The BSE Sensex (Bombay Stock Exchange Index) hit 19000 yesterday.
Is this a bull run/ irrational exuberance? Foreign investor play??
Here is our take on it.
We looked at the evolution of the sensex since 2003, the time when the Indian economy really took off and in the period 2003-2011 has been growing at about 8% per year. (please use attached link to see how the sensex has evolved)
http://finance.yahoo.com/echarts?s=^BSESN#chart3:symbol=^bsesn;range=20021216,20100913;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off
Given that agriculture grew between 2-3 % in this period, it is safe to assume that the industrial sector grew in excess of 12% on average.
The companies listed on the SENSEX which are BLUE CHIP, therefore had to grow 20% in this period for the sensex to reach 19000 by the end (almost of 2010). Not so unrealistic after all.
We think that if we as Indians held on to our balls and stopped looking for external excuses (FIIs) to explain the rise of the sensex, we should simply congratulate a growing economy and its star companies for the stellar performance of the SENSEX.
We continue to invest in the stock market. India must grow at least 8% for the next 30 years to avoid a social revolution. We are betting on it.
And looking at the sensex reach 40-45000 levels by 2015.
Ritu and Venkat.
Showing posts with label Indian economy. Show all posts
Showing posts with label Indian economy. Show all posts
Tuesday, 14 September 2010
Sunday, 24 January 2010
Why does young India regret its past?
A couple of recent movies in India - "Rock On" in 2008 and "3 idiots" in 2009 have done very well at the box office. I enjoyed the two movies. But my level of connect was pretty low with both- the underlying theme being how successful young Indians look back at their lives and true passions (music, writing, photography) and find ways of going back to that. I am ok with that, but unhappy if school children get distracted by that message.
What i want to caution many of my fellow country men is this:
- India was a poor country 50 years ago, 20 years ago, today and will continue to be poor 50 years from today. (1 billion people will not get rich overnight)
- While many professions will open up, the competition for jobs will always be very very high.
- Applied professions (engineering, medicine, carpentry etc) will always be the best ways of making a living and getting the family out of poverty.
- Writing, painting and photography will keep you mostly poor.
So get to school and study, is my message to the youth. Looking back at the past from the very comfortable confines of a cinema is possible when you have used engineering to get a very good job and life.
"3 idiots" the biggest blockbuster of the last 10 years, was only watched by 10% of India's population in the cinema. The rest could not afford it.
There is a message in that.
What i want to caution many of my fellow country men is this:
- India was a poor country 50 years ago, 20 years ago, today and will continue to be poor 50 years from today. (1 billion people will not get rich overnight)
- While many professions will open up, the competition for jobs will always be very very high.
- Applied professions (engineering, medicine, carpentry etc) will always be the best ways of making a living and getting the family out of poverty.
- Writing, painting and photography will keep you mostly poor.
So get to school and study, is my message to the youth. Looking back at the past from the very comfortable confines of a cinema is possible when you have used engineering to get a very good job and life.
"3 idiots" the biggest blockbuster of the last 10 years, was only watched by 10% of India's population in the cinema. The rest could not afford it.
There is a message in that.
go on, be a Nokia- core purpose or core business?
By the title we dont ask you to adopt Nokia's business model. (we are far from convinced it is the right one). But we ask you to do what Nokia did in 1992, move away from its rubber, cable and non telecom businesses, to focus on telecom!
Wow!
Core purpose or core business? What should really matter to an investor?
India and China are huge markets with unmet needs across a wide range of goods.
TV penetration in India is 60%, but
- refrigerator penetration is less than 10% (among 220 million households)
- car penetration is less than 4%
- microwaves at 4%
and so on....
Mobile phone usage is still very low, with 90% of the penetration accomplished with "pre-paid" users shelling out 2 USD per month as revenue.
Value added services are 6% of phone bills, which on average are 4 USD per qtr.
Consumption is so low, the only restraint on an organisation's growth is imagination and ambition.
Now, here is some back of the envelope calculation:
If 20% of the families bought cars at USD 6000 each, this is a 250 Bn USD industry
If 60% bought refrigerators at USD 200, this is a 25 Bn USD industry
If we could get current mobile users to spend USD 5 per month on VAS, its a 30Bn USD business PER YEAR.
Ok, so your core business may not be in any of the above. But if you truly want to grow, why would that be an excuse?
Indian companies are not lacking for innovation. They lack for capital. Which is abundant in the west.
Why not acquire aggressively Indian companies, and bring in capital to "go to market" faster, stronger?
On another note, water purification and electricity generation will be interesting businesses to get into. At the household level. Technologies that dont depend on the government grid.
Stop worrying about your core "business". Worry about your core "purpose". Profitable growth!
Ritu and Venkat
Wow!
Core purpose or core business? What should really matter to an investor?
India and China are huge markets with unmet needs across a wide range of goods.
TV penetration in India is 60%, but
- refrigerator penetration is less than 10% (among 220 million households)
- car penetration is less than 4%
- microwaves at 4%
and so on....
Mobile phone usage is still very low, with 90% of the penetration accomplished with "pre-paid" users shelling out 2 USD per month as revenue.
Value added services are 6% of phone bills, which on average are 4 USD per qtr.
Consumption is so low, the only restraint on an organisation's growth is imagination and ambition.
Now, here is some back of the envelope calculation:
If 20% of the families bought cars at USD 6000 each, this is a 250 Bn USD industry
If 60% bought refrigerators at USD 200, this is a 25 Bn USD industry
If we could get current mobile users to spend USD 5 per month on VAS, its a 30Bn USD business PER YEAR.
Ok, so your core business may not be in any of the above. But if you truly want to grow, why would that be an excuse?
Indian companies are not lacking for innovation. They lack for capital. Which is abundant in the west.
Why not acquire aggressively Indian companies, and bring in capital to "go to market" faster, stronger?
On another note, water purification and electricity generation will be interesting businesses to get into. At the household level. Technologies that dont depend on the government grid.
Stop worrying about your core "business". Worry about your core "purpose". Profitable growth!
Ritu and Venkat
Friday, 4 December 2009
The great waves of India and China
If you have been living in India for a decade or so, or have been visiting often over the past ten years, you would agree with this observations.
There is a lot of change happening in India- social- economic and demographic. You see the increasing affluence around you, the cars- homes. Yet the sight of slums, beggars and abject poverty never goes away.
Why? We asked.
And we realised that the this is the case in India and possibly China- large and poor economies. The large size of the population means that the only entity that has the objective of moving forward the entire population,i.e. the government, has no chance of either reaching everyone nor has the resources to move the population upwards, together.
So economic activity will never be "equal" or socialist- no matter what the government says, tries or does.
In the meanwhile, people move to cities - the areas of maximum economic activity, to get rich the earliest. These go ahead to buy cars and homes.
As cities reach saturation levels, private enterprise goes further into smaller cities for newer markets. So on and so forth. At the same time, less affluent people are heading to the cities- the centres of activity.
When a countries population is 30 or 40 million, this change can be rapid.
When the population is 1 billion, this change takes place over time. India's affluence is concentrated in the top 10% of its population. This is the FIRST WAVE of people that benefited from their presence in cities to benefit from the first wave of economic investment.
The rest of the population is poorer, most fighting for basic needs, unconcerned about public hygiene, cleanliness or the environment. So for every person who becomes more conscious about the environment and decides not to litter, there is another who enters the city to make his fortune- but is absolutely unconcerned about civic duties. So the litter and filth continue.
The first wave will give rise to the next wave in 5-10 years. And then the next wave.
In this way, we see the entire population getter richer (per capital GDP of USD 30,000 for example) over 50-60 years.
In the meanwhile, one set of poor people will move on in life to be replaced by a slightly poorer set of people. Who will move on to be replaced by another set of less affluent.
The rich and the poor in this way will continue to cohabit for many many years. Maybe as the fifth wave takes over (in 30-40 years), the affluence will cover better the poverty....but for the next few decades, lets just accept the site of two India's all around us.
What does this mean for companies looking to invest in India?
Ritu, Venkat
There is a lot of change happening in India- social- economic and demographic. You see the increasing affluence around you, the cars- homes. Yet the sight of slums, beggars and abject poverty never goes away.
Why? We asked.
And we realised that the this is the case in India and possibly China- large and poor economies. The large size of the population means that the only entity that has the objective of moving forward the entire population,i.e. the government, has no chance of either reaching everyone nor has the resources to move the population upwards, together.
So economic activity will never be "equal" or socialist- no matter what the government says, tries or does.
In the meanwhile, people move to cities - the areas of maximum economic activity, to get rich the earliest. These go ahead to buy cars and homes.
As cities reach saturation levels, private enterprise goes further into smaller cities for newer markets. So on and so forth. At the same time, less affluent people are heading to the cities- the centres of activity.
