India Growth Model 03: Fix-Contest-Leapfrog-Prepare Growth Model for India

Indian growth model must have various components addressing local AND global demand. The window of opportunity is short, we need to develop faster. The growth needs to come from both public and private sector and must utilize the Indian human resources. I propose a four-way Fix-Contest-Leapfrog-Prepare model for growth.

Fix

For basic infrastructure and basic capacity building there is enough capital available globally and that capital is seeking low returns which is good.

We need to continue to fix basic infrastructure, from ports, roads, power, housing, etc. to law and legal systems, education, defense to modern infrastructure like telecom and digital infrastructure etc.

We need to continue the cleanup that began in 2014 which mean reformative laws need to be cleaned and reworked for example, Insolvency and Bankruptcy Code, GST Act, etc. needs to be shepherded through the legal institutions that are trying to muzzle it.

However, the most important part of this strategy is to create a proper social security framework. What demographic dividend we envisage, will turn into a demographic nightmare in about 40 years. The problems faced by pensions, medical insurance, health insurance etc. In the developed countries like US, Japan, Europe etc. Signal potential pitfalls for the Indian economy.

The Fix strategy focusses mostly on government action. While there is ample scope for Public-private participation or for divesting government created infrastructure to investment vehicles, the central focus of this strategy will be driven by government. It requires high quality last mile delivery. The strategy will depend on known and innovative models of government action.

Contest

The Contest strategy is relevant for industries operating currently. The catch-up will involve penetration, locally by global companies and globally by Indian companies, of known business models. It is spread of McDonalds and Sushi across the Indian hinterland. It is also the spread of Vada Pav and Fish curry across the remote corners of the world.

This strategy portends that we will liberalise and open the economy. At the time when trade wars are looming large, this will mean global corporates will focus on India intensifying the competition in the domestic space. This will be quick win for consumers and job creation but a difficult time for domestic industry. However, it is not all bad, things will improve for domestic industry also. Something similar to what we say between 1992-1994 and between 2002-2005 we can hope to achieve. This is domestic battle. Battle for Indian consumers by Indian and global companies.

However, we need to prevent the mistakes and learn from the experience of the world when we liberalise. Thus, we may want to regulate the propogation of Genetic modified foods, or hormonally treated meats etc.

The contest strategy focusses on private players and known business models. The role of government shall remain limited to regulation and monitoring. Coordinated export development strategy is required. This means industrial policy will be as important as Fiscal policy.

Leapfrog

Generating, lasting, fast paced private growth is quite difficult. Particularly at the time when trade wars are looming large where economies will try to protect their jobs and therefore their markets. It will come from those industries where we India can deliver susbtantive and impossible to replicate advantage that will remain exclusively tied to India. This will be the focus of the Leapfrog strategy.

The Leapfrog strategy will focus on IT/ITES, Food, Fashion, Jewellery, Movies, Music, Entertainment, Culture, medicine, among other sectors.

Leapfrog strategy will be driven by innovative private players. The role of government will be limited but innovative interventions. We also need champions for each of the industry clusters working in this area. Dewang Mehta is the name that immediately comes to mind.

Prepare

At the time we are developing this strategy, we need to keep an eye on emerging trends in distributed manufacturing, robotics, artificial intelligence, advances in biology, etc.

These opportunities are for the private sector. In this report we focus on what private sector can do to address these opportunities in the economy and market place and create value. This participation by the private sector will entail some innovative groundwork by the government. We highlight that in later section.

Model in summary

The Fix-Contest-Leapfrog-Prepare Model is meant to limit the role of the Government. It also recognizes that Government is also necessary and required to deliver certain services. Thus, the model is centrist in terms of economic leanings. It is meant to clarify the necessary reform that government needs to undertake and to underline its urgency.

It is also the aim of this model to enumerate some of the many opportunities open for private sector in India. It is the private sector that will create those jobs. The model is meant as a treasure map that hopes to inspire many private sector treasure hunters to go forth and seek this treasure of growth and prosperity for the economy.

It is also important for this model to highlight the nature and extent of coordination that will be required between government and private sector. Both these entities will be required to complement each other so that India can address these opportunities before us. Coordination is more important because, unlike between 2002-2007, the macro environment is volatile.

The Fix-Contest-Leapfrog-Prepare Model will be explained in detail in subsequent sections.

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India Growth Model 02: India needs a new Growth Model

India needs growth at a time when global growth is sluggish, globalization of trade and supply chains has plateaued and is likely to reverse. These headwinds are challenging for any economy. Therefore, the Indian model of growth has to be substantially different.

Proven business models are broken

Across times countries have deployed similar models for growth. They are based on trade to places that have demand for goods / skills available in your economy. This demand emanates from cost arbitrage or availability arbitrage. 

Early Europeans were seeking spices available only in the tropical Asia. At that point in history they did not have much to trade with Asia but Industrial Revolution changed all that. With use of force they were able to maintain demand side and supply side in control and make neat profits. This enrichment of Europe came at the expense of Asia and Africa. The armed control over markets and suppliers allowed Europeans to run a level of protectionism that is unparalleled and hopefully will never be repeated. Nevertheless it represents one model of growth.

