What India brings to the table

₹Let me start with a personal story because I feel that it is relevant to the topic in a significant way. When I decided to contest the recent Lok Sabha elections in India, it was quite strange. Because you had somebody like myself, who had led a professional life for 25 years and had suddenly decided that he wanted to contest an election. So, that attracted a fair bit of media attention and one headline, From Harvard to Hazaribagh was Hazaribagh to Harvard, because I was born in Hazaribagh and grew up there. Obviously, I was lucky enough to get into IIT and, later, into Harvard. But that really is the more interesting part of the story and it is the story of India as well: the story of India is not necessarily about the West coming to India but about India going to the West. India is adapting and aligning with what is happening globally. That is the big story. So let me lay that out in some more detail for you.

The Indian economy today is worth $2 trillion. We are capable of getting to a growth trajectory of 7% or 8%; it is well within our reach and we have demonstrated a much faster growth rate than that for a brief period of time. If we can achieve a 7-8% growth rate and sustain that for at least 10 years, we can go double the economy from $2 trillion to a $4 trillion economy. As we work on this, the rupee will gain strength as well.

With the capital flow that India is going to receive, I am quite confident that we will soon reach a point where the rupee is not at 60. In fact, if the rupee is allowed to float freely, I can assure you that it would not be at 60. What Dr Rajan and the RBI are doing is building up reserves right now. If we had a free float for the rupee, we would have been at 55-56 already.

But it is quite possible that over a period of time, we will get to a point where the rupee is significantly stronger. Therefore, we have an opportunity to go from a $2 trillion economy to a $5 trillion economy somewhere in the next 8-12 years.

What we have seen over time is that the market capitalisation of the BSE or any other index, tends to move in tune with the GDP, which has been the case in India in the past 8-10 years. If we are able to turn into a $5 trillion economy and maintain this 1:1 ratio, we will see a situation where the market capitalisation of Indian companies could touch $5 trillion. This means that in the next 10 years, we could easily add another $3 trillion to the market capitalisation of Indian companies.

Now, as you look around the world to figure out where the global investment opportunities lie, it is hard to find one where you can get $3 trillion from, and this is just  the listed names. If you look at private names, there is potential for another trillion dollars or so. So, the wealth creation potential in India over the next 10 years is in the range of $3 trillion.

The last I checked, a lot of people had not made money in China. Though China has had a very impressive growth rate, that has not resulted in people making money. On the other hand, people have made money in India and are continuing to do so even as they invest from overseas. I believe that what we are seeing here right now is the most unprecedented wealth creation opportunity that we will witness in our lifetime, particularly for those of us who have invested in India. That is what I think is ahead of us.

I have tremendous faith in the prime minister. Having worked closely with him and knowing his party and the political landscape, I believe that we are going to be able to stay in power in 2019 as well. So, what we would expect to see is prime minister Modi ruling for another 10 years and transforming India within this decade.

As far as the prime minister is concerned, his vision for India for the next 10 to 15 years is something that resembles Japan — a peaceful, prosperous, stable democracy, where you are able to create tremendous opportunities for all citizens and at the same time have very competitive export-oriented industries. That is what the prime minister is working towards. And that is the context in which we have to look at what the world can supply and what India can supply to the world.

As I said at the outset, it is what India is bringing to the table that is much more interesting. If you think about what the world can provide India, it is fairly straightforward and clear. Those of us who have been tracking India know what we need and what we are importing right now. What we need in India, first and foremost, is energy. Of course, we are importing 90% of our oil requirement and we will be importing liquid natural gas in future. Energy is the number one import and will remain so over the next 10 or 15 years. It is something that will prove to be very difficult for us to substitute.

The second thing that India needs from the rest of the world is technology. I think what the Mangalyaan mission has shown us is that we are capable of doing whatever the rest of the world can do. But if you look at solar energy or fracking, all energy-related technologies, certain computer-intensive technologies, certain biotech-type devices, pharmaceuticals — that is really the kind of technology we need.

The third thing that we need, and for which all of you are important, is capital. Now, domestic capital is still by far the most important driver of our growth. If you look at India’s investment rate of about 30% of GDP of $2 trillion, we are investing $600 billion a year. A vast majority of that is coming from domestic sources and from our domestic savings; it is not coming from any global sources. But, at the same time, that capital, coupled with technology and the world’s best management practices, is of vital importance to India.