When a countries population is 30 or 40 million, this change can be rapid.
When the population is 1 billion, this change takes place over time. India's affluence is concentrated in the top 10% of its population. This is the FIRST WAVE of people that benefited from their presence in cities to benefit from the first wave of economic investment.
The rest of the population is poorer, most fighting for basic needs, unconcerned about public hygiene, cleanliness or the environment. So for every person who becomes more conscious about the environment and decides not to litter, there is another who enters the city to make his fortune- but is absolutely unconcerned about civic duties. So the litter and filth continue.
The first wave will give rise to the next wave in 5-10 years. And then the next wave.
In this way, we see the entire population getter richer (per capital GDP of USD 30,000 for example) over 50-60 years.
In the meanwhile, one set of poor people will move on in life to be replaced by a slightly poorer set of people. Who will move on to be replaced by another set of less affluent.
The rich and the poor in this way will continue to cohabit for many many years. Maybe as the fifth wave takes over (in 30-40 years), the affluence will cover better the poverty....but for the next few decades, lets just accept the site of two India's all around us.
What does this mean for companies looking to invest in India?
Ritu, Venkat
Thursday, 12 November 2009
Tirupati, Cricket and the changing Indian demography
First Tirupati- which is a town in South India with a temple dedicated to Lord Venkateshwara, of the Hindu faith. What is impressive about the town is how well it is organized and maintained. Smoking is banned, littering is absolutely banned, Indians are not allowed to chew tobacco (and spit out the red stained saliva). And in the name of the Lord, all Indians that enter the town respect the rules.
It is in a way, a little Singapore. I had to walk bare-feet for a mile in the city and it was really clean. You cannot walk barefoot in any city in India. In Tirupati, you can.
That was the good news.
The bad news was the crowds. Hundreds of thousands of people have been visiting the temple each day. This has been the case for many many years. And yet, the capacity of the temple management to regulate crowds is inadequate. Each solution is outdated by the time it is implemented, and the pushing, jostling to catch a view of the statue of the lord (which is stationery) is unimaginable. And this is the richest temple in the country with donations pouring in. Why cant crowd management solutions be put in place and implemented?
As I stood in the temple however, I made however, another observation that i note here.
Indian demographics is changing the nature of the visitor to the temple. The temple management should take note of this and act now, else be overwhelmed by the surge in the number of devotees.
When I visited the temple as a child, the exercise of traveling to a far off city, finding accommodation etc was an expensive “holiday”. So much so that it was restricted to many in the “upper middle class”. My parents saved money to donate to the temple.
Now, with travel getting cheaper and the average income in India on the rise, there are many more visitors. But the profile of the visitor is predominantly rural/ semi urban and from the small towns. This is good news. But on the other hand, the donations (per person and adjusted for inflation) being put into the temple are likely to be much lower than in the past.
The temple is going to find itself with few resources per person to handle the bulging crowds.
The temple has also created specific slots for a more personal viewing of the Lord, very early in the morning. These cost USD 2000 for a 10 year pass (where you can have a more exclusive viewing for the family once a year). Ordinary viewing tickets are USD1 per person. These however are limited in number. And with time are getting more and more expensive- supply and demand at work. However a family paying USD 2000 would expect a certain level of service from the temple in order to continue making this contribution to the temple.
On this visit, in spite of the “exclusive” pass, I found myself having to cover 2 miles and search in three buildings to find the office where I could get the “prasad” for the prayer I attended. The rules and the offices change every 6 months, so devotees have not many options to learn beforehand of a procedure.
The two above points highlight a classical marketing problem called segmentation.
You have a mass market. There the challenge is to maximize revenues from a large base but low affluence consumer. Cost management is critical here.
And you have the “niche” segment consumers willing to pay more, but demanding extra services. These are high margin consumers.
Managing both ends simultaneously is always a challenge, especially in a country like India with its “socialist” beginnings.
But the Tirupati temple trust need to wake up to the evolving Indian demographics to ensure the town and the temple continues to bring in devotes who can pray in a comfortable way.
2. The second area where I see a huge change that is going to come about is the sport of Cricket. Wildly popular in India raking in millions of dollars for the administrators, media and players.
The popularity of cricket in India has risen along with the rise in affluence of the Indian middle class. Almost every Indian living in the large towns has played cricket in his childhood. It is cheap, and with the availability of a playground, easily accessible. Unlike hockey and football (which need specific ground sizes and proper grass to play on). Swimming, golf, tennis all remained very expensive for India.
The Indian middle class that played cricket in its younger days (and lives in its cities) is now the Indian upper middle class. We pay to see people play and we relive our childhood neighborhood games when we see the cricket.
Cricket was always a middle class- upper middle class sport and with few exceptions, all of our players came from these backgrounds.
That is changing. The cities have no place to play cricket and indeed the affluent kids are shifting to tennis/ squash and other sports. These sports will grow in the future.
Cricket meanwhile is being shifted to smaller towns and villages which seen the only places now with open grounds where kids can play and practice the sport.
Emerging players for the national team (in the next 5 years) will have very non urban backgrounds. They will have learnt the sport by observation rather than training. (In non urban centers, training and coaching facilities are non existent).
They will come in with unorthodox techniques. Not ideal physical conditioning.
They will suffer far higher burnout than current cricketers, thereby limiting their playing time and the capability of the Indian team. Cricket will not be the money maker it is in Indian life today. The cricket board, in my view, is totally blind to this.
My guess is that unless administrators of cricket in India focus more on developing training facilities in smaller towns and villages, the competence of the Indian cricket team will decline very sharply in the next 4-5 years.
Lets wait and watch how these two areas of Indian life are influenced by the changing Indian demographics.
Venkat
It is in a way, a little Singapore. I had to walk bare-feet for a mile in the city and it was really clean. You cannot walk barefoot in any city in India. In Tirupati, you can.
That was the good news.
The bad news was the crowds. Hundreds of thousands of people have been visiting the temple each day. This has been the case for many many years. And yet, the capacity of the temple management to regulate crowds is inadequate. Each solution is outdated by the time it is implemented, and the pushing, jostling to catch a view of the statue of the lord (which is stationery) is unimaginable. And this is the richest temple in the country with donations pouring in. Why cant crowd management solutions be put in place and implemented?
As I stood in the temple however, I made however, another observation that i note here.
Indian demographics is changing the nature of the visitor to the temple. The temple management should take note of this and act now, else be overwhelmed by the surge in the number of devotees.
When I visited the temple as a child, the exercise of traveling to a far off city, finding accommodation etc was an expensive “holiday”. So much so that it was restricted to many in the “upper middle class”. My parents saved money to donate to the temple.
Now, with travel getting cheaper and the average income in India on the rise, there are many more visitors. But the profile of the visitor is predominantly rural/ semi urban and from the small towns. This is good news. But on the other hand, the donations (per person and adjusted for inflation) being put into the temple are likely to be much lower than in the past.
The temple is going to find itself with few resources per person to handle the bulging crowds.
The temple has also created specific slots for a more personal viewing of the Lord, very early in the morning. These cost USD 2000 for a 10 year pass (where you can have a more exclusive viewing for the family once a year). Ordinary viewing tickets are USD1 per person. These however are limited in number. And with time are getting more and more expensive- supply and demand at work. However a family paying USD 2000 would expect a certain level of service from the temple in order to continue making this contribution to the temple.
On this visit, in spite of the “exclusive” pass, I found myself having to cover 2 miles and search in three buildings to find the office where I could get the “prasad” for the prayer I attended. The rules and the offices change every 6 months, so devotees have not many options to learn beforehand of a procedure.
The two above points highlight a classical marketing problem called segmentation.
You have a mass market. There the challenge is to maximize revenues from a large base but low affluence consumer. Cost management is critical here.
And you have the “niche” segment consumers willing to pay more, but demanding extra services. These are high margin consumers.
Managing both ends simultaneously is always a challenge, especially in a country like India with its “socialist” beginnings.
But the Tirupati temple trust need to wake up to the evolving Indian demographics to ensure the town and the temple continues to bring in devotes who can pray in a comfortable way.
2. The second area where I see a huge change that is going to come about is the sport of Cricket. Wildly popular in India raking in millions of dollars for the administrators, media and players.
The popularity of cricket in India has risen along with the rise in affluence of the Indian middle class. Almost every Indian living in the large towns has played cricket in his childhood. It is cheap, and with the availability of a playground, easily accessible. Unlike hockey and football (which need specific ground sizes and proper grass to play on). Swimming, golf, tennis all remained very expensive for India.
The Indian middle class that played cricket in its younger days (and lives in its cities) is now the Indian upper middle class. We pay to see people play and we relive our childhood neighborhood games when we see the cricket.
Cricket was always a middle class- upper middle class sport and with few exceptions, all of our players came from these backgrounds.
