2 November 2016
In our last Global Matters paper, “Young tiger stalks ageing dragon”, we compared the current position and prospects of the world’s two most populous nations: China and India. We concluded that, over coming decades, the Indian tiger could loom as a very real growth rival for its north eastern neighbour. In this paper Greg Goodsell, Global Equity Strategist at 4D Infrastructure, ventures a little further into the tiger’s den to identify some of the incredible opportunities… and daunting challenges… facing this rapidly changing nation.
A closer examination of the Indian economy, along with key aspects of Indian society, showcases the enormous opportunities and daunting challenges before it. In this paper we delve into four important, related aspects of the Indian tiger: population and labour force; education; infrastructure; and, as a final barometer, personal consumption and spending. We again use China as the ‘benchmark’ to demonstrate the extent of the opportunities/challenges be-fronting the tiger.
1. Population and labour force: increased female participation essential
As shown in Table 1 below, China and India dwarf all other nations when it comes to population size.
While India’s and China’s populations are comparable, India’s labour force is less than two-thirds that of China (see Chart 1 below). Clearly, increasing the level of labour force participation will help energise India’s growth. However, the real challenge lies in female empowerment and increasing their level participation in the labour force in India.
As Chart 2 shows, in India the level of female participation is only around 29%, having declined over the last 20 years. This compares with a female participation level in China of ~70%, although it is also declining. Increased female involvement is one of the key opportunities and challenges to accelerating India’s growth.
2. Education: enhancing the nation’s skill levels
An important catalyst for improving India’s labour force is improving its educational outcomes. Chart 3 below shows that, although improving, India’s education levels still have a long way to go.
This is also reflected in the differing literacy rates with China which, in 2015, had an overall literacy rate of 96%; split 98% for males and 95% for females. While in India the male/female divide is again reflected in 2015 literacy rates – the overall literacy rate is 72%; split 81% for males and only 63% for females .
Prime Minister Narendra Modi understands the critical importance of improved educational outcomes to India’s future prosperity. In July 2016, he initiated two skill-development programs involving total spending of US$3.3 billion, aiming to equip 15 million people by 2020 with the skills necessary to bring more high-grade manufacturing to the country. This must be a priority as highly technical, large manufacturing orders are landing in India, often part of a government purchase, all of which involve big ticket values (see Table 2 below).
Major global corporations see the tiger’s potential, and are moving to be part of it. India’s challenge is to keep-up.
To help close the skills gap, Western companies are stepping up their own training. Boeing completed training for its first group of 30 recruits in the basics of aircraft assembly earlier this year in collaboration with India’s National Skill Development Corp. All these graduates have been hired by an Indian supplier to Boeing, and Boeing now wants to significantly scale-up the training program.
France’s Alstom sent 80 Indian nationals for training in Brazil and trained a further 250 in India to work at Alstom’s metro train manufacturing plant. In a similar vein, state-run Hindustan Aeronautics, a local Indian JV partner for many foreign defence and aeronautics firms, lead the launch of the Aerospace Aviation Sector Skill Council to train hundreds of thousands of aerospace factory workers, and 6,000 instructors over the next 10 years.
3. Infrastructure development: a must for growth
India will not achieve anywhere near its full potential unless its infrastructure is improved and expanded. The scope of the task is highlighted in Table 3 below where we compare the two countries road stock. While China and India use different classifications for their road networks, broad comparisons can be made, remembering that India and China’s population sizes are now similar.
Around ~87% of China’s roads are paved versus only ~50% in India, while China’s road network is ~4.5 million kilometres in length, which is ~33% longer than India’s.
The divergent quality and length of the road networks is also reflected in the two countries usage patterns on their rail networks. Chart 4 below shows that China and India’s rail networks are of a comparable total length.
However, Charts 5 and 6 show vastly different usage of those rail networks. China has a far greater volume of goods transported, while India’s system has a more significant passenger focus. This likely reflects India’s poor road network and China’s larger manufacturing base, while the recent flat-lining in Chinese rail passenger numbers reflects growing car use and national prosperity: both goals of the tiger.
What is highly significant is that PM Modi has recognised that the Indian rail network is in need of a serious upgrade. He plans to put US$130 billion towards improving the Indian rail system by 2020.
Indian infrastructure development: delays and deferrals are a problem
While Mr Modi recognises the importance of new and improved infrastructure, it is here that he has run into one of his toughest reform obstacles so far – acquiring the necessary, often rural, land to develop the new projects. This is very well illustrated with the recent case of Lippa, a small Himalayan village near a wildlife sanctuary in India’s north. Here 200 families have banded together to block the development of a 130 megawatt hydro-electric power plant, using the 2006 Forest Rights Act for empowerment. This Act provides that no forest land can be taken for development without the consent of those affected. Acquiring the necessary rural land for infrastructure development is potentially a real problem for PM Modi, and highlights the differing procurement challenges facing a democratic India compared to a communist China.
4. Spending and consumption: is it a signal of success, a goal for growth or both?
Our final point of the China/India comparison is at the consumer level and the scope for growth. PM Modi introduced the ‘Make-in-India’ plan in 2014 which was designed to increase manufacturing in India. It has forecast vehicle sales of 6.8 million units for the year-ending March 2021 (see Table 4 below) reflecting a growth rate of 18% pa from 2014. Yet this outcome would represent barely one-third of the 21 million units sold in China in 2015. No doubt the level of infrastructure spend discussed earlier will be an important determinant of the level of future vehicle sales, as will the other factors covered above such as labour force participation. However, if India is able to address some of the growth issues discussed earlier, the scope for vehicle sales to topple the forecast set out below is significant. The tiger could become a very big, growing consumer.
Our exploration of the tiger’s den highlights both the enormous opportunities and considerable challenges facing an emerging India. PM Modi appears well versed in both, and is enacting the necessary policies to properly unleash the tiger. Major international companies such as Boeing, Lockheed Martin and Alstom also recognise the Indian opportunity, as well as the educational challenges that must be met in order to grasp it. While the hurdles to increased Indian prosperity should not be underestimated, it looks to us that some irresistible forces are emerging in India, which will see the young tiger increasingly prevalent on the international stage over coming decades.
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