of finance Extent of financing consumption (%) 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 2004-05
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% 120% Percent of GDP 100% 80% 60% 40% 20% 0% 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 Unsustainable Baseline Year Rapid Health $$
Figure 8: Budget composition in the Baseline Scenario, India, 2005-2100 60% 50% 40% Percent of Budget 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% 40% Percent of Budget 30% 20% 10% 0% 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 Year Education Health Pensions Poverty Government Services Debt servicing
Table 10: Per Capita Net Public Transfers, India, 2004-05 (with age-specific cash transfers) 3000 2000 1000 INR 0-1000 -2000-3000 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 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% 35% Percent of Budget 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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