That is changing. The cities have no place to play cricket and indeed the affluent kids are shifting to tennis/ squash and other sports. These sports will grow in the future.
Cricket meanwhile is being shifted to smaller towns and villages which seen the only places now with open grounds where kids can play and practice the sport.
Emerging players for the national team (in the next 5 years) will have very non urban backgrounds. They will have learnt the sport by observation rather than training. (In non urban centers, training and coaching facilities are non existent).
They will come in with unorthodox techniques. Not ideal physical conditioning.
They will suffer far higher burnout than current cricketers, thereby limiting their playing time and the capability of the Indian team. Cricket will not be the money maker it is in Indian life today. The cricket board, in my view, is totally blind to this.
My guess is that unless administrators of cricket in India focus more on developing training facilities in smaller towns and villages, the competence of the Indian cricket team will decline very sharply in the next 4-5 years.
Lets wait and watch how these two areas of Indian life are influenced by the changing Indian demographics.
Venkat
Thursday, 9 July 2009
Asia Rising- Only half the story
A recent blog entry in the Harvard Business web site (http://blogs.harvardbusiness.org) spoke of Asia rising as a key trend. Sure nothing wrong in that. But it did beg the question, is the West sleeping? and if so , why?
It is clear that India and China (and Africa as well) will grow fast...why not, they are the poorest parts of the world. Especially in the case of India, poor government policies of the first 50 years of independence condemned large parts of the population to stagnation.
Now, these two countries are trying to make up for lost time and opportunity. 1 billion people in these two countries are still poor...i.e. not even in the middle class. The per capita GDP in India is USD 1000 and in China about USD 2000. About 15 times lower than Western Europe.
But this is still half the story of the world. The slowdown in western europe and the US made me ask a question to my colleagues there.
At 30,000 USD of per capita GDP, have you achieved all that you want?
Is there really no further aspiration?
Why is it that space travel is still not affordable and aspired for by your country?
Have you reached the end of research into AIDS and cancer treatment?
Have you given up on green technologies- and alternate fuels?
The world has too many unsolved problems. India and China can solve a few, but only those that don't require expensive research.
Why the West gave up on the idea of "renewing and re-educating" itself, i cannot say. The world has more than enough room to grow at more than 4% over a very long period. It needs productive investments. Both in Asia and in the West. Our leaders fail us when they allow us to get complacent. Both business leaders and government leaders in the west are responsible for the slowdown there.
One day Asia and China may also begin to bask in the glow of "contentment"- to their own peril.
India was a very rich country 500 years ago, but the kings spent the money on luxury goods- building palaces and generally decorating themselves. Sounds familiar?
Ritu and Venkatesh
It is clear that India and China (and Africa as well) will grow fast...why not, they are the poorest parts of the world. Especially in the case of India, poor government policies of the first 50 years of independence condemned large parts of the population to stagnation.
Now, these two countries are trying to make up for lost time and opportunity. 1 billion people in these two countries are still poor...i.e. not even in the middle class. The per capita GDP in India is USD 1000 and in China about USD 2000. About 15 times lower than Western Europe.
But this is still half the story of the world. The slowdown in western europe and the US made me ask a question to my colleagues there.
At 30,000 USD of per capita GDP, have you achieved all that you want?
Is there really no further aspiration?
Why is it that space travel is still not affordable and aspired for by your country?
Have you reached the end of research into AIDS and cancer treatment?
Have you given up on green technologies- and alternate fuels?
The world has too many unsolved problems. India and China can solve a few, but only those that don't require expensive research.
Why the West gave up on the idea of "renewing and re-educating" itself, i cannot say. The world has more than enough room to grow at more than 4% over a very long period. It needs productive investments. Both in Asia and in the West. Our leaders fail us when they allow us to get complacent. Both business leaders and government leaders in the west are responsible for the slowdown there.
One day Asia and China may also begin to bask in the glow of "contentment"- to their own peril.
India was a very rich country 500 years ago, but the kings spent the money on luxury goods- building palaces and generally decorating themselves. Sounds familiar?
Ritu and Venkatesh
Tuesday, 7 July 2009
The Indian Budget 2009-2010
There will now be numerous notes on the Indian Budget that was announced yesterday. (please click link above to read what the Economic Times has to say).
The budget disappointed those who wanted specific details on the disinvestment plan, on increased Foreign Direct Investment and on reducing the fiscal deficit.
But on the other hand, the government has spelt out clearly how it will focus expenditure on the rural economy, on building infrastructure and creating jobs for the weaker sections of society. The focus is clearly on strengthening the economically weaker sections of society- bridge the very huge gap between the rich and the poor in India.
Penetration of consumer goods in India (apart from TVs) is very low and enriching the weaker sections of society will drive consumption and hence purchase of goods and services. This should succeed in creating a trickle up effect.
We maintain that the huge salary growths of the middle and upper classes in the period 2003-2007 have raised income levels sufficiently and now the focus must be on delivering wealth more directly to the 60% of the population which is dependent on agriculture and is significantly poorer than the average family.
This is our belief. We support the budget.
Ritu and venkat
The budget disappointed those who wanted specific details on the disinvestment plan, on increased Foreign Direct Investment and on reducing the fiscal deficit.
But on the other hand, the government has spelt out clearly how it will focus expenditure on the rural economy, on building infrastructure and creating jobs for the weaker sections of society. The focus is clearly on strengthening the economically weaker sections of society- bridge the very huge gap between the rich and the poor in India.
Penetration of consumer goods in India (apart from TVs) is very low and enriching the weaker sections of society will drive consumption and hence purchase of goods and services. This should succeed in creating a trickle up effect.
We maintain that the huge salary growths of the middle and upper classes in the period 2003-2007 have raised income levels sufficiently and now the focus must be on delivering wealth more directly to the 60% of the population which is dependent on agriculture and is significantly poorer than the average family.
This is our belief. We support the budget.
Ritu and venkat
Sunday, 5 July 2009
an essay on recent pricing trends in india
Income growth estimates 2003-2007:
Given a lack of recent public statistics on income and income growth, we used newspaper reports and other estimates to paint a picture on the income segmentation in India in 2003 and its evolution in the period 2003-2007.
Table 1.1:
Number -------Annual inc(INR)----Average----Grth%(03-07)--Income 07----Inc grth% 08
of HH
4,000,000 ----->215,000 ---------215,000 -----25%---------524,902---------10%
90,000,000-----45,000-215,000----130,000 -----15%----------27,371----------8%
66,000,000------< 45,000----------22,000-- ----6%----------28,405----------6%
Table 1.2:
Average Inflation in the period 2003-2007 ----5%
Inflation 2008 -------------12%
Inflation 2009 -------------------1%
1 USD= 48 Indian Rupees (INR)
Given that the Indian economy grew between 7-9% in this period, these household income growths were not seen to be irregular. Income growths in the period 2003-2007 were significantly higher across all income segments, compared to inflation in the same period.
Note that salary growth rate fell in 2008 while inflation rose spectacularly (refer table 1.1)
Income growth in 2003-2007 must be seen in the context of supply and demand. While the Indian economy grew at break neck speed, the number of well educated graduates and competent managers was restrained by the lack of growth of high quality educational institutes. This resulted in high rates of turnover in companies, sky rocketing salaries and an overall increase in employment. In-fact this period also saw a large migration of people having very basic educational qualifications (grade 8 pass) moving from villages to cities where booming sectors such as retail were offering entry level jobs to people with modest education.
This means that apart from the 66 Mn households at the bottom of the pyramid, all other households were earning far more than inflation. This is a very big difference w.r.t. Western economies where salary increases are very closely tied to inflation. The savings rate in India increased from 27% in 2003 to 36% in 2008.
The period 2003-2007 was giving most Indian households real income growths in excess of 10%, taking into account inflation, and a lot of extra savings was being created
This is one of the reasons we wrote in 2008, that high inflation of 12% in 2008 was unlikely to impact the common man. Contrary to common opinion held in India that Indians would take to the streets to protest high prices, we maintained that “middle class” India had received a huge buffer in terms of salary increases since 2003 and would be able to withstand inflation of 12% in 2008. We maintained that if salaries rises were to reduce, the middle class would still be able to survive 12% inflation into 2009. But that inflation would need to fall in 2009 to 5% or lower.
The bottom most segment of 66 Mn households is agriculture dependent. This segment consumes what it produces and then sells to the market its excess. In a high inflation period, our understanding is that this segment is insulated from increasing prices of cereals and staples, since they themselves are the producers.
So, how did all this translate into pricing?
In the period 2003-2007, pricing went through the roof- particularly for the packaged goods and services sectors. From FMCG majors like Colgate and Unilever to airlines and everything in between, raised prices continuously between 2003 and 2007.
Capacity increases often take time and in the period where industry was constrained by capacity, prices increased sharply.
