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Opinion Free Lunch
Five undervalued qualities of the Indian economy
What does a moon-landing, plethora of scientists and large diaspora say
about its potential?
TEJ PARIKH
India appears uniquely positioned to specialise in knowledge-based activities © AFP via Getty Images
Tej Parikh 9 HOURS AGO
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Hello, Free Lunch readers. I’m Tej Parikh, the FT’s economics leader writer,
and it's my turn to regale you in Martin’s absence.
The timing is sound. India is celebrating its 78th Independence Day today.
Everyone knows the story: it’s the world’s most populous nation, one of the
fastest-growing economies, the third-largest by gross domestic product in
purchasing power parity terms, and a touted beneficiary of “China Plus One”
supply chain diversification.
The optimistic vision of India as an emerging economic rival to the US, EU
and China has, however, been held for a while. There have been many false
dawns. But, in keeping with the festive moment, and in my regular format of
looking for alt-narratives, I sought out some data points that put India’s
economic potential in a different light.
Five undervalued qualities of the Indian economy
1. An emerging services power
The idea of India as the world’s back office and call centre needs updating.
Multinationals are increasingly tapping into the nation’s tech-savvy talent to
develop “global capability centres” for their organisations. These hubs
conduct more lucrative activities for companies, including design, research
and development, and data analysis — skills that are often costlier and in
shorter supply back home.
Top companies including IBM, Google, Goldman Sachs and Novartis have set
up GCCs in the country. India accounted for more than 45 per cent of the
GCCs in the world outside of the home country in early 2023, according to
Ernst & Young. It is also home to some of the world’s largest IT services
companies, such as Tata Consultancy Services, Infosys and Wipro.
If China is the workshop of the world, India could become its research hub.
The country’s share of world services exports has grown steadily over the
past two decades, driven by a surge in professional consulting activities,
particularly in IT. This looks set to continue.
Why does this matter? Well, exposure to the growing, high-value added
global services trade, is promising for India’s economic trajectory, says Rohit
Lamba, an assistant professor of economics at Cornell University and former
economist at the office of the chief economic adviser to the government of
India.
“Most countries that have grown rapidly since the industrial revolution have
done so through the standard structural transformation route of vesting
agricultural surplus into low-skilled manufacturing such as textiles, and then
eventually high-skilled manufacturing and services,” says Lamba,
The likes of Japan, South Korea and China were able to make the first step
much faster than the US and Europe. But Lamba says India has leapfrogged
the standard route.
“Missing the manufacturing bus may have had its problems in more unequal
distribution of wealth. But going forward, a head start in service exports and
expertise in services embedded in manufacturing (think of codes written
into a Tesla car) make India well poised to take off once more in a rapidly
“servifying” global economy,” he adds.
India appears uniquely positioned to specialise in knowledge-based activities
— and services tied to manufacturing — which generate higher income than
more hands-on activities in building and processing.
At the same time, it is also attracting interest from multinationals seeking to
use it as an alternate manufacturing hub to China (Apple is aiming to make
25 per cent of iPhones in India in the coming years.)
2. A talented workforce
Where does India’s emerging comparative advantage in services come from?
It has one of the youngest and largest workforces in the world. For measure,
roughly 1mn workers enter its labour market every month. Although this is
often cited as one of the nation’s greatest challenges, the country’s surplus of
workers also creates enormous opportunities.
More than one-third of Indian students choose a STEM degree. And given the
country’s huge population, that gives it one of the largest pools of graduates
— in areas ranging from digital services, engineering, computing and data
sciences — in the world. When it comes to artificial intelligence, India also
has the highest AI skill penetration rate globally, according to LinkedIn data.
These skillsets are obviously in high demand in the US and Europe, and India
has them in abundance. They have the added advantage of not being
dependent on location, meaning that multinationals can leverage Indian
talent remotely, or by setting up offices and GCCs in the country.
