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Independence Day Special: How to unlock India’s growth potential

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What has been achieved in such a short span of 20 years is simply impressive. 

Independence Day Special: How to unlock India’s growth potential
While India’s political freedom is more than 70 years old, its economic freedom is only 25 years old. In 1991, the government abandoned the planned social economy model manifested in what was labeled as the “license Raj” in favour of capitalist market economy.
What has been achieved in such a short span of 20 years is simply impressive.  First
, it has become one of the fastest growing economies in the world (7-8% annually with  moderate inflation) compared to the Hindu rate of growth (2% or less) prior to its second independence.
Second, it has accumulated more than $500 billion dollars in foreign reserves
both through export growth in commodities and in services sectors such as IT and ITES as well as by attracting all types of investment (stock market, private equity and foreign direct investment) in India.
Third, India’s stock market has also performed well creating significant wealth for all types of investors which include main street investors through mutual funds, foreign institutional investors (FII) and especially for entrepreneurs and promoters. It has also produced more than two hundred thousand millionaires and a few billionaires.
Fourth, it has produced several large new enterprises such as Reliance, Infosys and Bharati as well as re-energized traditional business groups (including Tata and Birla) and many public sector units (PSU) including Coal India, ONGC, Maruti-Suzuki and State Bank of India. The combined market caps of these enterprises since 1991 is nothing short of spectacular. Finally, India’s economy increasingly and steadily got globally integrated both economically and politically.
The Transformation Miracle
So what has been the impact of this transformation of India’s economy? First
and foremost, it has created a new image of India: India’s image worldwide has
dramatically changed from a country of roaming cows and snake charmers to one of an emerging superpower with talented people in all walks of life from contemporary literature and art, to science and engineering, to business and finance. Second, it has also generated new self confidence and “can do” attitude among its educated class as well as illiterate masses. In fact, nothing seems to be impossible if you are an Indian or in India. Third, it has encouraged Indian enterprises to go global. Examples include Tata, Birla, WIPRO, Mittal, Dr. Reddy’s and State Bank of India (SBI).
Finally, it has also created two new middle classes; the first is college educated couples, where both husband and wife are college educated, both have to work, which doubles the household income and neither wants their parents to live with them because they like and enjoy their privacy and freedom. The couple does not want to shop from the traditional merchant or the neighborhood provision store owner who home delivers daily groceries and toiletries with a monthly account settlement. Instead, the couple wants to shop at a modern organized retailer such as Big Bazaar and Metro, which offer branded, quality products (both domestic and imported) with fixed prices and checkout counters that accept credit cards. The second and more intriguing are the small town vocational and technical workers, such as crane operators whose wages have increased dramatically but their household expenses have remained relatively constant. They have often greater discretionary income than software engineers, and they have become consumers of branded products ranging from snacks, sweets to shirts and jeans to HDTV and motorcycles. The economic growth in rural India is still strong.
Will the Journey Continue?
Where will India be in 2025? Here are some predictions based on projections of past impressive record. First, some of the largest global enterprises will be of Indian origin especially in basic industries such as copper, steel, aluminum and cement. India Inc. will transform into truly global enterprises not through exports but through large global acquisitions of world class companies with strong technical, manufacturing or branding assets. Recent acquisitions by Arcelor Mittal, Hindalco, Tata (across many of its companies), Wipro, Marico, Crompton & Greaves, Essar and Avantha Group will be replicated by Reliance Industries, ONGC, SBI and other state owned enterprises (SOE).
Second, India will become the second (and in some instances the first), largest domestic consumer market in many products and services surpassing the United States, Japan and Germany. This will include mobile phones, consumer electronics, appliances, garments, motorcycles, scooters, beverages, prepared foods, and agriculture products such as fruits, vegetables and grains as well as dairy products including milk, cheese and butter.
A recent study by the Boston Consulting Group (BCG) predicts that India and China alone will create $10 trillion consumer markets with $6.5 trillion in China and $3.5 trillion in India. No global company can ignore this market opportunity. As the second largest market in the world, it will attract global enterprises from around the world to make and market locally. This will also be true of global IT industry including IBM, Accenture, Microsoft, Google, Cisco Systems and Intel.
