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In the league of the extraordinary

I have argued in my writings, over the past several weeks, that the spectre of further consequences emanating from the financial crisis of 2008, is far from over. Businesses may justifiably be anxious of the near term prospects of a ‘double dip’ in the US (a relapse of the American economy that will again plunge the world into a nasty cycle of unemployment, falling wages and declining consumption). To my mind however, the more serious consequence is the longer term one – the phenomenon of ‘global rebalancing’. This is concerned with the balance of economic power, in line with the economic laws of gravity, shifting from the West to the East over the next two decades. Emerging market consumers will earn more and therefore, spend more; while developed countries will go through a painful process of paying for their past indulgences when they consistently spent far more than they earned on the presumption that they could buy their way out of trouble, either by printing more dollars (in the case of the US) or by artificially propping up inefficient labour markets (Europe and Japan).

I have also cautioned that while countries like India and China stand to reap significant advantages from this phenomenon, they must be aware of the dangers inherent in a process that has been considered inconceivable for the better part of the last 150 years. Specifically, emerging markets will face strong and sustained upward pressures on their currencies, which will expose uncompetitive and inefficient local businesses. It will also lead to greater competition in their home markets, as global multinational companies launch a concerted effort on the last remaining bastions of untapped growth. Thirdly, it will lead to sustained inflationary pressures, which in the case of a country like India, will inevitably prompt knee-jerk and irrational policy responses. Finally, at a political level, emerging markets must tread carefully as they attempt to gain a voice in the global political order. The risk that the current uni-polar system is plunged into global anarchy instead of a balanced multi-polar configuration is a very real one. Evidence of this threat is visible in the manner in which negotiations at the WTO, the UNFCC and the UNSC have happened over the last decade. Signatories have been unable to agree on almost anything at all. To avoid the prospect of a complete breakdown, emerging powers – China and India, but also the Middle East and the African nations – must exhibit responsible and far-sighted diplomacy, an attribute they are not particularly famous for.

In the meantime however, there is no denying that enormous opportunity will unfold in India over the next 10 years. Specifically, there are four game changers that businesses can look forward to, as they plan their strategy for the coming decade. The first concerns a little-known empirical observation that when an economy’s savings rate exceeds 30% of GDP on a consistent basis, it begins to witness quantum changes in its physical infrastructure. India’s savings rate has averaged 35% in the last few years, and if foreign investment is included, the total investment rate is almost 38% of GDP. The changes this will lead to in the coming decade will, despite shoddy implementation, be nothing short of transformational.

The second game changer stems from productivity gains. The incremental capital output ratio (ICOR), which measures the investment needed to generate one additional unit of output, in India is currently 4.1, implying that with an average investment rate of 38%, GDP growth of 9% is possible. However, if the ICOR improves to 3.5 (merely continuing its historical rate of improvement), GDP growth would increase to 10%. There is evidence to suggest that the rate of improvement may actually increase, with the private sector taking an increasing share of total investment (from 38% to 60% in the last eight years) and the Government putting in place efficiency enhancing measures, such as the UID programme and e-governance initiatives.

Thirdly, economic activity will receive a boost through the spending of an additional USD 800 bn over the next 10 years by the Government. This represents the incremental tax revenues the Government will receive through the GST. While the Government may well fritter away a large part of this money in wasteful programmes, the fact remains that the additional income this will generate in the hands of consumers will be equivalent to 80% of national consumption expenditure in 2009-10!

The final game changer is the evolution in consumer demographics. It is IMA India’s estimation that India currently has 5 million households earning a household income of USD 50,000 pa. These ‘have alls’ are followed by the ‘have lots’, 22 mn households earning USD 18,000 pa. Ten years hence, India will have 12 million ‘have all’ households earning USD 80,000 pa and 44 million ‘have lots’ households, earning USD 36,000 pa. They will buy a million passenger cars a month, consume 6 million barrels of oil a day and use 250 mn tonnes of steel a year. This calls for a change in scale and perspective that few companies in India may currently be prepared for. Businesses would do well not to under-estimate the strength of the approaching consumption wave and the risks on balance will remain on the upside.


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