India today is at an inflection point. Following two decades of reform and growth, the cracks in the current economic and political system have become visible. Given the country’s expected population growth, India will need to fundamentally transform itself in order to feed, clothe, educate, gainfully employ and turn into productive agents its population of 1.6 billion by 2040. To do so it will need to, among other things, create a transparent government, secure the resources required for growth and create a system of entrepreneurship to allow the private sector to take a leading position in India’s transformation. Doing all of these things will require an India Wide Open policy, bucking the regulation-and-taxation-heavy government model that is being embraced by fearful governments around the world. The cumulative effects of such a policy that successfully meets the challenges outlined above would be significant, with Indian GDP growth accelerating to over 11% through 2025 and continuing at nearly 9% through 2040. An India Wide Open in 2040 would look very different to today’s India, as the world’s second largest economy, with widely distributed economic participation and wealth creation. The following represents an initial attempt to define and quantify the implications of an India Wide Open strategy. We will follow up with more detailed analysis in due course.
For much of its existence as an independent nation, India has lived inside closed borders and pursued a socialist economic policy, which has stalled its progress and stifled development. In 1991, following a balance-of-payments crisis, India began to liberalise various sectors and initiated other free market-oriented reforms. This was the first phase. A decade later, in the next phase, India’s entrepreneurs exercised their freedoms to scale and to go global and the country’s growth accelerated significantly and India emerged as a significant contributor to the world economy and therefore a credible international investment destination. However, in 2011, much was revealed, India was shaken by corruption scandals which hit at the heart of how the country actually works, its capital market was revealed to be shallow, over-sensitive and too small to absorb the large quantities of capital required to drive India’s growth, and its leaders posed a stark contrast to what, at least for now, looks like a much better managed China. The India Story looks like it needs to be re-thought. It is time for Phase III.
The Election Manifesto of the Winning Party in the Next General Election of India
- Indians to rise to be the most educated workforce of any scaled economy. 200 million educated and skilled for the New India within five years. Open education using all domestic and global providers with no restrictions
- India to become a Food Superpower. Farmers and landowners permitted to become shareholders in Industrial Agricultural conglomerates to feed India and feed the world
- India to become the world’s “Special Economic Zone”. India to open for all foreign and domestic business and employment at the most competitive tax rates in the world
- India to become the world’s manufacturing hub, with scaled capabilities in both light and heavy industries driven by a highly skilled and low cost workforce
- India to Scale as a global export hub. For all industries, exporters from Indian soil to be given tax free status for three years and 10% taxes for the next seven.
- India to inject IT into every industry. Government incentive package for the IT sector to inject IT into every industry in the form of VAT exemptions for domestic revenues.
- India to become a global innovation and R&D leader. India to increase R&D spending to 2% of GDP by providing corporate tax breaks to companies spending more than 5% of revenues on R&D
India today is the world’s second most populous country, behind China. By 2025, India’s population is expected to overtake China’s with both hosting just under 1.4 billion people each. However, by 2040, India’s population is expected to grow to 1.6 billion while China’s is expected to have peaked at 1.4 billion and declining. More importantly, India’s population will be significantly younger than China’s and it will be one of the biggest drivers of net additions to the global labour force: out of the 1.3bn net additions to the global labour force in the next four decades, more than a quarter will be in India – while the labour forces in China and Europe will begin to shrink sizeably. 1 There is widespread sentiment among investors and economists that India’s large population will be an important asset that has the potential to give the country a long-term competitive advantage. If this sentiment holds true, India would become a powerful global economic force during the second quarter of this century. However, such a large population can be a huge liability rather than an asset unless that population is well fed, educated, employed and empowered.
