Friday, December 29, 2006

India's Growth Model: China or America?

In the previous post, we discussed about whether India and China were ever equal. Now we will go further and discuss the right model for comparison: United States of America.

As the analysts are finding the last couple of years, India and United States are much more common than what most people think (did I just say that the world's poorest & richest country have some commonality). Superficially, India's english, democratic tradition & British colonial legacy are visible. But, we have just got started. There are much more deeper. We will randomly see them and then put them in place.

1. Hollywood Vs. Bollywood - You must be thinking that I'm just kidding, as movies are not a factor for world economy. It is. At one point, not long ago, Russia overtook US as a super power and Japan overtook US as an economic power. But, how many kids dreamed of Russia & Japan, tried to imitate their culture, flock to their universities or even learn traces of Russian & Japanese? But they did all that to US, because of a very powerful influence - Hollywood. It shaped the world cinema, and gave a way for imagination and thought. In all that imagination and dream world, only America was there and its perspective on the rest of the world. Interestingly, whereever they lived most kids saw world from the prism of United States. Thus, US got the best of world relationships, best of students & scientists & entrepreneurs and easily outsmarted its competitors. I'm not saying that Hollywood was solely responsible for America's growth, but without hollywood, a lot of American succcesses would have never happened. For a long time, US benefited from the export of Hollywoodism, McDonaldism & CocaColaism. Culture shapes billions of bucks and US companies & brands (from Ford, GE to Pepsi, Coca-Cola to Microsoft) became a marque for the world.

Coming to India: India's long lasting legacy in Asia it is its export of culture. Everwhere from Thailand, Malaysia to China, Japan, Middle East, coastal Africa... you could see great influence of indian culture. Thus, even without magnificent war & army India had conquered a huge territory, just by being a powerful holder of cultural exports. People from Columbus, Vasco Da Gama to English sailors to Chinese buddists flocked to India and dreamed on a trade with India. In a way, it is similiar to American export of culture, only a good form of culture :). And as Bollywood emerges, people from as far as Africa to East Asia will see world from an Indian prism and will bring both development and international relationships with that, and Indian companies will get the visibility and brand promotion it requires. Probably we might even convince Pakistan and China to have better friendhship with India.

This is also extendible to other media. Washington Post, Time magazine & CNN has so much effect on world media. Now India has many of the strengths and can take a part of the strength just how US took from UK (with BBC, Times etc.).

2. Enthusiasm & Entrepreneurism: If a Rip Van Winkle from 19th century America suddenly woke up in current India, he could find the comfort of home in it. 19th Century America didnt have infrastructure, had shabby roads and dusty towns, quarelling federal government, but its people had an unique power: An optimism for the future, a sense of pride and vision & an overbearing urge to succeed. They quickly moved from the heterogeneous group of colonies to bring powerful economic houses that dreamed of growing big and conquering the world. This fiery capitalism and energetic entrepreneuship is what we see in India - from slums to high raises. We are poor in infrastructure and shabby in our cities, and our heterogeneous is quarallesome, but our energetic young men & women are going to overcome all of that with the same sense of purpose our godfathers (19th century Americans) had.

3. Stress on Unity in Diversity: America has a great power, it quickly assimilates its immigrants much faster than any other country. The irish, jews, Italians, Germans who came during the last 100 years are now fully integrated as Americans. Though, there is great diversity in terms of immigrants (we have huge African-Americans, Hispanic-Americans, Asian-Americans and of course European Americans) representing every continent in the world. But, they all are almost united on a concept: American (albeit diversity and fractionsim are growing).
Historically, only one other country had such a track record: India. It had such a power that whoever came to the land became Indians (or Hindus). We definitely have an exceptions like Islamics who will never be assimiliated anywhere. The Greeks, Afgans, Aryans, East Asians, Mongols, Arabs are all fully assimilated and the art & culture as an example for it. Thus, it has such a diversity (in language, religion, art forms) but a soft thread runs among all, conscious or sub-conscious. A sense of Indianism. A lot of Indians will oppose when I say it, till they feel their subconscious emotion of it at different times.

India and China: Were they ever equal?

The predominant comparison discussed everywhere in the world of economics and politics is India & China. People bring all sort of things to table how these are similiar and how India is the lame dog compared to Chinese tiger, etc. They also point out that India and China grew from similiar position. This blog has two threads: Were Indian and China from equal backgrounds and whether China is a model for India.

