It’s been 30 years since economic reforms were initiated. It is the right time for retrospection. Let us evaluate the three decades of reforms in three phases. The first part is the 1990s, marked by struggle and survival and the rise of the knowledge industry. The second part, from 2001 to 2010, is when we reinvented businesses, scaled up operations and created globally competitive organisations. This period also saw the start of the process to build core infrastructure, especially in areas like ports, roads, telecom and power. The third part, from 2011 to 2020, was when the country saw a further infrastructure push. There was focus on green and clean energy, companies were deleveraged, and became globally competitive in some areas. It also saw the start of building up of the digital start-up ecosystem. Let’s study these three phases in greater detail.
I returned to India in the middle of the ’90s. And what I saw was — I will put it in one word — Challenge. There was a palpable fear in the minds of Indian entrepreneurs. While the economy was opened up by way of decontrol and liberalised FDI, Indian companies were not structured or big enough to meet competition outside or inside. They could not produce the quality required in a globalised world. In the financial sector, liberalisation was followed by some opening up, including new banking licences for the private sector, but they were all fledgling institutions. Bankers were fearful about scaling up given high inflation and interest rates. Commercial banks were mainly working capital providers and development financial institutions basically lent long-term money. There was hardly anybody in retail credit.
The milieu remained more or less the same throughout the decade. But, towards the end of the decade, things started to change. First, it was the emergence of cheaper technology. The advent of technology meant that you could provide, let us say, branchless banking through ATMs, call centres and a fledgling internet. Retail lending also started to take place.
These developments brought us to the new millennium. But we were still burdened with non-performing assets (NPAs) or restructured assets. The silver lining was the rise of technology companies. In the ’90s, there was no IT player in the list of top 10-15 companies by market capitalisation. By 2000, there were at least three.
Another interesting thing happened. Even though inflation remained slightly high, the government and the RBI managed to get interest rates down by almost half. Ten-year government bond yields suddenly dropped from 11 per cent to 5.5 per cent. This helped retail lenders, which could make their products much more affordable for consumers. For instance, mortgages with 15 per cent interest rates suddenly got re-priced at 7.5 per cent. The car loan, priced at 18 per cent earlier, became available at 10 per cent. This gave a big push to retail lending, which in turn generated momentum for manufacturing companies.
These developments started pushing the economy forward. The momentum gave additional income in the hands of the white-collared workforce, particularly from technology areas. A report from a rating agency made a case that every white-collar job creates four-five additional jobs. This mass of people with increasing incomes and higher consumption drove the early part of the 2000 decade. The industry was quick to respond. It de-leveraged.
In the early part of the 2000 decade, India crossed the $500 per capita income hurdle. I had seen in my days across South East Asia (during the ’80s and early ’90s) that people’s aspirations rose at that level of per capita income. That, and the drop in interest rates, created a virtuous environment. That’s when most of the out-of-the-blocks acceleration happened for the Indian industry.
Simultaneously, the government’s infrastructure initiatives like the Golden Quadrilateral and the Pradhan Mantri Gram Sadak Yojana paid rich dividends by connecting the India which grows with the India that consumes. That decade was about industry building scale and capacity, becoming globally competitive, and producing quality products. The enabling infrastructure was set up during this period.
The third phase, 2010-2020, was where we actively thought green and dedicated a much larger amount to infrastructure. Corporate India also started talking the language of ‘debt is not good’. Technology costs kept falling at a dramatic pace. We became the world leaders in providing data of sufficient bandwidth at lowest possible costs. We have actually made connectivity virtually universal. The building blocks for the future have been built by Indian entrepreneurs. These give us a wonderful springboard to the next decade and beyond. We have another 25 years of investments to come in the infrastructure sector. It is an opportunity to look at green power, green infrastructure, etc.