India is already staggering under the weight of its 1.2 billion population and its government, bureaucracy, soft and hard infrastructure are strained. Given the sheer scale of India’s population increase, the country will need to see significant change to face significant challenges in maintaining social and political stability. Specifically, it will need to ensure that it can (a) gainfully employ its vast population, (b) provide the infrastructure, resources, and basic services such as education and healthcare which are essential for improving living standards, and (c) make its political system and institutions efficient and transparent such that this population feels it is being treated fairly. If the country fails to do these things, not only will India’s economic ascendance be in jeopardy, India’s leaders will need to consider whether they can rely on a docile and patient population. India is not China and cannot pursue a directive policy of top-down change. There are four open policies that can push India along the path and one that makes India truly wide-open, namely:
- Open the People: Unlocking Human Potential. The “India Shining” story took pride in the rapid growth of certain sectors such as IT services, wireless telecommunication, and financial services. However, India is not currently generating sufficient and sufficiently high quality employment to capitalise on its demographic dividend. Overall labour participation in India is low at 38%, 2 compared with rates of over 60% and over 70% in the EU and US, respectively. This is partially due to the lack of workforce participation by women in India, where female participation is 23%, significantly lower than the EU average of 57%, which incidentally is higher than male participation in India. Another critical factor is the structure of employment, with over 66% of workers in India employed in the agricultural sector, more than 10x the EU average and still twice as high as China’s, the world’s largest producer of foodstuffs. Tied closely to this is the informal structure of the labour market in India, with only 7% of the workforce employed in the formal (organised) sector 3 and the vast bulk of employment in the unorganised or informal sector which includes self and casual employment as well as contract labour. India today has neither the labour force nor the job quality required and it will need to expand employment aggressively to deliver on its promises of prosperity. The Chinese aim was to add 20 million people a year to the “new prosperity”, an aim that it delivered on in most years during the reform era in the 1980s and 1990s. 4The number of people India can employ in delivering IT services is not the question; clearly it is too few. However, the Indian IT services capability presents the opportunity to inject IT into every industry and this will increasingly matter for the competitiveness of Indian industry. To deliver the level of productive labour to transform the country, India would need to became a multi-hub nation: a first grade manufacturing hub for the world providing an “alternative-to-China” destination to international manufacturers, an R&D hub for healthcare and multiple knowledge industries, the destination for the implementation of alternative energies and materials, a professional services hub and an entertainment and tourism hub leveraging the diverse and rich culture of the country to become the number one tourist destination. None of this is possible unless the country has the ability to educate 25 to 50 million more people every year for decades to come. It is only through such diverse and ambitious initiatives that India can generate the high quality employment on the scale required to fully realise the demographic dividend. If India were to increase its workforce by c.20 million people every year through 2025, its work participation ratio would equal Brazil’s. Assuming India could also increase its worker productivity to say that of the Philippines’ (ranked 125th in GDP/Capita vs. India’s 135th position) the GDP impact would be substantial, rising from US$1.7 trillion today to US$4.2 trillion by 2025. If India could add 30 million jobs annually, real GDP 5 would expand to over US$5 trillion. However, to self-generate 260 million, much less 400 million, high quality jobs would require an Indian government that can manage large scale micro-managed change, something few governments (in India or elsewhere) have proven themselves to be capable of in the past.
