India: A story of progress & hope

Transformation of India from a resource-deficit country to a self-sufficient country and its potential to become a developed country!

To cut the noise, let’s go through some decadal trends and their implications for future years!

Funda1: Progress Comes in Layers!

Funda2: Productivity improvement is a pre requisite to economic progress.

In 1947, we became independent after being looted for more than 200 years. Our first priority was to get the basics in place. Our first few years of governance were all about getting the basics right and unifying the country. For these reasons, in our initial years, we turned to socialist or leftist policies. We did make progress on the basics. Let’s see how we performed in the basic essentials. That’s Layer 1. Unless the population is free from hunger,  educated, healthy, and has a basic sense of safety and security, it is not possible to progress economically. Everything else, like infrastructure, etc., comes later. These elements will be covered in Layers 2, 3, 4, etc. We can’t have excellent roads with hungry people. All economic progress should be seen in this context. 

Layer 1: Basics

Food, Shelter, Health and education are primary needs of the society. We seem to have done a decent job on these fronts as depicted by graphs below.

Source for above charts:

https://humanprogress.org/india-a-story-of-progress/

While we made good progress on the basics, we did not make any significant progress in other economic layers for a long time. By the late 80’s we realized that socialist policies had served their initial purpose and were not working anymore. Our productivity remained low and we came close to bankruptcy by the late 80’s and early 90’s. This forced our government to open up the economy and introduce economic reforms.

Economic Liberalization in 1991

What it did… 

• Open economy for private or international players, thereby increasing competition and improving productivity.
• It resulted in a massive productivity increase and led to price drops in many sectors; for example, the price of a Mumbai – Delhi air ticket was almost the same in 1990 and 2018.
• This resulted in a tremendous increase in both consumption and financial savings.
• Provided much needed access to capital to Indian entrepreneurs.
• Reduced the role of the government and helped unleash the entrepreneurial spirit of Indian entrepreneurs. Also allowed foreign companies to explore Indian markets. 

This liberalization, along with initial government investments, made us comfortable in Layer 1 (essentials like food, clothes, shelter, etc.) However, we were still resource scared and there was very poor infrastructure in all aspects of public goods. 

Layer 2: Basic Infrastructure to allow movement of people, good and information!

Funda3: Money, Economy and Business grows by movement…..Flow! Flow of Money, People, Information, Goods….. etc. Higher productivity of movement, will improve the flow and therefore economic progress.

See what we have done in these areas in recent times.  I will cover it in two parts: Layer 2 from 2000–2014 and Layer 3 from 2014–ccurrent.

• Roads
• Railways
• Airports
• Telecom Network

Roads

Funda4: Roads are important, this is first infrastructure that we need to build before any other infra comes into place.

Unless you have roads, you can’t have electricity. (transformers,  poles, etc.). You can’t transport grains, milk,  vegetables, etc. to cities and manufactured goods to villages. Roads also open up connectivity for kids to travel to nearby cities for education. Mortality drops because patients can be taken to the hospital, etc. 

• Did you know? Even until 1999 or 2000, about 54% of India did not have all weather road connectivity. 
• This divided rich states from poor states. States like Punjab, Haryana, and Maharashtra had 100% connectivity in 2000, but the rest of India had very little. 
• In 2000, the Indian government launched: 
  • Pradhan Mantri Gram Sadak Yojana to build rural roads. This connected rural areas to urban areas.
  • Golden Quadrilateral Program to Connect the North, South, East, and West Parts   of India.

Today, rural road connectivity is 95%. This is the first step in building up the economy. 

We will talk about intercity highways in a later section.

Electricity

Human civilization is all about energy. Fire, wood, coal, and nuclear

According to the 2011 Census, 45% of the rural population did not have access to electricity. Electricity, once it starts spreading, brings in tremendous productivity growth and efficiencies.   It also helps in the  spread of information by giving access to TV, telecom, etc. 

Today, India’s electricity access has reached almost 100% penetration.

Telecom: Phone and Internet

In 2008, tele density in rural India was             10%

In 2014                                                                      50%

Today:                                                                       60% (In rural areas, this is optimum level if you consider at household level).

Indian Telecom is the lowest-cost service in the world! 

What it does: 

• Access to information
• Labor market efficiency
• Trade Efficiency: Price and demand discovery

And from 2014 onwards (technically Layer 3, however, covering it here for continuity), India used telecom to build further layers to bring efficiency to it’s public eco system and to bring down costs drastically. 

• Jan Dhan Yojana
• UPI
• Digital access to government services. 

The efficiency of the state has gone up dramatically.

• Direct benefit transfer.
• Formalization of the economy. 
• Identification of the rightful beneficiaries. 

