Bhaskar Chakravorti and Gaurav Dalmia
<\/p>\n\n\n\n
Summary. <\/strong>Is India\u2019s economic rise inevitable? There\u2019s good reason to think that this latest round of Indo-optimism might be different than previous iterations, but the country still has major challenges to address to make good on this promise. In terms of drivers, demand…more<\/p>\n\n\n\n In 2002, India\u2019s government launched a ubiquitous international tourism campaign known as \u201cIncredible India.\u201d Were it to launch a similar campaign today, it might as well be called \u201cInevitable India.\u201d Not just enthusiasts within the country, but a chorus of global analysts, have declared India as the next great economic power: Goldman Sachs has predicted it will become the world\u2019s second-largest economy by 2075,<\/a> and the FT\u2019s Martin Wolf suggests<\/a> that by 2050, its purchasing power will be 30% larger than that of the U.S.<\/p>\n\n\n\n We have been through similar surges of Indo-optimism before. But the on-the-ground reality has continued to frustrate even the most ardent of India\u2019s champions. From bold predictions<\/a> that it would overtake China (an economy still five times larger than India\u2019s), to McKinsey\u2019s 2007 \u201cbird of gold\u201d<\/a> promise of the Indian consumer that never quite panned out, to deregulation followed by policy reversals and crises of confidence in doing business with India, to devastating periods through the pandemic, the country\u2019s promised inevitable rise has remained elusive. What\u2019s different now?<\/p>\n\n\n\n There are several positive trends converging, from different sides of the Indian business ecosystem: demand, supply, and the system-wide facilitating factors; in combination, they can transcend economic cycles, macro shocks, and policy reversals. Some are new, and the older ones are reaching critical mass and they can finally reinforce each other to create a growth flywheel<\/a>. But as with all flywheels, it is important to remain vigilant about rattling noises and burning smells, and in India\u2019s case, these exist in abundance. It\u2019s essential for both business and government leaders to pay attention and act before the flywheel breaks.<\/p>\n\n\n\n Three forces are converging on the demand side to fuel India\u2019s economic growth.<\/p>\n\n\n\n The starting point for any discussion of India\u2019s promise is, invariably, the promise of the Indian consumer. With 1.4 billion people and myriad unmet needs, India\u2019s growth is driven mainly<\/a> by domestic consumption and investments. Real wages are expected to grow at 4.6%,<\/a> whereas disposable income will continue to grow in excess of 15%<\/a>. Industries that are mature in the West are fast-growing in India: Private health insurance, for example, has almost tripled between 2015 and 2021<\/a>, while consumer durables were expected to grow between 15% and 18%<\/a> this year.<\/p>\n\n\n\n International companies have struggled to grasp what constitutes India\u2019s \u201cmiddle class\u201d and craft the appropriate value propositions. While some analysts<\/a> argue that one out of every three Indians is \u201cmiddle class,\u201d only 66 million<\/a> are genuinely \u201cmiddle income\u201d by global standards, while a whopping 1.16 billion<\/a> are low income. However, many in this second group constitute a vast aspirational consuming class<\/a>.<\/p>\n\n\n\n This has many implications. For one, competing in India means selling at much lower price points, which in turn requires reconfiguring activities, production, and supply chains in ways that are hard for competitors to mimic. India\u2019s best-selling car is Wagon R, priced at $7,000 and made by Japan\u2019s Suzuki, a company whose 41% market share<\/a> in India is an outlier in the auto industry globally.<\/p>\n\n\n\n That said, as Netflix discovered<\/a> through its stumbles in the country, it takes more than low prices to win in India. Localizing the content, working in multiple Indian languages, and leveraging synergies across products that Indian consumers want, as Amazon or Disney can do, is essential. In a very different sector, McDonald\u2019s, has incorporated vegetarian options, Indian snacks, and menus for multi-generational families, building a contextualized value proposition.<\/p>\n\n\n\n Those that can crack the code of the Indian consumer are handsomely rewarded: Many McDonald\u2019s franchisees in India are billionaires. The home appliances manufacturer Havells introduced a product line with \u201cIndia-friendly\u201d offerings such as water purifiers and compressor-less air coolers, relevant to both the Indian consumers\u2019 needs and affordability. Since its listing 30 years ago, Havells\u2019<\/a> profits have grown 826 times, and its market cap has jumped 5,800 times.