Prior to the India Chazen Trip 2011, I must admit that I knew very little about India’s economy other than the fact that it is one of the four BRIC countries. What makes it so? From riding auto-rickshaws alongside automobiles to getting lunch delivered through the six-sigma dabbawalla, Indians enjoy their unique way of living. These local consumers, albeit earning only USD$1219 on average in nominal income, total over 1 billion in headcount and together they fuel a strong domestic market demand. This demand coupled with the government’s traditionally protectionist policies against free inflows of foreign investments gave rise to the booming of globally competitive Indian-owned enterprises such as the Tata Group. While domestic demand is growing robustly, all the business leaders who had met with us unanimously agreed on a few pressing issues that the nation is facing.
- Water – No major city in India is known to have a continuous water supply and an estimated 72% of Indians still lack access to improved sanitation facilities. The World Health Organisation estimated that around 700,000 Indians die each year from diarrhea, hurting the India’s very own labour force.
- Electricity – According Mr. Vikram Limaye, the Executive Director of IDFC (Infrastructure Development Finance Company Limited), only half of the country has access to electricity. Power outages are frequent across the country. Recent coal shortage is further exacerbating the problem by reducing energy supply and residents in Delhi reported power cuts for 4 – 5 hours each day. Mr. Limaye estimated that India needs at least 100K MW more in power supply to adequately meet demand. Given that a 1000-MW power plant typically costs about USD$1B to build, a hundred of these plants, or USD$100B, would deem necessary.
- Transportation (roads, railways, and ports) – According to Mr. Limaye, most goods are transported by trucks in India. Unfortunately, congestion is severe, hampers reliability of transport, and ultimately increases transportation costs of goods. Capacity constraints of railways and inefficiencies in port operations are other major concerns.
Mr. Limaye noted that investments in infrastructure amount to 8.5% of India’s GDP, of which 40% comes from the private sector. Improvement in infrastructure, while slow, tends to focus on return on investment. As Mr. Adi Godrej, the Chairman of the Godrej Group, had pointed out, India has managed to do well without good infrastructure. Mr. R Gopalakrishnan, the Director of Tata Sons, also kidded about India’s “just-in-time infrastructure”.
Widening inequality gap
The dichotomy between the rich and the poor is a growing concern. However, Commerce Secretary Dr. Rahul Khullar clarified that the gap is widening not because the poor is getting poorer, but because the rich is getting richer at astonishing rates. In fact, he believed that the general living standards for the country are improving rapidly as a positive result of economic growth.
Unfortunately, the number of people living in slums in India has more than doubled in the past two decades and now exceeds the entire population of Britain, the Indian Government has announced. The tour through the Dharavi slum, housing over 1 million residents at the heart of Mumbai, vividly impressed in my mind the agonizing need to fight poverty. To continue the list of pressing issues that Indian government needs to address, lack of affordable housing is no doubt of high priority.
Despite being one of the world’s largest producers of fresh fruits and vegetables, wheat and rice, etc., domestic demand for food is outpacing supply and India is rising as a major food importer. In addition to the demand-pulled inflationary forces, depreciation of the Indian rupees has made import prices more expensive, further fueling inflation. Rising wages and increasing fuel and raw material costs are also hitting the economy hard. India’s central bank has increased interest rates 13 times since March 2010 in an effort to hold down rising prices. The latest inflation rate figure has fallen from double digits to 9%. However, the Indian government is cautioned against increasing rates further because of the weakening economy.
Despite the issues aforementioned, all of the business leaders that we had met are bullish on the Indian economy. In addition to betting on robust domestic demand, they believed that India’s healthy dependency ratio (the proportion of children and elderly to working-age adults) is the secret ingredient to the country’s success: India’s steady supply of the labour force will help it outgrow China, which is suffering from a shrinking working population due to its one-child policy. I further believe that Indians’ entrepreneurial spirit and creative mindset can further differentiate Indian enterprises in the global economy, as evidenced by successful examples such as the world’s cheapest car, priced just under USD$2,000, developed by Tata Motors.
In conclusion, I am grateful to have had the opportunity to go on the India Chazen Trip and meet many influential business leaders. I was not only impressed by the breadth and depth of their insights on the Indian economy, but also the consistency of viewpoints across the guest speakers coming from diverse backgrounds. The consensus is to be bullish on Indian economy and urge the government to accelerate reforms that help address burning issues, such as poor infrastructure, that are holding the economy back.