Layer 3: Advanced Infrastructure to allow movement of people, good and information!

High speed internet and Broadband (also refer to the digital infrastructure discussed above).

Macro Infrastructure

• National highways
• 16,000–17,000 km of highways are being built each year (50 km a day). 
• Expressways
  • New alignments: shorter routes. 
  • High-speed expressways
  • Bengaluru – Mysore
  • Mumbai – Nagpur
  • Delhi to several cities in UP and  Punjab
  • Mumbai – Delhi 
  • Pune, Bengaluru, and many more. 

• Railways
  • 75% of freight should ideally be via railways. But it isn’t the case in India.
  • Trains are green, energy-efficient, and faster.
  • Energy that we use on roads is imported (Petroleum products). Energy that we use on railways (electricity) is domestically produced.
  • Cost of freight by
    • Road: Rs. 2.4/ttonne/kkm
    • Rail: Rs. 1.36 per ton per km
    • Water: Rs. 1.06 per tonne per km

• Currently, massive infrastructure work is being done to improve the  Indian railway network. This includes
  • Dedicated freight corridors.
  • Better or faster passenger trains.
  • Electrification or doubling of existing networks.
  • Modernization of old networks to allow higher and faster traffic.
  • Station redevelopment.

• Air Traffic
  • The below information image is self-explanatory.

What it does:

• Logistics: speed, cost, and efficiency 
• People movement.
• Information is available  to everyone. 
• New location feasibility for manufacturing sites.
• Export competitiveness. 
• Clubbed with GST, the overall movement within the Indian economy is the fastest ever in our history. This is great progress. 
• In summary, the productivity improvement of the country. 

Layer 4: Capital Availability: Financial and Human

Funda5: Financial and human capital are the basic ingredients of any economic activity. They are like the oxygen of business activity. No business can survive if any one of these ingredients is missing. On the other hand, the easy availability of capital and labor leads to rapid economic progress. 

Financial Capital

• Olden days: only PSU banks… State control is inefficient, corrupt, and expensive. Outside of banks, entrepreneurs only source of capital was family and friends, so it was relatively difficult to build businesses in India.  

NOW 

• NBFCs: Outside of banking system, however, they are a major source of finance for  both formal and informal sectors.
• Banking:  Efficient and one of the best in the world. More retail focused and competing to give out loans.
• Foreign Capital: Easily available. Most of the large foreign funds are willing to invest in India. 

• Equity Capital
  • Venture Capital: One of the largest VC ecosystems in the world, after the  USA. An entrepreneur with a solid idea can raise capital from angel funds or / VC funds relatively easily. Almost all major cities in India now have an angel investing club.
  • Private Equity: Again, one of the biggest in the world. It helps large companies grow without getting into public markets (stock markets). 
  • Stock Market: Very well regulated when compared with other parts of the world.
  • Internal Accruals (Large Indian Corporations: Example: Reliance, Mahindra, Pharma, etc.). For example, Reliance used accruals from the petroleum business to build retail and telecom businesses. Mahindra used accruals from the automobile business to build other businesses.
  • India on the whole is still very less leveraged compared to the  rest of the world, which leads us to believe that access to capital will not be a problem in a few years to come.
  • This is a huge transformation. Capital is oxygen of a business, and easy capital is like a huge boost for business formation and expansion.

Human Capital

• Largest and youngest country in the world. Twin Advantage.
• Current TFR is a stable population.

(Note on Stable Population: It leads to a surge in savings and productivity.). Why? Because kids demand effort, money, and time. By having fewer  kids, parents need to devote less time and money to  raising kids, and therefore they are more productive at work. Think of it in terms of the  female workforce population.  More women will be available for Jobs, businesses, etc. A declining population is not good; however. A stable population is good for a country like India, which needs to improve its productivity significantly to be globally competitive. Just for reference, Japan in the 1970’s  and China in the 1990’s were in similar situations. Check their growth for 20 years after they achieved a TFR of 2. This growth was excellent. However, now their population is aging and declining, which is causing other problems. . However, India is very far from facing such issues.

• The population is largely educated. 
• Large pool of qualified engineering and technical talent. 
• In summary, we have a working population at SCALE that no other country can match.

Layer 4: What it does:

• Higher capital availability
• Services powerhouse: domestic and exports. 
• Manufacturing Labor.
• Talent Export: Migrant population all over the world. 
• Savings
• Productivity gains.

Today, India has close to 50 lakhs (5 million) or more software engineers, if we add other domains, the number will easily cross 10 or even 15 million engineers. No other country has this scale. We produce close to 10 lakh (1 million) new engineers every year.

