Understanding India: An Economic Perspective

Abdullah Verachia: Considering the impact of South Africa's Indian community despite its small size, surely we can gain much more from the Indian growth story?

President Jacob Zuma goes on an official state visit to India from the 2nd to the 4th of June 2010.

South African Indians only account for 0.1% of the total number of Indians in India but a cursory glance at the South African political, corporate and academic spheres reflects that they are an influential grouping who are inextricably linked to this country and the continent. Considering the impact of this 0.1%, surely South Africa can gain much more from the Indian growth story?

Mark Twain accurately summed up the strategic importance of India in the world when he said that “India is the cradle of the human race, the birthplace of human speech, the mother of history, the grandmother of legend, and the great grand mother of tradition. Our most valuable and most astrictive materials in the history of man are treasured up in India only!”

But it is India’s growth in the last 18 years that has drawn the most attention from the international community. It’s an economic story like no other emerging market or Bollywood story can accurately portray. Faced with a balance of payments crisis in 1991, sweeping economic reforms led to the subsequent boom that has culminated in annual growth at nearly 10 per cent over the last three years.

India today stands on the brink of becoming a global superpower. With a population of 1.1 billion people and having just surpassed Japan to become the world’s third largest economy, India is filled with a new sense of excitement, dynamism and hope.

The stats

When discussing the economic revitalisation of the world’s largest democracy the statistics are always mind boggling.

• A middle class of 400 million (larger than the entire population of the United States) and growing
• Second largest recipient of Foreign Direct Investment in the world since 2005
• Market value of listed companies now in excess of US$ 1 trillion thus making India a member of the elite trillion dollar club
• Largest road network in the world
• Two of the ten biggest cities in the world, Mumbai and Delhi, are in India
• Over 5000 daily and 16 000 weekly newspapers
• Indian universities and colleges enrol 4 million students a year which produce 200 000 engineers and 60 000 MBA graduates every year

Economic pundits who talk about the growth of India often speak about the large Indian multinationals which fuel this growth. However India’s economic growth is not solely driven by large multinationals who invest even more year on year, but by the spirit and ‘chutzpah’ of people on the ground.

The people

The magic of India rests in its people. From the renowned Mumbai dabawallahs who transport more than 200 000 lunches, over a 60 km radius, every day all with an extremely small nominal fee and with only one mistake in every 6 000 000 deliveries, to the launderers of the Dhobi Ghat, the largest open air laundry in the world. And the magic has just started. With half the population under the age of 25, young people in India are working harder, demanding better and spending more.

Spend more than three days in Mumbai and the pace at which this economy is moving reveals itself. It is then that one realises that no textbook, university lecture or newspaper article can ever encapsulate the incredible growth of this tiger economy. When VS Naipul wrote there is little subtlety to India, it was an understatement. From the street traders in Marine Drive to the boardrooms and offices of the richest men in the world, the sheer pace at which India is growing is incredible.

Ever since the Indian government started relaxing legislation to ease entry for foreign investors, the list has grown exponentially. Multinational banks, insurance companies, automotive giants and many more have all entered to tap into the massive Indian market. In the words of the ‘self styled’ Richard Branson of India, Vijay Mallya, "You rarely find a country with an acknowledged consumer class of more than 300m people, and an economy growing at 9 per cent a year. It would be quite idiotic to ignore the opportunity."

The attraction

India's commercial attraction lies in its immense domestic market, high growth rate, huge economies of scale in some sectors, the quality of management and labour, low-cost manufacturing capacity, and a large and rapidly growing middle class. It is also a gateway to other Asian markets such as Bangladesh and Sri Lanka.

However entry into India has not been as easy and plain sailing for many. Common misconceptions that, as long as one has money and can speak English, have been quickly dispelled. Many a foreign firm that has entered India has realised that one can never employ a general ‘India strategy’. India has 35 states and union territories, 22 recognised languages and ethnic diversity as wide as all of Europe. Different states have different regulations, rules to entry and licensing requirements.

But R Ravimohan, managing director and chief executive of Crisil, India's premier ratings agency, says it goes further than just the states. "In a sense, we have a Switzerland, an Ethiopia and a couple of Thailands all inside one country," he says. "The important thing is to identify where you want to invest: in the class market, or the mass market. Let me give you an example. When mobile telephone companies started here, it was thought of as something to aim at the class market, the elite, so they charged premium rates. Then Reliance went into the same business using a mass-market model and turned it upside down. They had very low charges - but they got 20 million customers." Reliance's model now prevails in the Indian mobile market, which has some of the lowest tariffs in the world - and the third-largest number of subscribers.”

Even the world’s largest chain of fast food restaurants, McDonalds, initially entered India with the wrong strategy. After dismal sales in the first few months the company quickly realised that the traditional menus utilised around the world would not cut it in India and in a matter of weeks menus were transformed to accommodate for McAloo tikka and McVeggie burgers. The company has not looked back.

• Abdullah Verachia is adjunct faculty at the Gordon Institute of Business Science, University of Pretoria, and Director and Business Division Head at Frontier Advisory