First, irrespective of what a lot of people think, India and China didnt start equals 30 years ago.
China was protected by Pacific Ocean to the east, Siberia to the north, Tibet to the south and Central Asia to the west and had no trouble of invaders except mongols. India was instead invaded by everyone from Greeks, Afgans, Persians, Huns to Arabs & Europeans. While China never was a full-fledged colony of anybody, India had 8 centuries of occupation when it entered 20th century. While China became a permanent member of UN security council and a recognized nuclear power, India was a pariah of World's elite clubs 30 years ago.

China was also a leader in manufacturing and innovation since eternity and was way ahead of India in the ancient history, from producing silk & tea to umberalla, gas pipes, etc. Indians were leaders in finance, religion, trade, arts (dance, painting, architecture, literature), Mathematics, etc. A perfect service sector. The comparative differences in the religion from a materialistic & pragmatic Chinese Confusianism to abstract & colorful Hinduism, are also point of interest here.

Chinese leadership also approached more pragmatically (however worse they were, they focused on fundamentals) and built its agricultural sector, rural health, roadways as major priorities even at an early age, while India is yet to reform the fundamentals even now. Dictatorship also helped them to get around with their reforms.

Thus, China and India were never similiar anypoint in their 5000 year history. Now to the second question: Is China a Model for India?

As they were never similiar and have different strengths & potentials simple comparisons dont do any justice. Just because India doesnt have a few things compared to China, doesnt make it worse. After all, just because the Tiger doesnt have fins, doesnt make it inferior compared to Fish. While it is definitely advantageous to learn from successful neighbors it is also better to keep originality as the tiger can and need never become a fish. The problem is especially found in investors, who just blindly compare return ratios (P/E) for India and Chinese stock exchanges and just say that China is more attractive. They just dont realize that Chinese exchange is heavily weighed by banking stocks, in which China doesnt have healthy position, and manufacturing that cannot have a higher P/E compared to India's Telecom & IT stocks. Just an example to show, how blind the comparisons are.

The next article focuses on a better model and comparison for India: America !!!

Also See:

India's growth prediction: Synopsis

As my previous article: "India's Scorching Economic Growth" has become pretty long, I felt a need to give a shorter synopsis of that. In short, India could easily get to double digit growth in the long term and maintain it for over a decade. While this seems to contrary to conventional wisdom, let me give the growth components.

1. Telecom & Electronics - This sector has been having 100%+ growth rate for the last few years. Since, the teledensity is still around 15% this sector is looking to grow 300% in the next few years, just on numbers. PCs, Broadband and Internet have even more low density and these all can have more than 100% growth per year for a decade, and the value added services from Telecom will grow as users grow higher in the ladder. This would also push India as a major electronics player by producing most equipments at home.

2. Agriculture - Indian agricultural productivity lags behind world standards by a factor of few times though it has some of the best climatic and land advantage than all the other major nations, and it has one of the highest wastage. This could all change with more infrastructural, technology and organized retail growth, and has potential for over 300% growth in a decade just by cutting down wastage and increasing per-hectage productivity to international standards.

3. Hotels & Tourism - India has the world's one of the lowest number of hotel rooms per capita, and in the medium term it looks to grow by 100% with the 2010 Commonwealth games & 2011 World cup. Airlines have cut fares by 75% in some sectors, Chinese are growing in prosperity, India's infrastructure and image are improving and India's middle class is bulging. Thus, foreign tourism could easily grow 10 times from the current low figure of 5 millions to over 50 millions in a decade and India's current 100K total rooms could easily grow to a few millions.

4. Auto - From nowhere, India has grown to become the largest auto component manufacturer in the world. Chennai has become a major auto hub with four major manufacturers including BMW, and Tata Motors is the world's largest commerical heavy vehicle producer. Since, companies are looking to produce cheap cars by using low cost of designing & manufacturing in India, and Indian middle class is bulging, India's current car ownership of less than 1% of population could grow over 10% in a decade, meaning a 1000% growth over 10 years.

5. Organized Retail - As this sector is opening up and it is extremely small by world standards, the coming of WalMart and growth of Indian players like Reliance, Tata, Bharti will cause over times growth in a decade.

As all these sectors grow, there will be skyrocketing growth in construction, metals & consumer durables as people will get richer. With each sector having potential to grow more than triple digits in a decade, I dont think achieving double digit yearly growth is a too much of a problem for India.

Thursday, December 28, 2006

India's Scorching Economic Growth

In the recent days, I'm pretty much disappointed with what economists forecast for India. I'm not rather disappointed at Indian growth, rather, I'm disappointed at the skills of the economists :P. I dont know whether they understand the whole picture and take all the information into account of what is happening to India. The other day, I found an economist's article totally questioning the India's growth statistics just on the premise that the growth of services is unusual for a growing economy, and he just had the east asian economies in mind, when saying that. I also read a gazillion articles of why people should invest in China, and why India is overheating, India will be affected by slow downs, India is just call-center centric, blah blah blah. Let me get around to my own understanding of what is happening.