<\/p>\n\n\n\n A burgeoning new source of demand growth comes from India\u2019s urgent need for a green transition. The scale of its economic potential means that its energy demand will be enormous. As the third-largest energy-consuming nation, it is already 4th in the world<\/a> in renewable energy installed capacity. The country has set ambitious targets<\/a>: installing 500 gigawatts of renewable energy capacity, producing 5 million tons of green hydrogen annually, cutting emissions by 45%, along with a billion tons of CO2 \u2014 all by 2030. A 2021 report<\/a> by the World Economic Forum projects 50 million net new \u201cgreen economy\u201d jobs in India \u2014 which means more consumers \u2014 and $15 trillion in economic opportunity by 2070, with $1 trillion by 2030.<\/p>\n\n\n\n There are several positive forces converging on the supply side as well.<\/p>\n\n\n\n One part of the supply-side story is old news: By 2030<\/a>, India\u2019s working-age population is expected to be 1.04 billion with a dependency ratio to be the lowest in its history at 31.2%, contributing just under a quarter of the incremental global workforce. The working-age population bulge is expected to last till 2055.<\/p>\n\n\n\n The \u201cAsian Miracle\u201d was built on harnessing this trend: Japan entered this sweet spot in 1964, South Korea in 1967 and China in 1994. Additionally, India also has the largest pool of English-speaking STEM graduates in the world.<\/p>\n\n\n\n India\u2019s financial markets are in a better state than ever before. With the China opportunities cooling, investors need alternatives, and India comes closest. The MSCI India Index is up 12%<\/a> this year, compared to 2% for the MSCI Emerging Markets Index.<\/p>\n\n\n\n Bank balance sheets are stronger<\/a> and credit markets are functioning well. It\u2019s telling that many Indian banks are valued higher<\/a> than U.S. peers. HDFC Bank \u2014 which merged with its parent, mortgage lender HDFC \u2014 has a market capitalization of $171 billion, making it the 4th largest financial company in the world. Even before the merger, the 29-year-old upstart was more valuable than the 154-year-old Goldman Sachs.<\/p>\n\n\n\n The change can be seen even in the traditionally underfinanced informal sector, comprising over 86% of India\u2019s workforce. Avendus, a leading Indian investment bank, calculated<\/a> that Indian small-and-medium-enterprise sector\u2019s total demand for debt is $1.5 trillion. Of this, $725 billion is unaddressable because of lack of collateral, and formal credit is only available to the tune of $289 billion. This is motivating lenders to deepen their offerings. New-to-credit customers are at 34% up from 9% of customers for small business lenders in 2017. Loans by small business lenders have jumped 43% annually in the past two years.<\/p>\n\n\n\n A critical barrier that sticks in the mind of anyone who has visited India is its lagging infrastructure. Historically, investing in handouts<\/a> may have been more politically expedient, but the current administration\u2019s popularity gives it greater leeway<\/a> to invest in infrastructure. Capital expenditure as a percentage of total government expenditure has increased from 11% in 2010 to a projected 22% this year. Infrastructure expenditure this year will see a 33% hike to $122 billion.<\/p>\n\n\n\n The outcomes have been striking. India has been adding 10,000 km of highway<\/a> annually. Since 2014, the number of Indian airports has doubled<\/a> and an upgraded train system will have new high efficiency \u201cfreight corridors<\/a>\u201d connecting the economic centers of India.<\/p>\n\n\n\n In addition, one of most distinctive changes has been in the digital infrastructure. With 881.25 million<\/a> internet subscribers, India has the second-highest internet-enabled population in the world behind China\u2019s 1.05 billion<\/a>. Riding on this access, there is a digital public infrastructure<\/a> \u2014 a model being studied by other countries \u2014 that combines a population-scale unique identity system, a payments interface that makes digital payments seamless, and a data management system, whereby citizens can access essential documents online, such as tax documents, vaccination certificates, etc. All of this helps make public services and credit more easily accessible to a wider swath of the population.<\/p>\n\n\n\n As an indicator of the resulting change, India has topped the list<\/a> for digital payments beating China by a huge margin. Interestingly, India\u2019s payments are more than the digital payments made in the next four leading countries combined.<\/p>\n\n\n\n On top of these forces in motion, there are several system-wide facilitators in the mix.<\/p>\n\n\n\n Many regulatory and policy reforms<\/a> have been put in place, from implementation of the 2016 Insolvency and Bankruptcy Code to the elimination of more than 39,000 regulations to foster ease of doing business.<\/p>\n\n\n\n Many other reforms, such as construction permits and power connections, are the domain of state governments and there is a drive towards change at these levels as well. State governments are competing<\/a> by helping speed up the process of setting up businesses, providing incentives for investment and even attracting clusters of competing companies, which enables more business-friendly environments in more regions across the country.