In the pre-war era, America developed exporting to war torn Europe. Taking advantage of wage differential, higher risk tolerance thanks to innovative risk mitigation mechanisms, and a healthy domestic demand augmented by immigration, Americans were able to enrich themselves both at the expense of Europe in some cases and also in cooperation with Europe in others. American protectionism was more from the cost side. Using slave labor and forcibly usurping the land and other resources Americans were able to create value. The American growth model was thus based on military industrial complex.

The Post World War II development of Europe was entirely based on exploiting American demand augmented by domestic demand from rebuilding initiatives supported by low cost capital. This time, Europe was not able to run the kind of protectionism that had benefited them earlier. However, they benefited from twin protectionism. Europe enjoyed fortuitous financial protectionism based on low cost of capital thanks to Marshall Plan. It also engaged in currency management to help sustain the development. There were other factors allowing faster growth in Europe - lower population in all of West, new technologies from war for productivity enhancement and solid demand from rebuilding.

The Japanese growth which partly overlaps with European growth was also based on the same premise. Japanese fine-tuned this strategy by self-deprivation and focusing on exports to the West turning it into a protectionist advantage. Japan had another advantage, it did not need to spend on military and defense.

However, this dependency of Japan and Western Europe became unbearable for United States which was operating under the Gold Standard. It lead to abolishing of Gold Standard and start of modern finance driven development era. This is the time when John Connally made his two famous statements - “Dollar is our currency and your problem” and the ever prescient and my favourite “My philosophy is that all foreigners are out to screw us and it’s our job to screw them first.”

East Asian tigers and then China were the first to take advantage of the growth unleashed in this period. Using essentially the same model, these countries relied on pegged exchange rates and export demand to move out of poverty. By the time India joined the party in 1991, this model was quite well understood. The initial quirks were exposed during the South East Asian Crisis. The crisis led to refinement rather than correction of the model.

By 2002-03 this model became so well understood that most of the developing countries started using this model. Over-reliance on consumers from developed world and excessive constraints on domestic demand were norms of the day. This old model of development has finally broken or is in the process of breaking. In effect we will need a new model for growth.

Indian model of growth has to be substantially different. It has to withstand competitive forces right from the word go. India will not have any advantage of protectionism except what naturally accrues to it. Indian model must take advantage of the uniqueness of Indian demand in comparison with other countries. Given that Indian markets are not exactly uniform, India can become the hotbed for innovations that can be exported to the whole world.

The future is hypercompetitive

In the next phase of globalization, we are likely to encounter countries defending their domestic consumer. India has to withstand competitive forces right from the word go. India will face stiff competition winning in the markets outside India. India will not have any advantage of advantages except what naturally accrues to it.


Thus, India will have to fight for the global consumer,  some times on unfavorable terms, other times with entrenched players. India will face technological gridlock making innovation costly and product development long drawn. India will also have to face adverse tacit protectionism in the form of unreasonably demanding product/service quality or unreasonable punitive damages from product/service failure.

Within Indian markets too there will be intense competition. There is shortage of consumer demand globally. All the top companies will look to gain from addressing the Indian demand. This competition will be both - an opportunity and a threat. If this competition for domestic market creates jobless profitability then it is threat. If it creates vibrant ecosystem then it is an opportunity. Indian model must take advantage of the uniqueness of Indian demand in comparison with other countries. Given that Indian markets are not exactly uniform, India can become the hotbed for innovations that can be exported to the whole world. Thus, the ecosystem will create competency to win across the world.

In short, while other countries grew by looking outwards, India should grow looking inwards AND outwards. But, how will India grow? 

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India Growth Model 01: Introduction

Two forces help the arduous journey of a nation towards progress. The How force makes us confident to embark on the journey and reduces the risks associated with it through sheer details. The second force is the Where force. It is the lure of the dream of a new tomorrow. That dream makes us turn, it gives us energy, carries us through the tough times and gives our life meaning. A nation that knows its WHERE can bear with any HOW! (1)

I was a bit disappointed with the Niti Ayog released their report titled “Strategy for New India @75”. [Here is the the accompanying presentation.] It was a very detailed HOW. The WHERE is missing - not just from the report but even from discussions, research papers, media. It is as if our WHERE has not been conceived. And that is a problem as the “how” depends on WHERE you are and WHERE you want to go. Without the WHERE, everything seems important and when everything is important, nothing is.

Even now the Where is missing. What does this India of 2050 look like? What do people do in this developed India? Where do they work? Where do they live? What do they wear? What things do they buy? What is their relationship with their government? What is their relationship with other countries? What are they worried about? How are the cities? How is the countryside? We can imagine many questions and paint a picture of India at 2050. It is here we want to go. This is our WHERE.

When we know the WHERE, our entrepreneurs will start gearing up for the challenge. When we know the WHERE, we will know what to prioritise, what to speed up, where can we go easy.

In my mind, I have a WHERE and hence my HOW is a little different. So this effort is to paint a detailed picture of the WHERE and augment the picture of the HOW we have already seen.

This series of posts details my thoughts on vision of new India and how to get there. These thoughts I will compile into a report at the end. At present time, the thoughts come from a broad based thinking on the topic, the final report will differ from this but hopefully not by much.

Notes:

1. Alluding to the quote “Those who have a 'why' to live, can bear with almost any 'how'.” ― Viktor E. Frankl, Man's Search for Meaning

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