Initially, we thought we were laggards in a lot of things and then we leapfrogged. Again, we are lagging a bit in infrastructure, and we will leapfrog. Today, we actually have the unique ability to reap the ‘fruits of waiting’ because we can get things done at probably the lowest possible cost and not be burdened with early-stage cost structures. We also have matured costs where we can leapfrog very easily. For example, we now hear of companies talking about solar harnessing devices at a fraction of the cost a few years ago. We will probably be the lowest cost providers of electric power in the years to come.
The other favourable development is de-leveraging. If one looks at the top 100 companies on NSE or BSE, almost all of them are de-leveraged. The top 50 companies for sure. There is something deeper here. In the past, we could not afford what we borrowed. Today, we need not borrow. Why? The Indian companies are generating free cash flows of the order that is enough to meet their brownfield needs, for sure, and in some cases even the greenfield requirements. In any case, the scale has been built. You can expand your existing facility in a brownfield mode at a fraction of the cost using your own money and maybe at an incredible speed compared to 20 years ago when projects used to take more than five years to complete. Today, hardly any project takes more than a year.
The manufacturing world has eked out significant productivity gains. They were forced to work with fewer people. Secondly, they were forced to adopt newer processes, which harnessed the technology. I would think that the Indian industry has managed anywhere between 15 per cent and 25 per cent productivity gains, which happens once in a lifetime of an industry. They are at the forefront of process improvement.
Another post-pandemic revelation is that the people who are working side by side on the shop floor appear to be less impacted than the white-collar industry which worked, to a large extent, from home. My anecdotal pieces of evidence suggest that the processes set up by blue-collar enterprises are far more robust than the processes followed by white-collar enterprises. In the last one-and-a-half years, they have done a marvellous job.
The Digital Journey
Interestingly, while infrastructure and manufacturing will drive us into the next decade, my belief is that the biggest driver is going to be digital transformation or the ‘digital super cycle’. The other growth engines will also fire, but the digital transformation will create momentum to provide GDP growth going up to 15 per cent from 7 per cent. I would like to believe that India can grow at 15 per cent. The incremental growth will be driven by a digital super cycle.
We often use the word ‘unicorns’. But we need to look at the entire ecosystem of these companies, from start-ups to the ones that have scaled up. Some of them will be huge successes, while some may fail, but the ecosystem is very critical.
In financial services, the next five years are going to be very interesting. The time to market for these new players is very short. So is the time to scale up. The financial sector incumbents will feel the pressure very quickly unless they reinvent themselves completely.
When we look at the start-up ecosystem, we need to ask: do we have the core building blocks of the ecosystem? First is the connectivity and, more importantly, affordable connectivity, which is certainly available. Is it ubiquitous and available to everyone at the same cost? The second is IT applications. What we are seeing today are only a few financial services applications, but I believe that this can be applied widely starting with education, medicine, e-commerce, distribution, and so on. Third, as you go along, you will see a marriage of virtual and physical because there is a physical distribution piece in e-commerce which provides huge employment.
The fourth dimension is the ability to build something for the world. Today, software built in India can be used globally. Let me mention two pieces of software we used in the New Development Bank. We did a Google search for the lowest cost providers of software services and found cloud software suite Zoho and Kissflow for workflow management. We never knew these companies were from India. This was about six years back. In the last six years, many more such companies must have mushroomed in India. I think this trend will only accelerate.
Clearly, in the coming decade, we will build for India and build for the world. We will build in education and medicine. We will build in e-commerce. We will build in fintech and digitech.
In this digitisation drive, there is one question that is often asked. How to create employment for the millions of people that will join the workforce? The employment will certainly come from the digital super cycle. This is akin to the white-collar jobs in the 2000 decade. In the 2021 decade, we will see employees and partners of these platforms creating new job opportunities. Each job in these areas, just like in the IT sector earlier, will create four-five opportunities of various sorts.
In conclusion, I think if we can marshal the power of the digital super cycle appropriately and keep pushing on infrastructure and doing all the things that need to be done, we could unlock India’s higher growth potential. The next 25 years is clearly a period of big opportunity for us.
(The author is Former Chairman of New Development Bank of BRICS Countries)
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