<\/p>\n\n\n\n Another transformation is a more distinctive geopolitical positioning for India, triggered, most significantly, by the growing rift between China and Western economies, particularly the U.S. This is translating into new business opportunities for India, most visibly \u2014 the manufacturing of Apple\u2019s smartphones<\/a>. With a goal of producing 20 million iPhones a year, 50,000 new jobs will be created by one such project alone. In addition, when it comes to military-grade technology used for space launches, there is greater confidence in India as a host than China and there is already a thriving ecosystem<\/a> in place. India has hosted 111 international space launches<\/a> since 2020, and successfully landed a rover on the moon<\/a> in late August.<\/p>\n\n\n\n To consider another prominent example, chipmaker, Micron Technology, announced<\/a> plans to build a new assembly and test facility, as part of moves to diversify beyond China. In fact, the new president of the World Bank has suggested that there is a narrow window for India to \u201ccash in\u201d<\/a> on the growing trend behind companies seeking to diversify their supply chain and manufacturing beyond a massive dependence on China.<\/p>\n\n\n\n It is interesting to note that both the CEO of Micron Technology and the World Bank chief are Indian-born, which brings us to the third key facilitator: the Indian diaspora, now the world\u2019s largest and influential in ways that it had never been before. In the business world alone it is telling that 25 of S&P 500<\/a> company CEOs are Indian-born. Beyond this, senior management ranks of numerous companies are populated by Indians. It\u2019s the leading country of origin<\/a> for immigrant founders of U.S. unicorns. These connections help build global connectivity to Indian business and facilitate India\u2019s integration into global value chains.<\/p>\n\n\n\n While these factors reinforce each other, many barriers remain \u2013 and they could cause the multiplier effect to stall. Consider three major bumps in the road and the actions needed.<\/p>\n\n\n\n Despite impressive growth numbers at the national level, the economic benefits have been highly unequal. The top 10% of Indians hold 77%<\/a> of the national wealth. Almost 2 people every second<\/a> are pushed into poverty because of health care costs alone. India\u2019s population density \u2014 amongst the highest in the world \u2014 exacerbates the zero-sum nature of resource allocation and environmental stresses. Regional imbalances \u2014 southern and western India growing 12% faster than northern and eastern India \u2014 will magnify over time. Superimpose on this linguistic fault-lines, new inter-regional tensions could surface. Handling these will require deft management of the political economy.<\/p>\n\n\n\n Other imbalances are growing because of divisive politics. An increasingly assertive form of Hindutva ideology<\/a> is overshadowing core issues such as job-creation, enhancing productivity and shared economic benefits. The root cause of this problem was a belief in large sections of society that what started as affirmative action projects in a newly independent India should have had sunset clauses leading to discontent over minority appeasement by political leaders. The pendulum has now swung in the other direction creating new challenges of exclusion and identity politics. For many India-watchers it hasn\u2019t helped that India has declined in its position on the World Press Freedom Index<\/a>. Consequently, potentially, bottled-up sentiments in large sections of the disaffected and minority segments of the population can explode, triggering a downward spiral. Such developments can undermine objectives of shared prosperity. For international investors and trade partners, this can add a risk premium of majoritarianism in a country with as much religious, linguistic and socio-cultural diversity as India. More significantly, these developments exhaust political capital, which can otherwise be leveraged for social and economic transformation.<\/p>\n\n\n\n There are at least two solutions to these challenges. One is of political parties moving away from identity politics to inclusive growth and job-creation as the most reliable means of winning over the widest swath of the country\u2019s vast population. Two, India sees a constant flow of state-level elections, which distorts public dialogue by skewing it away from longer-term economic growth-oriented perspectives. Streamlining and bunching elections will give breathing space to public discourse and push political leadership and voters toward longer-term horizons.<\/p>\n\n\n\n Less than half<\/a> of urban workers have full-time jobs, while far too much of India\u2019s employment is in under-productive informal sectors. Education, skill-building, and health care are grossly inadequate. The India Skills Report 2023<\/a> <\/em>found only half of young Indians are employable. Even the \u201ccrown jewels\u201d technology services sector is vulnerable; demand for outsourcing is falling<\/a> and the labor-cost arbitrage model will be disrupted by secular shifts towards cloud computing and AI for coding and routine functions. Alarmingly, India\u2019s female labor participation rate has been in a steady decline<\/a>, having dropped from 32% in 2005 to 19% in 2021.