- Open Government: Creating a Modern Transparent Meritocracy. Travelling from China to India, travelers do not get the impression that they have arrived in a country with effective government. Post-independence it was easy to blame the British, democracy, life, the weather or the gods. However, some time after the first decade post-independence there was no one to blame but oneself. If people were not gainfully employed building roads, schools, factories and so forth, there was no one to blame but India. India urgently needs to create an efficient, transparent, and meritocratic government in order to become a truly open, free and fair society. Today India ranks 95th out of 178 countries in Transparency International’s Corruption Perceptions Index and studies report that more than 55% of Indians have first-hand experience of paying bribes or using influence to get jobs done by public servants. 6 It is estimated that over US$18bn, or 1.26% of annual GDP, is paid annually to India’s public officials. 7 Tied to public corruption is a large underground or informal economy – most recently estimated at 50% of GDP. 8 Clearly, corruption is a human phenomenon and the numbers in even higher-ranking nations outstrip India and others below India in the corruption index. Individual frauds such as Madoff in the United States may outstrip individual ones in India. The challenge for Indians is that India’s corruption has a depth and breadth that touches just about every business and the “ordinary man on the street” in a way that undermines trust and meritocracy and threatens to bleed India’s potential through a thousand cuts. The sheer audacity of the recent scandals, including the arbitrary allocation of 2G wireless licenses in 2008, which led to a shortfall in government revenues estimated at up to US$40bn by some sources, has led to a level of public outrage which may well mark the turning point in the Indian public’s acceptance of endemic corruption. 9 Despite the initial successes of activists who with nationwide protests, moved the government to agree to enact new anti-corruption legislation this past summer, it is apparent that freeing India from this crippling corruption will be a long and drawn out process, of which only the first tiny steps have been taken. The men and women that rallied to Gandhi’s call could not be proud of this. This requires a revolution in thinking; another independence movement, another Quit India campaign, wider than individual protesters. As most Indians will tell you, without a revolution, which they deem highly unlikely if not impossible, this will not change. The price India is paying today is significant: we estimate that the direct impact of reduced corruption to be an additional 1.7% on 2025 GDP, and up to 3.5% of 2040 GDP. However, the indirect impact will be much more significant, providing the governance framework for the implementation of sector deregulation and liberalization, transparent privatisations and other policies designed to create the new jobs, rise to the productivity, encourage the sector development and entrepreneurship and efficiently exploit the resources required to create India Wide Open.
- Open Resources: Securing the Resources for Growth.India will need to access substantial resources including energy, food and water in order to fuel rapid economic growth and create the industrial scale required to employ the country’s vast potential labour force. At first glance, the simple mathematics of finance would suggest India cannot compete against resource-hungry and richer nations and secure enough to build and grow its nation. India simply lacks the financial resources to compete against China, America, Europe or Japan for the resources these richer countries also require. In spite of overseas resource acquisitions by large Indian corporates, including government-owned companies, India has no sovereign wealth fund, no mutual fund in the top 25 worldwide by size and no private investing institution with over US$20 billion in assets under management.However, India has significant domestic resource potential which is still relatively unexplored. The discovery of an additional 30 trillion cubic feet of gas in the Krishna Godavari basin by ONGC and Reliance Industries will double the size of India’s natural gas reserves once fully developed, and potentially reduce India’s oil imports by up to US$9 billion annually. India’s North East can be in resource terms what Tibet is becoming for China, without the conflict issues, with untapped hydropower resources worth over US$35 billion annually at current electricity prices as well as uranium, oil and coal. India also has the second biggest stock of arable and permanent cropland in the world after America, although agriculture today is highly fragmented and inefficient with a high percentage of peasant subsistence farming. Turning this into a world asset is both one of the biggest opportunities as well as challenges facing India today. The resource revolution requires: (1), the industrialization of agriculture and this in turn will create a new generation of billionaire entrepreneurs with the power to feed not just India but the world, (2) strategic natural resource development of India’s Northeast and Western states, and (3) strategic acquisition of resources worldwide in a China style resource acquisition endeavour. The third factor alone would require US$300bn acquisitions between now and 2025, assuming India adopts China’s 2011 pace of natural resource and energy outbound FDI. However, reaching Chinese levels of agricultural output efficiency could create an incremental US$1 trillion in annual GDP output by 2025 and significantly more by 2040, when increased resourced exploitation could reduce energy imports by over US$55bn annually. The changes implied by the policies are clearly necessary but, once again, they require an India that can manage large-scale domestic and foreign endeavours.