These packaged goods and services, do not have a significant impact on the calculation of inflation in India, official inflation continued at 5%. The less affluent families also did not see their basket of goods (mainly non processed food) becoming very expensive.
There was a complete “free for all” interms of pricing and companies reported huge profits in this period.
The year 2008:
In 2008, commodity prices started impacting India as well and the price of basket of goods that are used to calculate inflation, rose 12%. India also began to take note of the global slowdown, which through the fall in exports of products and services, hit home sometime in the second half of the calendar year 2008-2009.
Sentiment fell. We wrote at that stage that the large and untapped Indian market was reason enough for entrepreneurs to focus on satisfying domestic demand, and not worry about global sentiments. We added that as long as the companies representing “new India” - Infosys/ TCS/ WIpro did not lay off staff, there would not be any risk of mass layoffs and hence the economy would be able to continue growing, albeit at a lower pace of maybe 5-6%. On top of this, the government announced various incentives (farmer loan waivers/ infra investment/ pay scale revision of govt employees) all adding to almost 200 Bn USD. This is a big investment for a 1 trillion USD economy.
Companies reacted by initially holding prices steady and accepting declining volumes. A very bizarre approach in the mass market segments. Sure enough, worsening sentiment coupled with high prices (given salary increases were minimal in 2008), meant that the Indian shopper stayed home. Retail sales collapsed in the 3rd Qtr of 2008.
By the end of 2008 and in the early months of 2009, however, we have seen pricing sentiment and philosophy change significantly. Companies became more cost conscious and began to benefit from the worldwide fall in raw material prices. They started to reduce prices and most companies took a hit to margins as well. And companies looked to maximise capacity utilisation.
- FMCG majors such as Unilever dropped prices in the market.
- Promotions (cross promotions/ price discounts/ free volumes) on products have increased.
- Hotels have launched very sensible “all inclusive” packages taking care of food, non alcoholic beverages, laundry and sight-seeing for their guests.
- Low cost airlines became truly low cost opening a 30-40% differential versus full price.
- Capital goods manufacturers reduced prices as the government announced reduction in sales taxes.
- Real estate prices have fallen 10-30% depending on the location.
Over and above, companies have started looking at rural India as a viable business opportunity and have started to set up products and services targeted at rural masses (at suitable price points). The aggressive pricing has brought the Indian consumer back and Q4 of the financial year 2008-2009 recorded 6% growth for the Indian economy.
What happens going forward:
A new budget will be announced by the government early next week. We expect to see investments made to facilitate development of the less affluent, infrastructure development and privatisation of government companies (mostly to finance the budget deficit, but also to make them more competitive).
These will be good initiatives that will continue to increase domestic demand.
However, one concern is still agriculture- the monsoons are late. 60% of the employment sector is supported by agriculture and if the rains fail, this will impact the buying capacity of a significant segment of the population while diverting government resources from investments to direct support of the weaker sections of society.
Bottom-line on Pricing in India:
Our view is that India is a market where product availability and distribution are the most important factors for success. Marketing is very nascent and is limited to advertisements featuring prominent film celebrities. Marketing becomes important when people start having choices. In India, we are still many years behind that stage.
In our view, the capacity shortages of 2003-2007 which caused pricing to spiral out of control, have been corrected. A lot of investment went into infrastructure and manufacturing capacity in the period 2003-2007, and these will keep pressure on pricing. Investments in education, infrastructure are increasing and the supply-demand imbalance of talent should be mitigated significantly by the time the Indian economy returns again to its 9% trajectory.
Companies will find it hard to increase prices beyond “raw material increases” or the standard inflation rate (4-5%). While there is some segmentation in the market, penetrations for most product categories are less than 20% (micro waves/ washing machines/ computers/ vehicles). This means that driving penetration and hence gaining volumes and market shares in the market is the priority. The Indian consumer is price sensitive and hence value pricing and “penetration” pricing will continue to drive the pricing approach in India.
Ritu and Venkat
June 2009.
Given a lack of recent public statistics on income and income growth, we used newspaper reports and other estimates to paint a picture on the income segmentation in India in 2003 and its evolution in the period 2003-2007.
Table 1.1:
Number -------Annual inc(INR)----Average----Grth%(03-07)--Income 07----Inc grth% 08
of HH
4,000,000 ----->215,000 ---------215,000 -----25%---------524,902---------10%
90,000,000-----45,000-215,000----130,000 -----15%----------27,371----------8%
66,000,000------< 45,000----------22,000-- ----6%----------28,405----------6%
Table 1.2:
Average Inflation in the period 2003-2007 ----5%
Inflation 2008 -------------12%
Inflation 2009 -------------------1%
1 USD= 48 Indian Rupees (INR)
Given that the Indian economy grew between 7-9% in this period, these household income growths were not seen to be irregular. Income growths in the period 2003-2007 were significantly higher across all income segments, compared to inflation in the same period.
Note that salary growth rate fell in 2008 while inflation rose spectacularly (refer table 1.1)
Income growth in 2003-2007 must be seen in the context of supply and demand. While the Indian economy grew at break neck speed, the number of well educated graduates and competent managers was restrained by the lack of growth of high quality educational institutes. This resulted in high rates of turnover in companies, sky rocketing salaries and an overall increase in employment. In-fact this period also saw a large migration of people having very basic educational qualifications (grade 8 pass) moving from villages to cities where booming sectors such as retail were offering entry level jobs to people with modest education.
This means that apart from the 66 Mn households at the bottom of the pyramid, all other households were earning far more than inflation. This is a very big difference w.r.t. Western economies where salary increases are very closely tied to inflation. The savings rate in India increased from 27% in 2003 to 36% in 2008.
The period 2003-2007 was giving most Indian households real income growths in excess of 10%, taking into account inflation, and a lot of extra savings was being created
This is one of the reasons we wrote in 2008, that high inflation of 12% in 2008 was unlikely to impact the common man. Contrary to common opinion held in India that Indians would take to the streets to protest high prices, we maintained that “middle class” India had received a huge buffer in terms of salary increases since 2003 and would be able to withstand inflation of 12% in 2008. We maintained that if salaries rises were to reduce, the middle class would still be able to survive 12% inflation into 2009. But that inflation would need to fall in 2009 to 5% or lower.
The bottom most segment of 66 Mn households is agriculture dependent. This segment consumes what it produces and then sells to the market its excess. In a high inflation period, our understanding is that this segment is insulated from increasing prices of cereals and staples, since they themselves are the producers.
So, how did all this translate into pricing?
In the period 2003-2007, pricing went through the roof- particularly for the packaged goods and services sectors. From FMCG majors like Colgate and Unilever to airlines and everything in between, raised prices continuously between 2003 and 2007.
Capacity increases often take time and in the period where industry was constrained by capacity, prices increased sharply.
These packaged goods and services, do not have a significant impact on the calculation of inflation in India, official inflation continued at 5%. The less affluent families also did not see their basket of goods (mainly non processed food) becoming very expensive.
There was a complete “free for all” interms of pricing and companies reported huge profits in this period.
The year 2008:
In 2008, commodity prices started impacting India as well and the price of basket of goods that are used to calculate inflation, rose 12%. India also began to take note of the global slowdown, which through the fall in exports of products and services, hit home sometime in the second half of the calendar year 2008-2009.
Sentiment fell. We wrote at that stage that the large and untapped Indian market was reason enough for entrepreneurs to focus on satisfying domestic demand, and not worry about global sentiments. We added that as long as the companies representing “new India” - Infosys/ TCS/ WIpro did not lay off staff, there would not be any risk of mass layoffs and hence the economy would be able to continue growing, albeit at a lower pace of maybe 5-6%. On top of this, the government announced various incentives (farmer loan waivers/ infra investment/ pay scale revision of govt employees) all adding to almost 200 Bn USD. This is a big investment for a 1 trillion USD economy.
Companies reacted by initially holding prices steady and accepting declining volumes. A very bizarre approach in the mass market segments. Sure enough, worsening sentiment coupled with high prices (given salary increases were minimal in 2008), meant that the Indian shopper stayed home. Retail sales collapsed in the 3rd Qtr of 2008.
By the end of 2008 and in the early months of 2009, however, we have seen pricing sentiment and philosophy change significantly. Companies became more cost conscious and began to benefit from the worldwide fall in raw material prices. They started to reduce prices and most companies took a hit to margins as well. And companies looked to maximise capacity utilisation.
- FMCG majors such as Unilever dropped prices in the market.
- Promotions (cross promotions/ price discounts/ free volumes) on products have increased.
- Hotels have launched very sensible “all inclusive” packages taking care of food, non alcoholic beverages, laundry and sight-seeing for their guests.
- Low cost airlines became truly low cost opening a 30-40% differential versus full price.
- Capital goods manufacturers reduced prices as the government announced reduction in sales taxes.
- Real estate prices have fallen 10-30% depending on the location.
