India is a bird of gold, but too stodgy to really soar; here is why the economy really needs freeing

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January 15, 2018 4:31 AM

It is comforting to bracket India and China and talk of this century being Chindia’s—never mind the intense hostility over the border between the two.

India, China, India-China, HSBCIt is comforting to bracket India and China and talk of this century being Chindia’s—never mind the intense hostility over the border between the two.(Image: IE)

It is comforting to bracket India and China and talk of this century being Chindia’s—never mind the intense hostility over the border between the two—and of the country’s 300-million-strong middle-class which, as The Economist has pointed out in its cover story on India last week, HSBC has projected will grow to 550 million by 2025. Obviously there is a sizeable middle-class but it is a middle-class that mainly buys only cut-rate products—a Nirma middle-class, for those who still remember how this low-cost detergent’s challenge to the then market-leader, Surf, expanded the market dramatically. The surge in mobile phone connections and, more recently, the explosion in data usage is evidence to this rapidly growing middle class, but this only happened as tariffs declined rapidly.

As Economist points out, the e-tail market that grew at 100% in 2014 and 2015 and was projected to cross $100 billion by 2020—five times today’s size—hardly grew at all in 2016; in dollar terms, it reminds us, 2017’s growth was comparable to that of a week in China. Apple, the article points out, makes just 0.7% of its revenues here—the latest iPhone, even for someone in the top 10% of the population, represents five month’s salary. Facebook may have the largest number of users in India but made just $51 million in 2017, all of India’s domestic airlines taken together are no larger than Ryanair, the world’s fifth-biggest carrier …

Getting a large enough middle-class—in terms of developed country standards—will take a lot more than what is being done right now; indeed, with India unlikely to be able to achieve anything more than 7% for a few more years, even sustaining the current middle-class will be a challenge. For a genuine middle-class, India needs to growth at 9-10% for several decades and that requires its exports to soar, its MSMEs to grow in size and become world-beaters. In contrast, along with overall investments, growth in infrastructure has collapsed, adding to India’s uncompetitiveness—road transport in India costs $7 per km versus $2.5 in China, and it takes 21 days to deliver from JNPT to the US East Coast versus 14 days from China.

Thanks to bad labour laws, primarily, India’s manufacturing, which offers the best hope for growth, peaked as early as 2008 when the share of registered manufacturing in the country’s value added was a mere 10.7%. As for exports, while Bangladesh’s total exports grew by 82% in 2010-16 and Vietnam’s 145%, those for India grew a mere 17%—that’s hardly surprising when you consider that, for instance, in the case of the apparel sector, there are 2 million establishments that hire, on average, 1.5 persons as compared to 2,800 firms in the formal sector that hire 118 workers each; how can they possibly deliver quality? The government, for all its efforts, has not even been able to remove compulsory deductions such as EPFO/ESI that reduce take-home pay of those earning a basic salary of Rs 5,000 per month by around 45% and which, in turn, makes workers prefer informal jobs.

For over three-and-a-half years, it has ducked labour reforms and, with the country readying for elections in a year, it is difficult to see that happening now. In even the agriculture sector which is globally competitive for the most part, government policy has been restrictive. Thinking of India as the next consumer hotspot is exciting, but untrue.

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