- Open to Entrepreneurs: Democratising Entrepreneurship. India’s story needs to be about more than just its most successful entrepreneurs. Today we can justifiably ask: is the investment story about India as a whole or only about its few prominent entrepreneurs and their businesses? Leading business families like the Ambanis, Adanis, Mittals and Birlas have transformed their conglomerates into multinational corporations, creating massive personal wealth and a wave of mass employment in the process. In 2010, the combined fortune of India’s 100 richest people was $301 billion, almost one-fifth of the country’s GDP. Despite a slower start, India’s entrepreneurs have generated huge wealth for themselves. Of course, India is a beneficiary. However, if India wants the investing story to be about the country, then the challenge is for India to become more than the sum of its largest entrepreneurs. Failure will mean that Indian entrepreneurs will be classed in the Russian context, as oligarchs, rather than entrepreneurs and India itself will be the victim. This requires the country to have a strategy to create a system of enterprise.To achieve this India would need to dramatically broaden participation and to do so it would need to demolish “rent-seeking” and arbitraging relationships between business and officials. It is not a coincidence that many of the industries where most of the country’s large business groups have thrived over the last decade (such as wireless telecommunications, retail, power generation, mining, real estate, among others) are ones which require close coordination with or licenses from regulators and/or government officials. There are of course exceptions, particularly in the knowledge-based sectors such as IT services and pharmaceutical industries – where a number of globally competitive firms have emerged from scratch – primarily due to a complete lack of (or minimal) government intervention. India now needs to enable similar industrial revolutions across six new sectors, namely consumer goods and retail, housing and construction, manufacturing, healthcare, power and transportation. Reforming agriculture and creating high growth and high value services industries is key, but a large part of India’s future lies in its ability to rapidly industrialise and become the global manufacturing hub China became 20 years ago. The potential impact of these initiatives makes perhaps the biggest impact on the modernisation of the country and the GDP of the nation, with accelerated sector development and investment adding a potential US$1.5 trillion to GDP by 2025 and US$5 trillion by 2040. However, this requires the government to foster a genuine system of enterprise with a level playing field in terms of access to capital, know-how, and exposure to regulation. The retail reforms in December 2011 that failed to pass the test of public and cross-party support demonstrate the degree of resistance in the system.
Each of these aspects of opening India is necessary and each seems to be onerous and revolutionary in its own right. Each requires an Indian political leadership that does not exist, perhaps cannot exist, given the scale of the challenges, the nature of the assets required to overcome them and the level of resources available to government. Rather than pursue four revolutions, it seems that India might pursue one revolution that could solve all four. Hence, the fifth answer is as follows:
- India Wide Open: India Becomes a Global Platform and So, an Engine of Demand and Supply. As we noted earlier, India must first conceive of a nation that is, given its size, at once the world’s manufacturing hub, R&D hub, alternative energy and materials centre, professional services hub and number one tourist destination. How will this be achieved? The Chinese answer is not the Indian answer: India is a slowly functioning democracy. India is, however, gradually becoming an entrepreneur factory and given its chaos it is breeding a highly adaptive entrepreneur. Three to five decades into the twenty-first century India may well have enough entrepreneurs to attempt this level of change. That may be too late given the rate of development of China and its hunger for resources that may well leave India without means the fuel its needs for growth. The challenge is to do this in the next decade not in the next five. No government in a democracy of great size has ever managed this level and rate of change. There is no road map for this level of change and no one to follow.
India will need to chart its own course. “Letting go”, as India’s spiritual teachers, have often said, is one of the most difficult of tasks. India will need to buck the regulation-and-taxation-heavy government model that is being embraced by fearful governments around the world. The way for India’s leaders to achieve what seems unachievable is to provide land at virtually no cost, set its taxes to a negligible rate, make the inward migration policies for the talented and for entrepreneurs as easy as possible, provide its people with as much education as they can muster through radical liberalization, implement dispute laws to be as rapidly enforceable as the best in the world, simplify regulations and reduce the bureaucracy to the lowest level in the world, provide co-finance for strategic projects through fixed period tax breaks in return for equity ownership, consolidate land for industrial agriculture, provide rapid and massive redevelopment for slums, en masse prepare its roads for building on and its streets for cleaning by entrepreneurs. The result will be that India will find that its problems will be solved by the smartest people in the world, both Indian and foreign. These opportunities will need to be offered to everyone in the world with the ideas, capital and energy to come to India and get rich making a difference.