Even then, India has the largest diaspora population in the world. Rising
numbers of Indians are moving abroad for education and work, in lucrative
industries where there are skill shortages. Indians born outside the US earn
an average of $120,000 a year in America, well above the national average.
That income returns home, too. Last year, remittance inflows hit a record
$125bn — the largest of any country.
Of course, not everyone entering the workforce is highly skilled. But if more
Indians enter higher-income jobs in professional services, this will drive
additional service sector roles in India to cater for a growing middle class.
(Plus if the country can also soak up some manufacturing activity from
China, that can support the employment of individuals with lower skillsets.)
3. Entrepreneurial spirit
An under-appreciated facet of most countries is culture. Yes, it may be an
amorphous concept, but norms and values do shape nations’ economic
destiny, too. (For instance, greater risk tolerance in the US is sometimes cited
as a factor that supports its investment and enterprise environment,
compared with Europe).
In India, Jugaad, or frugal innovation, is a way of life. Take Mumbai’s
dabbawalas. They shuttle lunch tiffins every day to hundreds of thousands of
office workers, navigating chaotic roads with awkwardly stacked and often
identical steel containers. Yet a 2010 study from Harvard Business School
found only an error rate of just 3.4 mistakes per 1mn transactions.
The “can-do” attitude is prevalent across India: from makeshift water pumps
cobbled together from truck parts to shoes with floats that help people walk
on flooded ground. Last year, the landing of the Chandrayaan-3 spacecraft
on the moon was also lauded as a feat of frugal engineering. The operation
cost just $74mn (that is less than the budgets of space movies Gravity and
Interstellar) — and the space programme’s $2bn budget is a fraction of that
of every other country that has landed on the moon.
Entrepreneurialism is evident in the economy, too. At 271, the country has
the third-most billionaires in the world, behind China and the US. Its start-up
ecosystem is the third largest globally. And a number of innovative
companies have emerged in recent years, including food delivery group
Zomato, ecommerce retailer Flipkart and Ola Electric, a two-wheeler electric
scooter manufacturer (which last week became India’s largest IPO this year).
Of course, Indians head global companies too, for example Sundar Pichai
(Google), Satya Nadella (Microsoft) and Laxman Narasimhan (until this
week, Starbucks).
The point? An entrepreneurial spirit has a tangible impact on growth,
innovation and investment. It should not be overlooked when assessing any
country’s potential. To build on it, India needs to open up to competition,
including by easing tariff barriers, and reckoning with large conglomerates
with ties to the state.
That reminds me. Yes, the wedding of Mukesh Ambani’s son was hardly an
example of Jugaad. Asia’s richest man and chair of India’s Reliance
Industries splashed out £100mn-£120mn on the festival, including private
gigs by Justin Bieber and Rihanna. Anything but frugal. That aspect of India’s
culture is perhaps for another time.
4. Maturing capital markets
A large, talented and innovative workforce needs capital to leverage its
ideas. And, in recent years, both institutional and retail investors have been
ploughing cash into Indian companies, lured by the nation’s growth
narrative. The National Stock Exchange of India’s market capitalisation has
more than doubled since 2020. It is now the fourth-largest by country, having
jostled with Hong Kong recently. IPO activity has boomed, too.
Reflecting India’s rising promise, MSCI is expected to raise the country’s
weight in its benchmark indices, putting it closer to China. That should
support further capital flows.
Despite a recent softening in activity in India’s venture capital market, Bain
expects rising consumption (India’s internal market is almost double the size
in population terms of those of the US and EU), a strong “digital backbone”
and China Plus One tailwinds to support it over the long-term. Indeed, India
is currently the second-largest destination for VC and growth funding in
Asia-Pacific.
Boosting FDI will be important too. Invest India, the government’s
investment promotion agency, has also laid out ambitions to raise India’s
annual FDI by about 50 per cent, largely by tapping into China Plus One
supply chain strategies.
So, it seems as though India’s capital markets are maturing and, assuming
the economic story remains intact — and the policy environment supports it
(investment in skills, education and infrastructure etc)— this should drive
continued investment and business growth in the country.