First, the obvious. India's IT & BPO are having extrordinary growth. At this rate, the IT exports alone would cross $60billion in 2010 and the overall revenues might get closer to $100b. A lot of people are worrying about the rise of China and other players, lack of quality engineers in India and rising pays and these area all honest fears. But, these fears are not all big enough to rock Indian boat, and Indian entrepreneurs are smart to see through innovative solutions. They plan to buy out a number of foreign operators in the the competing countries, giving them both expanding market & foreclosing competition, and their greater clout could lead to more techonology exchange and capital for investing. By aggressively entering cheap Tier-II & III cities, having dedicated massive training programs to train cheaper non-engineering workforce, they can effectively blunt many of the cost-based fears, and by better market diversification and innovation they have also broadened their approach.

For most Indian economic focusers, their prediction ends here and they are myopic enough not to look ahead. The following ones are going to be the trailblazers that are going to outsmart the Indian IT growth and overshadow them in the next decade.

1. Telecom - By far this is going to be the strongest sector for India in the next decade. In the last three years, our teledensity tripled and now we add 7 million mobile phones a month. At this rate we would move from our current presence of 180 million phones to over 250 million by 2007 and over 500 million by the end of this decade. This would place us head-head with China, and overtake US. Already, VSNL & Reliance's FLAG Telecom's hold the world's largest backbone telecom networks, (undersea cables & fiber optics handling most of Pacific & Atlantic lines) and this greater domestic clout will lead to greater buy outs in the saturated markets & bring more technology to India.


Increasing Telecom clout would also lead to two major developments. First, is the growth of India as a major electronics player. To produce 500 million phones and for peculiar needs, major telecom companies are already increasing their massive presence in India in production, and such stellar demand for these devices would place us closer to China & Taiwan on electronics industry, using the same strengths in IT growth - good design knowledge, better English understanding & now backed by world's one of the largest markets. Second, the greater teledensity would enable better information exchange and ease of trade and commerce, and would lead to a stellar growth in a lot of sectors, particularly in rural areas that are the focus of cellular expansion from now.

2. Metals & Infrastructure - While analysts always crib about the India's faltering infrastructure, not much of a note is taken when a single state (one of the poorest) secured over 40 deals for investments in this core sectors worth a whopping $100b in a year. Given cheap labor, low cost of procurement and abundance of resources, 100 billion might be worth half a trillion in this state of Orissa. And, with that Reliance is planning to build a 12GW plant (world's largest single power plant), POSCO, Mittal & Tata for massive steel capacity expansion, stunning Aluminium expansion by Vedanta industries et al. and port and road/rail link expansion by a combination of players. Since, this is a poor state such developments can lead to stunning growth and these players are already building a city foused on health care & IT.


Similiar to Delhi Metro, a lot of other expansion is expected to happen in city metro systems for almost all major cities including Pune & Bangalore, and this would pump billions of dollars in a decade & growth activities. Indian Railways has also emerged a strong company in the last couple of years and eyes on a massive expansion, including modernization of Railway stations with Private participation, Container privitizations, electrification etc. A number of road ways projects are moving at a breakneck pace, and in aviation India became the largest customer for planes in the last couple of years, and dozens of new airlines have started or staring by 2010 and airports like Delhi's & Mumbai's are going to get agreat facelift. All these might get in over $300 billion in the next couple of years, and if government plays right it would push India's manufacturing, construction sectors to new heights.

3. Banking & Finance- Though often ridiculed, the government owned banks have moved a great deal in the last decade. From being indifferent and lethargic, their employees have increased their zeal in expanding further. Indian banks are among the healthiest in Asia with the lowest Non Performing Assets, and greater branch coverage. With the sector opening up due for 2009, a huge growth is waiting to happen when new foreign banks will emerge and modernize the practices and the Indian banks would have a great footprint abroad. Public banks like Canara Bank, State Bank & Bank of India are aggressive on a massive expansion both in India and abroad along with private guys like ICICI & YES bank. With greater diversification into equity trading, investment banking, Indian banking sector is expected to grow leaps and bounds with their current strength and with that India's core sector will be pushed up, as they are the largest lenders & employers. Also, innovations like Microcredit are earnestly explored causing a potentially great rural expansion. India's stength with a huge number of finace & commerce students will not just lead Finance BPO expansion, but also massive stock & financial sector in India.