We are,

• • • Migrating from only IT outsourcing to IT, engineering, accounting, legal, medical, etc.
    • Within IT, people are migrating from software coding jobs to high end complex business processing and higher end engineering work. 
    • From outsourcing to Indian companies to the setting up of GCC by large companies,. (GCC: Global Capability Centers). 

From 1995 to 2010, software exports were dominant in India’s service exports.  almost 80/90%

Today, out-of-service exports of software are only 45%… The rest is in other domains: engineering, R&D, accounting, research, medical, business, etc.

45 new GCCs were set up in India in 2022 alone. 

GCC is now a major part of India’s software and other service exports. 

About 40% of workforce of USA based consultants is in India as of today.

40 to 45% of Global Banking work now happens in India.

Some prominent examples,

• Barclays, global workforce: 90,000 people, India 25,000
• Wells Fargo, Goldman Sachs, JP Morgan, PWC, Deloitte, KPMG, IBM, Accenture, and many more have very large Indian presence for their global work.  
• largest R&D centers of companies like GE, Honeywell, etc. outside of USA are in India. 
• Boeing just announced their largest campus outside of the USA in India. 

Think of the impact it has on jobs, real estate, wealth, people’s movements, etc.

Manufacturing

• We are missing the bus here, despite all the talk of make it in India, etc.

Of course, our manufacturing is growing, but in sync with the overall Indian economy. It is still not growing at the pace we want it to. But things might change over time.  

Consider this, 

The global goods trade total market is of the size of US$ 20–22 trillion. 

India’s share is only $450 billion (1.8% of global trade).

Now consider the opportunity. 

Electronics: About 25% of global goods exported are electronics. about 6 trillion dollars. 

From India, we exported only 8 billion dollars in 2018. Which is nothing? 

Today, this number is $25 billion, and in another 4 years, it will be about $100 billion. 

Autos and auto components, the companies that started in the 1980s,  are now starting to reach global scale.  A lot can be done here.  

Chemicals… China + 1 strategy: cheaper energy, China slowing down. 

Conclusion

Over the last 75 years, and more importantly, in the last 23 years, we have built the foundational layers of our economy. This is where the USA was in the 1950s and 1960s and China was in the 1980s and 1990s. When these countries got their 4 layers right, they underwent a major economic boom for the next 10–15 years. We are at that place now.

Productivity improvements lead to economic progress.

Faster roads, a better railway network, air connectivity, faster internet, capital availability, efficient banking, faster and easier access to government services, an educated, young, and stable population— everything will help India achieve higher productivity in the years to come and will help us make rapid economic progress in the decades to come. 

Since our independence in 1947, we have never had the basics so well aligned. It has taken us 75 years, but finally we are doing well on foundational work. All the ingredients are in place to unleash India’s future growth. 

Now is the time to leverage these foundational layers to build a superstructure. We have the next 20 years to build this. These 20 years will be exciting and challenging. Let’s see how they shape up.

Risks

• Dependence on imported energy!
• Disruption of political consensus for reforms! (Undoing of reforms). 
• Social instability if not enough jobs are produced. 
• Global risks (due to our dependence on imported energy and service exports). 

Bit of Caution

1. We have faltered in the past when everyone thought India’s time had come. India is a large and complex country,  and it’s not easy to govern it. 
2. Never correlate the growth of an economy with the growth of the stock market. For example, on January 1, 2008, and July 15, 2013, both Sensex and Nifty were at the same level. China has been the world’s fastest growing country over the past two decades. But has the stock market delivered returns? The answer is no. See below the chart:

So, your investing decisions are independent of this ‘India Growth Story’.…

India has the habit of disappointing both its most optimist supporters and most pessimistic critics.

Let’s hope that this time it’s real and different.

Sources:

https://humanprogress.org/india-a-story-of-progress/

https://youtu.be/MItfNp5mcTk?si=cP7mnuetBjn3iLFZ

https://www.dspim.com/latest-literature

https://www.investindia.gov.in/sector/railways

https://www.capitalmind.in

https://www.moneycontrol.com/news/business/how-gccs-in-india-are-giving-it-services-companies-a-run-for-their-money-10779861.html

https://www.moneycontrol.com/news/business/economy/india-emerging-as-a-services-export-giant-not-just-software-10350231.html

https://economictimes.indiatimes.com/news/economy/indicators/services-exports-set-a-new-record-of-254-4-billion-in-fy22/articleshow/91316648.cms

https://www.fortuneindia.com/macro/indias-software-services-exports-rise-to-89-in-fy22-rbi/109593

https://www.moneycontrol.com/news/business/markets/non-it-service-exports-can-wipe-out-current-account-deficit-in-2-3-years-neelkanth-mishra-11226941.html

Information compiled by Ashish M. @ Forms+Surfaces.