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TECH TALK: As India Develops:

February 25th, 2004 · No Comments

A much-discussed Goldman Sachs report looks ahead to India in 2050 and sets out what is needed for growth:

India has the potential to show the fastest growth [among the BRICs – Brazil, Russia, India and China] over the next 30 and 50 years. Growth could be higher than 5%over the next 30 years and close to 5% as late as 2050 if development proceeds successfullyIndias GDP outstrips that of Japan by 2032. With the only population out of the BRICS that continues to grow throughout the next 50 years, India has the potential to raise its US dollar income per capita in 2050 to 35 times current levels. Still, Indias income per capita will be significantly lower than any of the countries we look at.

As developing economies grow, they have the potential to post higher growth rates as they catch up with the developed world. This potential comes from two sources. The first is that developing economies have less capital (per worker) than developed economies (in the language of simple growth models they are further from their steady states). Returns on capital are higher and a given investment rate results in higher growth in the capital stock. The second is that developing countries may be able to use technologies available in more developed countries to catch up with developed country techniques. As countries develop, these forces fade and growth rates tend to slow towards developed country levels.

Countries also grow richer on the back of appreciating currencies. Currencies tend to rise as higher productivity leads economies to converge on Purchasing Power Parity (PPP) exchange rates.

A set of core factorsmacroeconomic stability, institutional capacity, openness and educationcan set the stage for growth. Robert Barros influential work on the determinants of growth found that growth is enhanced by higher schooling and life expectancy, lower fertility, lower government consumption, better maintenance of the rule of law, lower inflation and improvements in the terms of trade. These core policies are linked: institutional capacity is required to implement stable macroeconomic policies, macro stability is crucial to trade, and without price stability a country rarely has much success in liberalizing and expanding trade.

Thomas Friedman writes in the New York Times (22 February 2004) on the changing attitudes in urban India:

The Zippies Are Here,” declared the Indian weekly magazine Outlook. Zippies are this huge cohort of Indian youth who are the first to come of age since India shifted away from socialism and dived headfirst into global trade, the information revolution and turning itself into the world’s service center. Outlook calls India’s zippies “Liberalization’s Children,” and defines one as “a young city or suburban resident, between 15 and 25 years of age, with a zip in the stride. Belongs to generation Z. Can be male or female, studying or working. Oozes attitude, ambition and aspiration. Cool, confident and creative. Seeks challenges, loves risks and shuns fears.” Indian zippies carry no guilt about making money or spending it. They are, says one Indian analyst quoted by Outlook, destination driven, not destiny driven; outward, not inward, looking; upwardly mobile, not stuck-in-my-station-in-life.

With 54 percent of India under the age of 25 that’s 555 million people six out of 10 Indian households have at least one zippie, Outlook says. And a growing slice of them (most Indians are still poor village-dwellers) will be able to do your white-collar job as well as you for a fraction of the pay. Indian zippies are one reason outsourcing is becoming the hot issue in this year’s U.S. presidential campaign.

Business World featured a cover story (8 December 2003) by Rama Bijapurkar on The New Improved Indian Customer which traced the demographic changes that are driving the local market: income growth, affordability growth, the rise of the self-employed, environmental changes drive aspiration, pragmatism in consumption and preference for ‘real value’ products and services, comfort with borrowing to fund future consumption, comfort with consumption, comfort with technology. She adds:

Current levels of penetration influence the pace of future penetration. Penetration increases are not linear, instead they accelerate as base penetration increases till a point where saturation sets in. If only one out of 20 households in a given affluence grade have a washing machine or a two-wheeler, adoption will be slow. But when one out of every 10 has it, it becomes something that gets on the radar screen of aspiration for the rest. And when it gets to one in five families, it serves to rapidly penetrate the remaining households because it now becomes a ‘must have now’ product for them.

For consumer durables, the top (in terms of affluence grades) 40 million households in India – 24 million in urban India and 17 million in rural India – based on their penetration levels would constitute the core consuming class. The magic number of 200 million consumers (assuming five members to a household) has arrived at last!

Within rural India, there are two different grades of overall affluence, which we can call the developed and the developing states. The developed states comprise Punjab, Haryana, Gujarat, Maharashtra, Karnataka and Kerala. They account for about one-third of the rural population and have shown higher penetration in most categories.

The market has enough scale to offer, and enough desire to consume. The consumer is ready and waiting to be served. The new Consumer India will pose a huge challenge to marketers because it offers a difficult revenue model of large but not enormous volumes, modest prices and high benefit expectations. It will reward real innovators and ignore marketing hype. Most of all, it will continue to comprise many markets at different stages of evolution, demanding a complexity of strategy that is far in excess of its worth. And yes, it will continue to throw up unexpected answers to the arithmetic of (medium penetration) x (large size of consumer base) x (low price-willing to pay) x (modest per capita consumption).

So, what does development really mean?

Tomorrow: A Tutorial on Development

TECH TALK As India Develops+T

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