Over and above, companies have started looking at rural India as a viable business opportunity and have started to set up products and services targeted at rural masses (at suitable price points). The aggressive pricing has brought the Indian consumer back and Q4 of the financial year 2008-2009 recorded 6% growth for the Indian economy.
What happens going forward:
A new budget will be announced by the government early next week. We expect to see investments made to facilitate development of the less affluent, infrastructure development and privatisation of government companies (mostly to finance the budget deficit, but also to make them more competitive).
These will be good initiatives that will continue to increase domestic demand.
However, one concern is still agriculture- the monsoons are late. 60% of the employment sector is supported by agriculture and if the rains fail, this will impact the buying capacity of a significant segment of the population while diverting government resources from investments to direct support of the weaker sections of society.
Bottom-line on Pricing in India:
Our view is that India is a market where product availability and distribution are the most important factors for success. Marketing is very nascent and is limited to advertisements featuring prominent film celebrities. Marketing becomes important when people start having choices. In India, we are still many years behind that stage.
In our view, the capacity shortages of 2003-2007 which caused pricing to spiral out of control, have been corrected. A lot of investment went into infrastructure and manufacturing capacity in the period 2003-2007, and these will keep pressure on pricing. Investments in education, infrastructure are increasing and the supply-demand imbalance of talent should be mitigated significantly by the time the Indian economy returns again to its 9% trajectory.
Companies will find it hard to increase prices beyond “raw material increases” or the standard inflation rate (4-5%). While there is some segmentation in the market, penetrations for most product categories are less than 20% (micro waves/ washing machines/ computers/ vehicles). This means that driving penetration and hence gaining volumes and market shares in the market is the priority. The Indian consumer is price sensitive and hence value pricing and “penetration” pricing will continue to drive the pricing approach in India.
Ritu and Venkat
June 2009.
Saturday, 7 March 2009
the trickle-up effect...and the strength of India's rural economy
A wonderful note in the Hindu today (please click title to read)... a must read for anyone interested in the Indian economy. We kid you not.
Its gives some interesting thoughts to mull over...and why we must now focus (apart from the IT sector) on the capacity of the Indian consumer- rural consumer to deliver economic growth.
To which we add are two bits:
Over the past 9 months, we have been emphasising the need for Indian industry to be optimistic for various reasons.
a. The US has a credit problem, sure..its based on predominantly, the unsustainable house price bubble. US banks took on too many toxic assets. Now the economy has to correct itself.
b. Europe has had limited exposure to this. The UK and Spain have had significant asset bubbles and will take longer to correct themselves.
c. Germany is affected because it is an exporting country (like China) and its major markets are the US and China.
d. France and Italy, we believe, have limited banking exposure to the toxic assets. There, it is clearly a sentiment issue. Layoffs announced by companies are opportunistic. Companies are using this crisis to cut out all the fat which govt regulations and strict labor laws prevent them from doing in normal times. Add to this, govts are giving away cheap money... what company will not use this opportunity to become more competitive? But the French and Italian economy is a predominantly a consumption based economy which depends on its people's optimism.
e. in India, our exposure to the US market is essentially through the IT sector. Infy/ Wipro and TCS have not laid off anyone. The lay offs in the news everyday are mostly from the American companies (which goes back to point 1). Organised retail is weak, but the insurance sector/ telecom continue to be strong. Reputed companies like the TATAs are reducing work hours rather than number of employees. This is important and needs to be amplified.
f. The Indian auto sector (exports) will be affected ...in a limited way since we do not export big numbers to the US. As the sentiment in Europe corrects itself, the auto sector in India will recover.
g. Now lets look at government expenditure. Farm loan waiver of 70,000 crore (14 Bn USD), Pay hike in the govt service, rural employment scheme of 30,000 (6 Bn USD) crore and new infrastructure investment of 70,000 crore. These are big numbers for the Indian economy....where the toxic asset problem is not a concern. Banks are fundamentally fine, the sentiment is awful.
This is a lot of public money which is slowly finding its way into the consumers hands.....but rather than a trickle down effect, govt expenditure targeted to the weaker economic class always causes a "tricke up effect". This will translate itself through purchases of mobile phone/ FMCG products (tooth paste etc) and basic white goods (TV, fridge)... then the 2Wheel segment starts to benefit. If you see, over the past 6-8 months, inspite of the economic slowdown, these industries have maintained robust growth. This rural/ semi urban sector (as pointed out in the note) does not invest in the stock market either, and have been untouched by the stock market crash.
h. It is true that as the foreign investor has withdrawn money from the India to pay off their loans and debts abroad, resulting in a crash in our stock market as well.
Companies have tried to collect as much cash as possible...lower manufacturing by TATA and Ashk Leyland , in our view, is an effort to reduce inventory levels and hence save cash.
If 14 Bn USD is being invested in infra, you need trucks to move things around.
So what am we asking? We are asking for optimism. It is irrational, this pessimism and it unfortunately feeds on itself and affects the lives of everyone.
We do not believe (if the govt continued to spend on infra and the rural scetor) , that the "slow down" in India will last much longer. We continue to invest in the market. This is our personal view.
thank you
Ritu and Venkat
Its gives some interesting thoughts to mull over...and why we must now focus (apart from the IT sector) on the capacity of the Indian consumer- rural consumer to deliver economic growth.
To which we add are two bits:
Over the past 9 months, we have been emphasising the need for Indian industry to be optimistic for various reasons.
a. The US has a credit problem, sure..its based on predominantly, the unsustainable house price bubble. US banks took on too many toxic assets. Now the economy has to correct itself.
b. Europe has had limited exposure to this. The UK and Spain have had significant asset bubbles and will take longer to correct themselves.
c. Germany is affected because it is an exporting country (like China) and its major markets are the US and China.
d. France and Italy, we believe, have limited banking exposure to the toxic assets. There, it is clearly a sentiment issue. Layoffs announced by companies are opportunistic. Companies are using this crisis to cut out all the fat which govt regulations and strict labor laws prevent them from doing in normal times. Add to this, govts are giving away cheap money... what company will not use this opportunity to become more competitive? But the French and Italian economy is a predominantly a consumption based economy which depends on its people's optimism.
e. in India, our exposure to the US market is essentially through the IT sector. Infy/ Wipro and TCS have not laid off anyone. The lay offs in the news everyday are mostly from the American companies (which goes back to point 1). Organised retail is weak, but the insurance sector/ telecom continue to be strong. Reputed companies like the TATAs are reducing work hours rather than number of employees. This is important and needs to be amplified.
f. The Indian auto sector (exports) will be affected ...in a limited way since we do not export big numbers to the US. As the sentiment in Europe corrects itself, the auto sector in India will recover.
g. Now lets look at government expenditure. Farm loan waiver of 70,000 crore (14 Bn USD), Pay hike in the govt service, rural employment scheme of 30,000 (6 Bn USD) crore and new infrastructure investment of 70,000 crore. These are big numbers for the Indian economy....where the toxic asset problem is not a concern. Banks are fundamentally fine, the sentiment is awful.
This is a lot of public money which is slowly finding its way into the consumers hands.....but rather than a trickle down effect, govt expenditure targeted to the weaker economic class always causes a "tricke up effect". This will translate itself through purchases of mobile phone/ FMCG products (tooth paste etc) and basic white goods (TV, fridge)... then the 2Wheel segment starts to benefit. If you see, over the past 6-8 months, inspite of the economic slowdown, these industries have maintained robust growth. This rural/ semi urban sector (as pointed out in the note) does not invest in the stock market either, and have been untouched by the stock market crash.
h. It is true that as the foreign investor has withdrawn money from the India to pay off their loans and debts abroad, resulting in a crash in our stock market as well.
Companies have tried to collect as much cash as possible...lower manufacturing by TATA and Ashk Leyland , in our view, is an effort to reduce inventory levels and hence save cash.
If 14 Bn USD is being invested in infra, you need trucks to move things around.
So what am we asking? We are asking for optimism. It is irrational, this pessimism and it unfortunately feeds on itself and affects the lives of everyone.
We do not believe (if the govt continued to spend on infra and the rural scetor) , that the "slow down" in India will last much longer. We continue to invest in the market. This is our personal view.
thank you
Ritu and Venkat
Sunday, 18 January 2009
when young india learns to keep its b#lls
This sentiment may have appeared before, but we felt it is worth recapturing again. While a lot of companies in India have gone into cost cutting mode, many others continue to see growth and are investing in new ventures. We hail these companies.
And ask young India to not lose self confidence. Our size matters. And our poor population needs many more products and solutions. We have our own markets to satisfy....growth is only limited by our imagination.
The stock market tanked from 20,000 levels in 2007 to 8000 in sep 2008.
In this period, India continued to have 1.2 billion people and approximately 200 million households.