Finally, India will gain significant geopolitical clout by 2025. It is already a member of G20 nations along with China; it will be also given a permanent seat at the UN Security Council, and will be asked to provide leadership talent to world bodies such as the ILO, WHO, World Bank and IMF. It will be strategically positioned between Asia and the United States. The new triad power consisting of India, China and America (ICA) will shape the future of global geopolitics.
Accelerating India’s Growth
Despite great resource advantages, India also possesses significant legacy weaknesses, some of them critical enough to become major liabilities for the nation.
While the Indian economy has the size, it lacks scale advantage. This is due to several reasons. First, the government's historical policy to limit the production capacity by licenses resulted in fragmentation of the industry. There are, for example, too many banks, too many cell phone operators, too many cement producers and so on. Therefore, encouraging consolidation by public policy is key to becoming globally competitive. The only place in India one sees scale advantage is in the public sector industries. Such as oil & gas, banking and financial services.
This fragmentation is compounded by two additional factors. First, most businesses are family owned and managed even though they are publicly listed companies. The family businesses tend to be reluctant to sell to each other because of the expectation and desire to provide a career for their children and grand children. In other words, competitive forces which encourage scale efficiency are counterbalanced for family reasons. Second, and more importantly, it is simply staggering to know how large percentage of Indian economy is served by the unorganised sector. For example, the unorganized sector even today controls more than half of the total capacity in molded luggage, in garment manufacturing as well as in most services. The inherent advantages of the unorganized sector companies (lack of compliance, cash transactions, tax avoidance, and low wage workforce with no employee rights) provides no incentives to sell to others.
The evolutionary market process is simply too slow to achieve scale efficiency. It will require proactive government policy to increase the domestic scale of Indian enterprises by encouraging industry consolidation and by reforming the unorganized sector into organized modern SMEs.
A second major obstacle to accelerating the growth is of course, lack of modern infrastructure throughout the value chain from production to consumption. This includes modern seaports, cargo airports, logistics and high speed roads. It also includes financing, warehousing and retailing. The transition from the agriculture to services economy, resulted in investing in the ICT (information communication technology) infrastructure especially the mobile phones.
Consequently, it is possible to reach practically anywhere in India by digital mobile phones and wireless computing. However, there is chronic shortage of electricity with planned blackouts and rationing of the capacity all over India. There is a chronic and growing shortage of cold storage.
What we need is modern infrastructure for manufacturing. Just as the government through policy reforms, permitted the private sector to participate in the ICT industry, it needs to encourage private investment in the manufacturing infrastructure. Without a strong manufacturing base, a nation does not become a global sourcing destination despite its large domestic market.
India is a great raw materials rich nation and must refocus on value added manufacturing rather than export its raw materials. To attract manufacturing, it needs modern infrastructure. This is very strategic as the world is looking for dual sourcing from China and India. In fact, due to their large domestic markets, both nations are becoming de facto sourcing destinations for world markets and especially the United States. This is already happening in textiles, for example. It will also happen in automotive components and pharmaceuticals. In my estimation, investment in modern manufacturing-centric infrastructure will generate additional 1.5% GDP growth without inflation.
The third obstacle is lack of governance and enforcement. India needs governance and it needs it urgently and badly. Without the governance, it has the potential to disintegrate into a society of powerful mafia groups who will extort wealth from the economy. Without governance and civic mindset, it is easy to regress to lawlessness as witnessed in many transition economies.
A fourth major weakness is lack of investment in education and health. There is no
better resource than a healthy, educated population. Unfortunately, India is one of the
poorest nations in the world on a per capita basis in its investment in education and
health. The only way to attract resources to health and education is to reform existing
rules and regulations specific to education and health comparable to economic reforms
it undertook (out of necessity) in 1991. In my view, urgency about education and health cannot afford to wait for political dialogs and gridlocks.