For this strategy, India would abandon the plan that is creating a “narrow opening” and implement an “India Wide Open” strategy. India will need to launch a twenty-first century revolution. Will India cope with such a large influx of foreign capital and talent? Indians have seen waves of foreigners – Aryans, Persians, Greeks, Chinese, Mongols, Afghans, Arabs, Portuguese, British and others – come to their land and have coped just fine. Today’s Indians will be fine too. India Wide Open requires confidence and a real conviction in the power of its people and its democracy.
Revolutions by nature are volatile creations and history has shown that they are difficult to control. In order to do so India will need to adopt a series of enablers to bring about the scale of change required. India Wide Open would need to be achieved through three resolutions implemented in one revolutionary shift over one decade. This would create the momentum for India to break the shackles of its own situation. The three resolutions are:
- Land Resolution. India would offer agricultural, industrial and commercial government land for a token cost to all employers, domestic or foreign, creating employment for more than 100 people in their initial investment.
- Education Resolution. India would dismantle all restrictions on the establishment of private educational institutions and allow the public to decide. Taxes on private sector educational and training enterprises would be a maximum of 5% in the first five years and 10% for the next ten years.
- Business Resolution. India’s major advantage is that it already has a convertible currency and no restrictions on the repatriation of profits. The Business Resolution would open all sectors to foreign and domestic participation with the government focused on creating regulatory frameworks for competition, with an efficient judiciary enforcing fairness, regulatory standards and the transparency of business practices.
Will the incumbent political elite unleash this revolution? Fortunately, for India – and the world – it takes a small group of brave visionaries or a very deep crisis to turn an entire country in a new direction, as the events of 1991 demonstrated. What are the triggers one should look towards to determine whether India is adopting this radical path or, perhaps more importantly, what are the catalysts that will accelerate its adoption and progress? Continued political unrest, further revelations of corruption, the government’s continued inability to deliver on promised infrastructure improvements, or even a clear victory in India’s next national elections could all accelerate India’s movement to adopting a Wide Open position.
Conclusion. The cumulative impact of a successful India Wide Open strategy would have a significant effect on India’s growth, with annualised GDP growth rates of up to 11.2%, through 2025, reducing to 8.6% from 2025 to 2040, on par with China during the period of its fastest expansion. A Wide Open India in 2040 would look very different from India today. GDP/capita would be at US$17,700 or larger than Brazil or Russia’s today. India’s workforce would have expanded from 480 million today to over 950 million, with significantly increased female participation in the workforce. Literacy rates would increase from 75% currently to 85% or above. India’s economy and capital markets would be fundamentally transformed with manufacturing output rising over twenty-fold from US$200 billion to US$4.5 trillion and the total market capitalisation of the equity market would increase 16-fold (assuming current market capitalisation to GDP ratios).
The smartest dictators will be those that overthrow themselves. India’s political class is smart and resilient and will learn this lesson faster than others. Given the size of the challenge and the opportunity, we believe India has no choice but to pursue an India Wide Open strategy. India Wide Open is not an option for an India that will have 1.6 billion people very soon. It is not an option also to imagine that one can micro-manage this level of change. The risk to India failing to deliver on even the 7% annual growth being currently assumed is very real given the challenges India faces today. The role of government as enabler will be a massive transition for a nation with the world’s biggest bureaucracy. The traditional values of the country support the principle of “duty” as leadership. It seems time to put these values to the fore. Power without purpose and principle will not move India forward.
1 : United Nations Population Fund (www.unfpa.org)
2 : International Labour Organization (www.ilo.org)
3 : Ministry of Labour, Government of India
4 : Joint Economic Committee, United States Congress
5 : In 2010 equivalent dollars
6 : Transparency International Survey 2010
7 : Debroy/Bhandari “Corruption in India: The DNA and RNA” Konark 2011
8 : Global Financial Integrity: “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008″ 2010
9 : Comptroller and Auditor General of India