India has 8 cars per thousand of population (this is closer to 400 cars per thousand in developed economie).
Penetration of color TVs at 32%. Penetration of washing machines at 8-9%.
Penetration for microwaves in the kitchen is at 1%.
With such a huge unmet demand for every imaginable product category, growth in the economy is limited only by our self confidence and imagination.
Companies like Nokia and Airtel (Bharti) have grown and will continue to grow at break neck speeds. Because they are designing value for the millions of indians who have an average per capital income of USD 1000. A phone call in India costs 3 cents.
A Nokia phone costs 35 USD.
At 25%, India's penetration of mobile telephony is far ahead of any other household equipment category.
Why dont we se more innovation in TVs/ Fridges/ Washing machines that take these products to more households? Why does not the NANO inspire us further?
Why is is that foreign investors shatter the dreams of the common man by pulling our billions of dollars overnight and crushing the stock market by half? (and hence the investments of the common man?)
Why have we not yet learnt to bring in the millions of Indians living in villages and small cities into the "investor" fold? What innovations need to happen so that even a Rs 100 investment per month (4% of per capita monthly income) can be sucked up by financial institutions?
Why must we continue to look to the west for our economy's growth?
India understand's its markets and its people best.
Why should we not think of satisfying India's needs rather than worry about how deep the American recession will be?
Should not each employee in each company in India today ask what he has done to ensure that one new household has come closer to buying his product?
Ritu and Venkat
And ask young India to not lose self confidence. Our size matters. And our poor population needs many more products and solutions. We have our own markets to satisfy....growth is only limited by our imagination.
The stock market tanked from 20,000 levels in 2007 to 8000 in sep 2008.
In this period, India continued to have 1.2 billion people and approximately 200 million households.
India has 8 cars per thousand of population (this is closer to 400 cars per thousand in developed economie).
Penetration of color TVs at 32%. Penetration of washing machines at 8-9%.
Penetration for microwaves in the kitchen is at 1%.
With such a huge unmet demand for every imaginable product category, growth in the economy is limited only by our self confidence and imagination.
Companies like Nokia and Airtel (Bharti) have grown and will continue to grow at break neck speeds. Because they are designing value for the millions of indians who have an average per capital income of USD 1000. A phone call in India costs 3 cents.
A Nokia phone costs 35 USD.
At 25%, India's penetration of mobile telephony is far ahead of any other household equipment category.
Why dont we se more innovation in TVs/ Fridges/ Washing machines that take these products to more households? Why does not the NANO inspire us further?
Why is is that foreign investors shatter the dreams of the common man by pulling our billions of dollars overnight and crushing the stock market by half? (and hence the investments of the common man?)
Why have we not yet learnt to bring in the millions of Indians living in villages and small cities into the "investor" fold? What innovations need to happen so that even a Rs 100 investment per month (4% of per capita monthly income) can be sucked up by financial institutions?
Why must we continue to look to the west for our economy's growth?
India understand's its markets and its people best.
Why should we not think of satisfying India's needs rather than worry about how deep the American recession will be?
Should not each employee in each company in India today ask what he has done to ensure that one new household has come closer to buying his product?
Ritu and Venkat
Wednesday, 12 November 2008
Nicholas D. Kristof: Obama and the war on brains
http://www.iht.com/articles/2008/11/09/opinion/edkristof.php
The one above from Nicholas is an amazing yet obvious insight. In India, politicians are corrupt. Mostly. But the Prime Miniter has always been intellectually strong. Mostly.
With the emergence of Bush and his defeating Gore, most of us really gave up on the need for intellectual leadership as one of the criteria for American presidency. The Amercian "common man" it seemed cared nothing of intellect, as long as he got his beef, corn and well oiled rifle.
But the participation of the youth has changed this. Youth that have access to information and have a medium for making themselves heard. 24 X 7. From the comfort of their rooms. Just out of college. Who would like to believe that they have the right to asking intelligent questions and be given intelligent answers. They want to believe that change for the better comes from them. (this may be naive, but it gives change a chance)
Never before have young people been so engaged in an election. People, it seems, saw through Palin very quickly. The internet and the right to a good education will change the way leaders will get chosen. There is no doubt about it.
What we will see next is the use of the internet in other western economies which have a high penetration of the internet. Western European elections of the near future will be influenced. (I wonder why Gordon Brown has still not activated the web?)
The US election and the rise of Obama must be taken as a catalyst by all those people that are tired of being condenmed for their intellect. Strong intellect should not mean "lack of touch" with the common man. It should mean the ability of the leader to understand better the problems of theb common man and to build better solutions.
We hope Obama succeeds. (whatever that may mean). Because the rise of intellectual political leaders in the future will gain a lot of momentum from his successful presidency.
Ritu and Venkat
The one above from Nicholas is an amazing yet obvious insight. In India, politicians are corrupt. Mostly. But the Prime Miniter has always been intellectually strong. Mostly.
With the emergence of Bush and his defeating Gore, most of us really gave up on the need for intellectual leadership as one of the criteria for American presidency. The Amercian "common man" it seemed cared nothing of intellect, as long as he got his beef, corn and well oiled rifle.
But the participation of the youth has changed this. Youth that have access to information and have a medium for making themselves heard. 24 X 7. From the comfort of their rooms. Just out of college. Who would like to believe that they have the right to asking intelligent questions and be given intelligent answers. They want to believe that change for the better comes from them. (this may be naive, but it gives change a chance)
Never before have young people been so engaged in an election. People, it seems, saw through Palin very quickly. The internet and the right to a good education will change the way leaders will get chosen. There is no doubt about it.
What we will see next is the use of the internet in other western economies which have a high penetration of the internet. Western European elections of the near future will be influenced. (I wonder why Gordon Brown has still not activated the web?)
The US election and the rise of Obama must be taken as a catalyst by all those people that are tired of being condenmed for their intellect. Strong intellect should not mean "lack of touch" with the common man. It should mean the ability of the leader to understand better the problems of theb common man and to build better solutions.
We hope Obama succeeds. (whatever that may mean). Because the rise of intellectual political leaders in the future will gain a lot of momentum from his successful presidency.
Ritu and Venkat
Tuesday, 11 November 2008
‘We’ve spooked ourselves into thinking there is a slowdown’
This is a post we recommend. This, appeared in the Hindu Business Line- an interview with Mr J.P. Nayak, Director & President (Machinery & Industrial Products), Larsen and & Toubro Ltd.
http://www.thehindubusinessline.com/2008/11/11/stories/2008111150080300.htm
We support his view and we take this moment to repeat:
- In a country where TV/ Fridge and Washim machine penetrations are below 25%, how can demand become sluggish? (Who has been smoking the strong stuff?)
- Sure, liquidity is an issue and steps need to be taken to ensure this.
- But we must recogonise that our stock market falls have more to do with foreign investors pulling out from the Indian market (to perhaps raise cash to meet their commitments back home).
- Demand in the Indian market is only limited by the imagination of the entrepreuner.
The real challenge is to set up supply chain and distribution systems that help manufacturers reach to consumers far away from Indian cities.
- This "investment in the interiors" is what new entrants to the market are not doing. Every entrepreuner seems to want to take away share from the current entrants in the cities. (This is in itself not wrong, but a suboptimal strategy for emerging markets.)
The focus on gaining market share in urban markets ignores that larger un-tapped rural India. And it avoids us forcing ourselves to think of profitable ways to making products and services available to this market.
So, evertime the US sneezes, we avoid looking at the opportunity that remains in the country, and quickly send the SENSEX off to the hospital!
http://www.thehindubusinessline.com/2008/11/11/stories/2008111150080300.htm
We support his view and we take this moment to repeat:
- In a country where TV/ Fridge and Washim machine penetrations are below 25%, how can demand become sluggish? (Who has been smoking the strong stuff?)
- Sure, liquidity is an issue and steps need to be taken to ensure this.
- But we must recogonise that our stock market falls have more to do with foreign investors pulling out from the Indian market (to perhaps raise cash to meet their commitments back home).
- Demand in the Indian market is only limited by the imagination of the entrepreuner.
The real challenge is to set up supply chain and distribution systems that help manufacturers reach to consumers far away from Indian cities.
- This "investment in the interiors" is what new entrants to the market are not doing. Every entrepreuner seems to want to take away share from the current entrants in the cities. (This is in itself not wrong, but a suboptimal strategy for emerging markets.)
The focus on gaining market share in urban markets ignores that larger un-tapped rural India. And it avoids us forcing ourselves to think of profitable ways to making products and services available to this market.
So, evertime the US sneezes, we avoid looking at the opportunity that remains in the country, and quickly send the SENSEX off to the hospital!
Thursday, 23 October 2008
India's airline industry- Nose diving in perfect formation!