Finally, the government at all levels still has the culture of license Raj and a fundamental mistrust of capitalism and competitive market economy despite what has been achieved in the last twenty five years. Rather than act as enabler for its citizens, consumers, entrepreneurs and
businesses to realize their potential, it still acts as a gatekeeper, especially in attracting foreign direct investment (FDI).
Accelerating India’s Growth Momentum
So what should be done to accelerate India’s growth momentum? First, India needs a sense of urgency and purpose. Its “chaltahai” culture, especially in the government bureaucracy and political leadership, needs to change to a mission driven deployment of its abundant resources. Second, we all have to ask ourselves what we can do for the nation rather than what the nation can do for us, to paraphrase President John Kennedy. In other words, collective self interest does not necessarily result in public interest as advocated by capitalism unless it is guided by purpose. Third, massive investment in infrastructure, as mentioned earlier, is a must. If you analyze the rise of all super economic powers whether England, Germany, Japan, America and most recently China, investment in public infrastructure has been the foundation of economic growth and prosperity.
Fourth, India must refocus on manufacturing anchored to its resource advantages. Its
transition from agriculture to service economy has resulted in enormous and ever
widening disparity between the rich and the poor. Fortunately, I believe India’s
manufacturing will be revitalized due to its inherent resource advantages. Unlike China (which began with low end consumer electronics, toys, shoes and appliances), India’s manufacturing can be at high end of technology such as aerospace, military and industrial technologies. To some extent, this is already happening in pharmaceuticals, petrochemicals, automotive parts and high-end electronics.
Fifth, India must embrace inclusive growth and reduce the expanding gap between the rich and the poor. Most political revolutions against the incumbents have invariably occurred by the revolt of the masses and the oppressed whether it is the Czars of Russia, or dynasties in China. Even in functioning democracies, it is the revolt against the incumbent party that gets the opposition elected. Reducing poverty among the Base of the Pyramid (BOP) population earning two dollars/day or less will require a totally fresh perspective because the traditional
approaches of subsidies, paternalism and platitudes all have failed in the past. Unless the
nation democratizes wealth (and not just income) among its masses, poverty will invariably persist. While the rise of the manufacturing sector will provide some relief in that direction, it needs massive efforts of encouraging entrepreneurship among the illiterate and the less educated by such methods as large scale incubation of micro businesses and organizing cooperatives of farmers, similar to AMUL in dairy products.
Finally and probably most importantly, India needs massive political reforms to achieve full potential of its economic reforms. It is a virtuous cycle. Political reforms led to economic boom. Now, the economic boom needs to trigger more political reforms. The most pressing are reforms with respect to political contributions from vested parties or individuals. Making these contributions transparent and legal is far superior to the present system. In this instance, it may be best to emulate and adapt the U.S. system of fund raising by political candidates and parties. A second area of reforms is to reduce the fragmentation of political parties. This may become increasingly necessary as mutations and fragmentation of parties multiply. The ever increasing fragmentation results in unholy alliances and coalitions among political strange bedfellows. This leads to constant shuffle of union ministers and elected leaders resulting in political gridlocks and arbitrary changes without a vision for the nation. A two party system similar to United Kingdom and the United States may become necessary for the survival of democracy in India.
A third initiative is computerization of the government and governance; it is the fastest way to reduce corruption. It will speed up enforcement of rules and regulations, and mandate compliance for better and equitable governance. Finally, I strongly believe we need to shift focus on those who corrupt the system and not just the corrupted. A strong enforcement of existing laws on people who corrupt the system is equally necessary.
In the end, India needs a celebrity Chef with a good recipe and a great personality. As I have mentioned before, it has all the ingredients but no recipe.
Who Will Unlock India’s Potential?
Despite the obstacles and lack of leadership, I am optimistic about the future of India for a very simple reason: It will not be India or the Indians, but the rest of the world who will unlock its potential. This is because the world, including China, needs India more than ever today for global growth.
Jagdish N. Sheth is the Charles H. Kellstadt Professor of Business at Emory University in Atlanta, Georgia, USA.