4. Organized Retail - This is one sector that would be a killer application in the future, as they start from almost nil, and would soon have over $50 billion investment in the next couple of years. Reliance has setup a highly ambition project of over few thousand outlets & Malls, Bharti with its Walmart tieup is looking to do big, and other smaller players will try to outbeat them by going early. The prospective opening up of FDI along with a greater middle class will let this sector grow by 100% in the next few years, as all these ambitious projects get along, and dozens of international bigwigs enter it. This would greatly increase the Indian revenue generation (current retail industry hardly contributes to revenue due to massive tax evasion), bring greater employment, reduce the prices & consumer inflation (ha! We have Walmart). But, to me the greatest development will be for Indian agriculture. Indian farmers hardly get a 5% of what they produce, while even with Wal-Mart squeezing American farmers get many times more than that. This is due to lowering wastage (this could be as much as 90% in India vegetables & fruits), increase farming productity with greater technology interchange & cutting down the middleman. Thus, we might finally have our Green Revoltion - II, finally.

5. Hoteling & Real Estate - Enough has been said about the fact that India has just as many hotel rooms as the New York City. While this is a disgrace, see it as a potential. As 99% of the market seems to be unutilized, with proper planning the hoteling industry can easily grow at 100% without reaching saturation for a long time. Atleast 75 International brands are eyeing India, and with proper real estate growth and better technology/infrastructure and greater tourism/business growth, this sector will add 100's of thousands of new hotel rooms in the budget and the luxury sector. Organized Real Estate will piggyback the growth of these & the retail industry. While the prime lands are at huge prices, still we have millions of hectares of lands at low prices of less than $2/sq ft, around the cities and these have huge potential for growth. For eg. a lot of hoteling industry is eyeing for the smaller city of Noida that has land at a fraction of price compared to the prime lands of Delhi. Indian Railways is also planning to share thousands of hectares of its land around the big railway stations for building hotels. A great hoteling expansion would in turn stengthen the tourism industry.

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6. Healthcare & Pharma- By now you should have heard that medical costs in India are among the lowest in the world. Thus, we have a huge potential for expanding this booming industry as more and more people can now afford medical facilities leadind to a huge domestic expanision, and a lot of countries are thinking about formally sending their patients to India for treatment. And, Indian pharma companies are leading a great expanision, and busy buying assets abroad and expanding R&D facilities. Thus, with greater middle class clout and prosperity, these two industries will have a massive growth as more people can get medical care, and more drug development will be done in India.

7. Auto - There was a time when blindly took outdated european car designs and manufactured small amounts of car for domestic use. The times are changing. In Chennai alone four major manufacturers are setting up huge factories, Tata Motors is world's one of the largest medium & heavy commercial vehicle producer & also eyeing for a $2000 car. In auto components, India is slowly becoming the world's largest manufacturer. With great domestic market growth & a potential for cost cutting using cheap labor & facilities, a lot of foreign majors like BMW, Nissan, Fiat are entering India, big time.

8. Agriculture - Indian agricultural productivity lags behind world standards by a factor of few times though it has some of the best climatic and land advantage than all the other major nations. If the production is too low, then the wastage (which goes as high as 90% for some products) kills whatever remaining and due to inefficient practices we are not growing more lucrative crops. As technology, infrastructure & organized retail growth, are looming, this sector could close in on the international productivity standards, and this means we can have over 300% growth in the end value of what we produce, given our potential. This might take over a decade, but still if we have a potential for 300%+ growth in India's core sector in the long term, its effect on industrial consumption and Indian growth rate will grow exponentially.

As the article gets long & winding, I had to cut a lot of material and you could search online for each of the individual developments. The outcome it seems that, inspite of global slowdown India could maintain and increase growth, as the Indian core sector is starting from a very low base, and most of these developments can continue in spite of a weak world consumption, as they are based on domestic consumption that is again growing from world's lowest per-capita. Though, India could possibly slow in the medium term, in the long term, it could easily maintain a 10%+ growth, as all these segments above can maintain a double to triple digit growth in the near future.

A world recession can also indirectly benefit India, when its hungry entrepreneurs can get value buy outs at cheaper prices (like how VSNL & Reliance boughtout world's major telecom backbones like Tyco & FLAG). It would also hit upon the margins of international producers who might eye India for greater cost cutting, and Indian government would be more amenable to opening up to overcome the world recession. It would also make companies to look for the bigger & fast moving Indian market than the saturated world markets (like how Vodafone & Oracle are doing) and bring more investments. We benefitted from the American recession of 2001-02 (it increased outsourcing and cheapened telecom assets) and I guess we could now repeat the performance.

The writing on the wall is clear: India can grow inspite of what happens in the rest of the world - receding or prospering.