An interesting topic addresses by Mr. BV Krishnamurthy on the state of the aviation industry. http://discussionleader.hbsp.com/krishnamurthy/2008/10/indian-aviation-in-turmoil.html
The airline industry in India is losing money everyday and by some estimates expected to lose 1.5-1.7 billion USD this year (second only to the US airline industry).
The airline companies in India are upset and asking for the govt. to help them out. They blame fuel costs and the economic downturn.
I don’t believe them.
Take fuel costs. Even two years back when the airlines industry was taking off, the pricing of tickets was not allowing recovery of all costs. They were losing money at the beginning and they are losing money now. In fact, with falling oil prices they should feel happier than 4 months ago.
Take the economic downturn. What has everyone worried is that fill rates are declining. Economic slowdown seems to have everyone cutting costs. Non essential expenses are going out of the window. A downturn is indeed a good time to judge the fundamentals of a business model. Every airline company is suffering and this is unusual. Usually, in a downturn, there is “down-trading” within a category. People go for cheaper alternatives of the same product. Then, if the downturn is longer, they shift to different substitution categories.
Eg: to fight higher fuel costs- you buy a smaller car. (But if you’re already stuck with a big car, you switch categories and use public transport.)
In a downturn, you avoid a Gillette and go for a Wilkinson. Or avoid a Heinz and take a WalMart ketchup. If the downturn is too steep, you avoid ketchups!
In the airline example, you would, in a downturn, move from business class to economy class or from full service to budget airlines. But for travelers to shift from air travel to road transport en-mass means that for them the value proposition of the entire industry has been found wanting. (See- traffic declined by a whopping 19% in September 2008- http://economictimes.indiatimes.com/articleshow/3610790.cms
In today’s environment then, in India, low cost airlines should be gaining market share. But in India, they are closing down.
What happened?
When budget airlines took off, their ticket prices were indeed low (one fifth regular prices in some cases). But they were never making money. Always below break-even point. As the fuel prices increased, all companies were forced to reflect this into the ticket price as a ”surcharge”. These surcharges are now 80% of the price of the ticket such that the price of a low cost ticket is not much different from a full fare ticket.
These low cost airlines (Deccan airlines being the pack leader) drove first time user growth in the industry. But, fundamentally the “low cost” carriers were a myth. With a cost structure so heavily skewed to fuel prices, managing all other costs is not sufficient to create a truly low cost business model.
Sure, when less than 5% of the Indian population flies with any regularity, setting artificially low prices is a good way to drive growth. But for long term sustainability, the usage of air travel must become regular. What’s the use of market penetrating pricing if the consumer does fundamentally have the income to get hooked onto the category at some stage?
But the low cost airlines were not alone in their enthusiasm. The 30% passenger traffic growths were extrapolated by all airline companies that went on to add more aircrafts and routes....and hence more costs.
In the case of air travel, the consumer is also aware that his purchase is an indulgence. Unlike a TV/ fridge or washing machine which is purchased once in 6 years, and only when seen to be a necessity for which the purchase is planned months in advance.
When a return ticket for a 600 km journey costs Rs 6000 or USD 133 per person, does not the income of a family need to cross a significant level before such purchases become regular? (We estimate this threshold to be Rs. 15L (USD 35K approximately), before they take to flying regularly.)
Then the key questions:
How many households/ consumers in India make this cut? How many planes and airline companies are then really needed to satisfy this demand?
In the last 2-3 years, how many consumers actually flew because the ticket price was artificially low and unsustainable for the airline company?
What kind of government watches and encourages this kind of industry growth?
And now the airline industry is asking the govt. to hand out sops…and keep it afloat!
Why should the tax payer pay for the shortcomings of an incompetent business idea?
Ritu
PS: on 14th Nov, came across this in the papers:
http://economictimes.indiatimes.com/News/News_By_Industry/Transportation/Fliers_return_to_budget_carriers/articleshow/3711023.cms
It seems, the budget airlines are indeed cutting down price to create a differentiation and hence become more attractive to consumers.
On a side note: A good parallel is the car industry. While auto manufacturers have entered the Indian market, they have refused to sell at a loss. The industry had identified new products (low cost car) that makes it more affordable for families to buy and has hence increased penetration. Isn't that a more responsible business model?
The airline industry in India is losing money everyday and by some estimates expected to lose 1.5-1.7 billion USD this year (second only to the US airline industry).
The airline companies in India are upset and asking for the govt. to help them out. They blame fuel costs and the economic downturn.
I don’t believe them.
Take fuel costs. Even two years back when the airlines industry was taking off, the pricing of tickets was not allowing recovery of all costs. They were losing money at the beginning and they are losing money now. In fact, with falling oil prices they should feel happier than 4 months ago.
Take the economic downturn. What has everyone worried is that fill rates are declining. Economic slowdown seems to have everyone cutting costs. Non essential expenses are going out of the window. A downturn is indeed a good time to judge the fundamentals of a business model. Every airline company is suffering and this is unusual. Usually, in a downturn, there is “down-trading” within a category. People go for cheaper alternatives of the same product. Then, if the downturn is longer, they shift to different substitution categories.
Eg: to fight higher fuel costs- you buy a smaller car. (But if you’re already stuck with a big car, you switch categories and use public transport.)
In a downturn, you avoid a Gillette and go for a Wilkinson. Or avoid a Heinz and take a WalMart ketchup. If the downturn is too steep, you avoid ketchups!
In the airline example, you would, in a downturn, move from business class to economy class or from full service to budget airlines. But for travelers to shift from air travel to road transport en-mass means that for them the value proposition of the entire industry has been found wanting. (See- traffic declined by a whopping 19% in September 2008- http://economictimes.indiatimes.com/articleshow/3610790.cms
In today’s environment then, in India, low cost airlines should be gaining market share. But in India, they are closing down.
What happened?
When budget airlines took off, their ticket prices were indeed low (one fifth regular prices in some cases). But they were never making money. Always below break-even point. As the fuel prices increased, all companies were forced to reflect this into the ticket price as a ”surcharge”. These surcharges are now 80% of the price of the ticket such that the price of a low cost ticket is not much different from a full fare ticket.
These low cost airlines (Deccan airlines being the pack leader) drove first time user growth in the industry. But, fundamentally the “low cost” carriers were a myth. With a cost structure so heavily skewed to fuel prices, managing all other costs is not sufficient to create a truly low cost business model.
Sure, when less than 5% of the Indian population flies with any regularity, setting artificially low prices is a good way to drive growth. But for long term sustainability, the usage of air travel must become regular. What’s the use of market penetrating pricing if the consumer does fundamentally have the income to get hooked onto the category at some stage?
But the low cost airlines were not alone in their enthusiasm. The 30% passenger traffic growths were extrapolated by all airline companies that went on to add more aircrafts and routes....and hence more costs.
In the case of air travel, the consumer is also aware that his purchase is an indulgence. Unlike a TV/ fridge or washing machine which is purchased once in 6 years, and only when seen to be a necessity for which the purchase is planned months in advance.
When a return ticket for a 600 km journey costs Rs 6000 or USD 133 per person, does not the income of a family need to cross a significant level before such purchases become regular? (We estimate this threshold to be Rs. 15L (USD 35K approximately), before they take to flying regularly.)
Then the key questions:
How many households/ consumers in India make this cut? How many planes and airline companies are then really needed to satisfy this demand?
In the last 2-3 years, how many consumers actually flew because the ticket price was artificially low and unsustainable for the airline company?
What kind of government watches and encourages this kind of industry growth?
And now the airline industry is asking the govt. to hand out sops…and keep it afloat!
Why should the tax payer pay for the shortcomings of an incompetent business idea?
Ritu
PS: on 14th Nov, came across this in the papers:
http://economictimes.indiatimes.com/News/News_By_Industry/Transportation/Fliers_return_to_budget_carriers/articleshow/3711023.cms
It seems, the budget airlines are indeed cutting down price to create a differentiation and hence become more attractive to consumers.
On a side note: A good parallel is the car industry. While auto manufacturers have entered the Indian market, they have refused to sell at a loss. The industry had identified new products (low cost car) that makes it more affordable for families to buy and has hence increased penetration. Isn't that a more responsible business model?
Thursday, 11 September 2008
The Singur episode (TATA- Nano)
To move India out of poverty, millions of people have to be shifted from the farming to manufacturing/ service sectors.
Bengal must be among the poorest states in India. The low level of industrialisation coupled with under-developed agricultural practices and produce, in my view is a key reason. (Punjab- haryana, while agro based have very high productivity...however they to face low growth rates)
Agriculture in India has not grown more than 3-4% (long term average). Which means that a farmer in the long run has only and will only see his income increase 3-4%.
Industry and services however have the capacity to grow more than 10-12% per year and have done so the last 5 years.
What then is the fastest way out of poverty for a country that has 70% of its population dependent on agriculture? Surely shifting people to the services and mfg sectors is key.