One risk on the horizon, however, is that the huge interest in India has
stretched asset valuations. In the coming years, a boost to corporate
governance, regulatory oversight, and transparency in its capital markets
will go some way towards supporting its financial stability.
5. Resilience
Finally, some argue that India’s economic model makes it more resilient
compared with other emerging markets, both past and present. Indeed, an
economy that can bounce back from shocks helps to drive sustainable
growth over the long term:
(i) India’s emerging strength in services makes its growth more robust.
Nations that depend on commodities and manufacturing exports can be at
the whims of global demand and geopolitical shifts. “The continuing boost
from services exports would make India’s external sector resilient to supply-
side shocks over the medium-term, and reduce volatility in the currency,”
explains Santanu Sengupta, chief India economist at Goldman Sachs.
Services exports accounted for about 44 per cent of India’s overall exports in
the last financial year.
(ii) India’s development story is unique insofar as its democratisation largely
preceded its economic take-off, as Lamba and Arvind Subramanian, a
former chief economic adviser to the Indian government, noted in a 2020
paper.
“Since 1950 there are only nine countries that have grown for four decades
at 4.5 per cent or higher in GDP per capita in real terms without the decadal
average falling below 3 per cent,” says Lamba. “India is one of them.”
But the country is also an outlier for being consistently democratic. “Such
high levels of political freedom despite its relatively small [initial] economic
footprint arguably slowed but also steadied India’s march towards
prosperity”. Lamba explains that democracy has helped India to mediate its
many social and cultural cleavages without fundamental ruptures.
(iii) India is also well aligned to benefit from digital and green growth. First,
it has developed a world-leading digital infrastructure system, covering
universal identity cards, rapid financial transactions and data sharing.
Chaiwalas and rickshaw drivers can now collect payments with the swipe of
their phones. It has cut red tape, boosted digital enterprises, improved
economic inclusion, and supports the government’s ability to target welfare.
It also helps future AI adoption across the country.
Second, although India remains reliant on fossil-fuel power, particularly
coal, it has huge potential for renewable energy generation. In 2022, 40 per
cent of energy capacity installed came from renewable sources, already
making it the world’s third-largest producer. India’s solar power potential in
a single year exceeds the possible energy output of all of the fossil fuel
energy reserves in the country. BloombergNEF has forecast that India will
generate 75 per cent of its electricity from renewable energy sources by
2050, mostly from wind and solar energy. This suggests the country can play
an important role in the global green supply chain.
The upshot? Clearly a country of India’s scale and diversity cannot be neatly
summed up with just a few data points that allude to its rapid economic
growth, population size and geopolitical alignments. There is much more
below the surface, more than I, at least, had appreciated.
India is at once a budding knowledge hub, and a prime choice for
manufacturers, looking to diversify from China. A huge workforce, of both
highly skilled STEM graduates and labourers, makes that possible. And while
money is pouring into its capital markets, creative entrepreneurs are
spawning new business ideas too.
The nation’s many facets guarantee that its development path will be unique.
But, the elephant in the — touted tiger economy’s — room is that capitalising
on it depends on effective governance. Reforms, investment and political
stability are all needed. Unlike China’s path, India’s status as a democracy
offers hope for long-term sustainable growth.
Even if policymakers get only some of it right, the rewards for India — and
the world — will perhaps be greater than many had realised.
Other readables
I joined FT colleagues for a subscriber webinar to discuss the past few weeks
of market turmoil, the US Fed and whether we can expect more volatility.
Shekhar Aiyar, a visiting scholar at Johns Hopkins Sais, reminds readers on
the FT’s opinion page that rising disparities in the US and Europe should not
overlook the rapid pick-up in incomes in India and China.
Check out this insightful research piece by economists (Hamza
Abdelrahman, Luiz Edgard Oliveira and Adam Shapiro) at the San Francisco
Federal Reserve, which tracks the evolution of liquid assets among different
income groups in the US.
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