As far as I can see, the world is awash with low-return capital. Therefore, if you can create the right investment opportunities, capital will come in. Those are the three things that we need from the rest of the world. If we have energy, technology and capital, then we can truly move towards becoming a $5 trillion economy. In some quarters, that part is well known and well understood.

Now, let me tell you something about what it is that India can provide to the rest of the world. This idea may not be discussed as much but is equally important and that is the Hazaribagh to Harvard journey that I started my speech with. So, what is that I think India can do for the world?

First and foremost, what you are going to see is the start of many different types of industries that only India can run. I will explain that in a bit, but first let me start off with an analogy with China. What China brought to the table when it really integrated with the global economy was very low-cost and efficient manufacturing. You see that in Shenzhen and other big factory cities in China, where a lot of industries such as furniture-making, low-tech assembly, electronics manufacturing and leather and toys were swamped by what is called the ‘China price’. That was the incredible supply boost that China provided in terms of manufacturing and it really transformed the world. That is what China achieved when it integrated with the global economy. What, then, can India achieve? 

I think India will do well with a different set of industries. We have seen that in the software sphere, where India has transformed an entire industry by manufacturing from a uniquely Indian base. We are going to see that in many other industries as well. The Mars Orbiter Mission (or Mangalyaan) is a prime example. There are going to be many different industries where the combination of low-cost frugal innovation coupled with the talent of the human capital in India is going to work in favour the global economy. I will give you an example of three such industries. The first is the medical devices industry. We have already seen in the pharmaceutical and generic manufacturing sector that Indian companies can be very competitive. We are now going to see that in the medical devices sector.

There are a range of medical devices that people are working on right now that I think are really going to make a big impact on global medical costs, such as optometric devices for diagnosing eye problems and low-cost stents. There are people in India working on stents that are as good as anything that Johnson & Johnson manufactures, but at 1/10^th the cost. So, medical devices is one industry where we can expect to see a lot of interesting things.

The second area where we will be able to see a lot of interesting innovations is in what I call the rooftop solar sector. I sit on the board of a company called D.light, which is already manufacturing the most cost-effective and innovative rooftop solar systems. A lot of their design and engineering work is happening in India. This type of distributed solar generation is coming out of India and is going to places such as Haiti that face tremendous electricity shortage. Once the enabling technology is in place for distributed solar power, a lot of other things will be possible. This is another industry where innovation, technology and prudent thinking, coupled with India’s own large market, will result in tremendously interesting growth opportunities for industries that can only develop in India, just like certain industries that have developed only in China.

The third example I want to give is in the automotive industry. Maruti Suzuki has already been quoted as saying that India could become the largest manufacturer of automotive vehicles. Daimler Benz has said that its Indian truck-manufacturing unit is going to be the export hub for southeast Asia as well as Africa. That is another example of high-quality talent coupled with engineering-intensive manufacturing, resulting in a kind of industry that can only exist in India.

So, we can deliver industries that couple innovation with engineering-intensive solutions, the kind of industries where India will perform well. We are not going to become a Foxconn type of electronics manufacturing player as that requires supply chains, low-cost land, and a tax regime like the ones set up in China. We are not going to replicate that model.

The industries that we are going to develop are going to be very different. They are going to be much more engineering-intensive, which is where we have a competitive advantage, and we will focus on medical devices, distributed solar power and automotive manufacturing. That is something we bring to the rest of the world.

The other thing that India will bring to the rest of the world is something even more powerful than a new set of industries. I am already beginning to see that impact in certain parts of the world, particularly in Africa. What I mean by that is if we can get to that 7-8% growth rate and become a $5 trillion economy, if we can generate return for the rest of the world, if we can profitably employ a young workforce, then we can demonstrate to the rest of the world that there isn’t just a China model but there exist other models for development.

We will be able to demonstrate that there is an India model for development that is based on diversity, democracy and a different kind of innovation. That is a very powerful message to send to the rest of the world; to show people that we don’t necessarily need to have authoritarian powers to achieve prosperity, to show that we can be prosperous by giving people freedom and thereby making a country that we can all be proud of. 

Excerpts from the address made at the India Investment Forum 2014