<\/p>\n\n\n\n Emulating, say, Vietnam<\/a>, public and private investment in upskilling must be prioritized, which could add $570 billion<\/a> to the Indian economy. A major handicap has been manufacturing \u2014 a key jobs creator in comparable economies \u2014 which has plateaued at 13.3% of GDP<\/a>. The current infrastructure thrust, policy reforms, geopolitical drivers and capital influx could help unlock Indian manufacturing, but the barriers discussed here must be removed.<\/p>\n\n\n\n In emerging sectors, the surge of potential in AI could be an opportunity for India to take leadership in a cutting-edge area, given the emergent AI talent hubs<\/a> in the country that can be massively expanded, paired with the vast pools of data<\/a> that accumulate in India. Cultural and organizational changes are needed to create on-ramps for women in the workforce and retain them. Such projects have long gestation periods, so a focused and disciplined long-term plan is required.<\/p>\n\n\n\n Doing business in India has improved, but many challenges remain. Land acquisition can stall construction projects and the courts are slow-moving institutions. Land records may be non-existing or outdated and environmental clearances have created additional barriers. On top of this, contract enforcement remains challenging. According to an index created by The Economist, India ranks 10th<\/a> in the prevalence of crony capitalism, in spite of the large-scale liberalization of the past three decades. A legacy of protectionism<\/a> still persists.<\/p>\n\n\n\n India\u2019s state capacity needs change. Contrary to popular perception, the Indian state is not big and bungling, but weak and waning. Institutions \u2014 from regulators to civic bodies to the judiciary \u2014 often juggle conflicting demands and are playing catch-up to market and social realities. Many important decisions are made with a crisis as a frame of reference and India\u2019s story of victories is often of individual heroism amidst institutional failure. Making India\u2019s state machinery cutting-edge may well be India\u2019s pivotal project.<\/p>\n\n\n\n In sum, while barriers remain, the positive forces can, indeed, create a domino effect: \u201cInevitable India\u201d is within reach. India\u2019s greatest challenge will be to make its inevitability tangible and believable to the many constituencies that wish to see India succeed. To get from \u201cIncredible India\u201d \u2014 aimed at tourists \u2014 to now bring the global economy to its door, India next campaign ought to be \u201cCredible India.\u201d Bhaskar Chakravorti and Gaurav Dalmia Summary. Is India\u2019s economic rise inevitable? There\u2019s good reason to think that this latest round of Indo-optimism might be different than previous iterations, but the country still has major challenges to address to make good on this promise. In terms of drivers, demand…more In 2002, India\u2019s government launched a ubiquitous international …<\/p>\n","protected":false},"author":11,"featured_media":7387,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[183,218,172],"tags":[],"class_list":["post-7386","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-asian-issues","category-reports-and-articles","category-172"],"_links":{"self":[{"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/posts\/7386","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/comments?post=7386"}],"version-history":[{"count":1,"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/posts\/7386\/revisions"}],"predecessor-version":[{"id":7389,"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/posts\/7386\/revisions\/7389"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/media\/7387"}],"wp:attachment":[{"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/media?parent=7386"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/categories?post=7386"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ameforum.net\/ar\/wp-json\/wp\/v2\/tags?post=7386"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Demand<\/h2>\n\n\n\n
Consumer boom<\/h3>\n\n\n\n
Context-appropriate innovation<\/h3>\n\n\n\n
Green transition<\/h3>\n\n\n\n
Supply<\/strong><\/h2>\n\n\n\n
Demographic dividend<\/h3>\n\n\n\n
Access to finance<\/h3>\n\n\n\n
Infrastructure upgrades, both physical and digital<\/h3>\n\n\n\n
Facilitators<\/h2>\n\n\n\n
Domestic policy reforms<\/h3>\n\n\n\n
Geopolitical sweet spot<\/h3>\n\n\n\n
Diaspora dividend<\/h3>\n\n\n\n
Barriers<\/h2>\n\n\n\n
Unbalanced growth<\/h3>\n\n\n\n
Unrealized demographic potential<\/h3>\n\n\n\n
Unrealized ease-of-business and innovation potential<\/h3>\n\n\n\n
. . .<\/h3>\n\n\n\n
(Source: Harvard Business Review)<\/p>\n","protected":false},"excerpt":{"rendered":"