Sure, i dont understand everything about the Singur problem. But i do want to know if our politicians such as Ms. Banerjee have considered that small scale intensive agriculture such as the type followed in Bengal is not the way to progress for the millions of her supporters. Is returning farm land to the farmer offering them a higher standard of living in the long run?
She could be right. But I suspect she isn't.
Bengal must be among the poorest states in India. The low level of industrialisation coupled with under-developed agricultural practices and produce, in my view is a key reason. (Punjab- haryana, while agro based have very high productivity...however they to face low growth rates)
Agriculture in India has not grown more than 3-4% (long term average). Which means that a farmer in the long run has only and will only see his income increase 3-4%.
Industry and services however have the capacity to grow more than 10-12% per year and have done so the last 5 years.
What then is the fastest way out of poverty for a country that has 70% of its population dependent on agriculture? Surely shifting people to the services and mfg sectors is key.
Sure, i dont understand everything about the Singur problem. But i do want to know if our politicians such as Ms. Banerjee have considered that small scale intensive agriculture such as the type followed in Bengal is not the way to progress for the millions of her supporters. Is returning farm land to the farmer offering them a higher standard of living in the long run?
She could be right. But I suspect she isn't.
Thursday, 4 September 2008
A dosa from McDonald's
For those unfamiliar with South Indian cuisine, a dosa is an Indian crepe!
Ritu and I recently wrote "The State of the West address"; "The State of the Union address" and "Desiging for the bottom of the pyramid". In this note, we are trying to close the loop.
1. India's per capita GDP of USD 1000 must grow at 9-10% for the next 25 years for the average Indian to enjoy a "western" standard of living. This is his right. Lets focus on making this happen.
2. The West cannot understand 9% GDP growth. No one in the working class has ever lived through 9% growth. From current literature, we gather that the long term projected growth rates for India and China are 6%. We challenge this. And ask whether western think tanks are trying to rationalise growth to bring it in line with their beliefs? 6% growth will continue to continue to leave almost 2 billion people in close to poverty conditions for another 25 years.
3. If you look at the average Indian, he lacks so many "day to day" products, that delivering 10% GDP growth should not be a problem. Whitegoods/ housing/ medical facilities/ insurance....you name it and the penetration in India would be less than 10%. So why should high GDP growth be a problem? The Indian consumer sees, through the TV, products available around the world. And would like to access these products at reachable price points. (Think a Nokia phone at USD 30 with built in features such as a radio and a torchlight, which are relevant to the rural masses at the bottom of the pyramid).
4. Designing products for the Indian mass (at the bottom of the pyramid) requires not stripping away cost from western concepts, but adding value to current consumer practices. Western strength in R&D must be used to build products and services from the base-up.
5. This brings us to "a dosa from Mcdonald's". Why has a chain like Mcdonald's not gone much further than "Indianising" thier burgers? (Mcdonald's does not make beef burgers in India, but uses chicken. To cater to the vegetarian taste, McDonald's prepares various vegetarian options). Why has McDonlad's not developed a "parantha" (similar to a pancake) for the North Indian consumer, or a dosa for the South Indian consumer. Why has Levi's not gone further and developed Indian outfits....kurtas/ dhotis...as a means of tapping into consumers at he base of the pyramid.
10% GDP growth in India should not be dependent on whether Infosys sees its IT business grwoing or not.
Growth is possible as long as companies are willing to get their hands dirty in the Indian market and develop products based on the usage and habits of Indian consumers.
There are too many things an Indian consumer lacks today for us to believe that growth should be anything less than 10% on average for the next 2 decades.
Lets start to believe.
Ritu and I recently wrote "The State of the West address"; "The State of the Union address" and "Desiging for the bottom of the pyramid". In this note, we are trying to close the loop.
1. India's per capita GDP of USD 1000 must grow at 9-10% for the next 25 years for the average Indian to enjoy a "western" standard of living. This is his right. Lets focus on making this happen.
2. The West cannot understand 9% GDP growth. No one in the working class has ever lived through 9% growth. From current literature, we gather that the long term projected growth rates for India and China are 6%. We challenge this. And ask whether western think tanks are trying to rationalise growth to bring it in line with their beliefs? 6% growth will continue to continue to leave almost 2 billion people in close to poverty conditions for another 25 years.
3. If you look at the average Indian, he lacks so many "day to day" products, that delivering 10% GDP growth should not be a problem. Whitegoods/ housing/ medical facilities/ insurance....you name it and the penetration in India would be less than 10%. So why should high GDP growth be a problem? The Indian consumer sees, through the TV, products available around the world. And would like to access these products at reachable price points. (Think a Nokia phone at USD 30 with built in features such as a radio and a torchlight, which are relevant to the rural masses at the bottom of the pyramid).
4. Designing products for the Indian mass (at the bottom of the pyramid) requires not stripping away cost from western concepts, but adding value to current consumer practices. Western strength in R&D must be used to build products and services from the base-up.
5. This brings us to "a dosa from Mcdonald's". Why has a chain like Mcdonald's not gone much further than "Indianising" thier burgers? (Mcdonald's does not make beef burgers in India, but uses chicken. To cater to the vegetarian taste, McDonald's prepares various vegetarian options). Why has McDonlad's not developed a "parantha" (similar to a pancake) for the North Indian consumer, or a dosa for the South Indian consumer. Why has Levi's not gone further and developed Indian outfits....kurtas/ dhotis...as a means of tapping into consumers at he base of the pyramid.
10% GDP growth in India should not be dependent on whether Infosys sees its IT business grwoing or not.
Growth is possible as long as companies are willing to get their hands dirty in the Indian market and develop products based on the usage and habits of Indian consumers.
There are too many things an Indian consumer lacks today for us to believe that growth should be anything less than 10% on average for the next 2 decades.
Lets start to believe.
Saturday, 30 August 2008
The State of the West address
India and China need to grow at 10% GDP growth rates for the next 25 years if we want the average citizen to have a reasonable standard of living.
If will happen, only if we believe it can happen.
This note is for various global “think tanks”. The Economist Intelligence Unit/ Global Insight …and many others. I was at a seminar yesterday, and it got me thinking.
Ritu and I have been fortunate. We have lived all our lives in India. We studied in India and began our careers here. But we have had the opportunity of working and living in Western Europe for the last six years.
Some time last year, we both developed a strong urge to return. No matter what, we realized, our professional aspirations could only be achieved where 1 billion people were beginning to grow their GDP at 9%. These are amazing facts. Western Europe (all of it) is about half the size in population and one third in growth.
For most (if not all) people in the work force in Western Europe, 9% growth rates never happened in their lifetimes. This is key to understand how they view high growth in populous countries like India and China. Western Europe continues to be focused on the growth rates in China and India. They are judging whether such high growth rates as sustainable. They are not focusing on the current quality of life in India and how much the growth has to be sustained for living standards to rise to Western European levels.
The “Hindu” rate of growth is no longer relevant. We Indians are already looking beyond that. But the “Christian” acceptance of “sustainable” growth levels is beginning to drive global investment sentiment in India-China. And we need to be very very cautious.
What am I seeing:
- The west is enamored by China’s consistent growth rates over the past 10 years. It has accorded China much respect. It believes China will take its place among the industrial powers of the World.
o However, look at any long term growth forecast for China, and the average growth over the next 25 years (2008-2035) will always be predicted at between 6 and 6.5%. WHY?
How can we decide that 6% is the long term sustainable growth rate? Who has decided this? Were these people predicting China’s decade of 10% average growth?
- The West is equally enamored by the rise of India. 9% GDP growth rate over the past 5 years is wonderful.
o However, look at any long term growth forecast for India, and the average growth over the next 25 years (2008-2035) will always be predicted at between 6 and 6.5%. WHY?
How can we decide that 6% is the long term sustainable growth rate? Who has decided this? Who predicted India’s resurgent growth rates?
Since I do not believe in economic predictions, I will not make one.
In a Q2, 2008 report, the Global Insight suggested the folloing numbers:
India : nominal per capita GDP (USD) of 975$ growing to 8,027$ by 2035. Implying a growth rate of 6%.
China : 2,483$ growing to 25,623$. A growth rate of 6.20%.
Australia: 43,709$ growing to 129,203 $. A growth rate of 3%.
The average Indian is 20 times poorer than the Australian. If India grows at 6% for another 25 years, the average Indian will remain 15 times poorer than an Australian.
WHO HAS DECIDED THE GROWTH RATES THAT CONDEMN INDIANS AND CHINESE TO REMAIN POOR FOR ANOTHER 25 YEARS?
This is not particular to Global Insight. I saw similar numbers from the Economist recently. And i believe this is a deeply entrenched perception about future growth in India and China.
The West cannot digest a consistent 9% growth rate. That’s their problem. What worries me is that the Indian investment community is accepting their predictions. And using the stock market fall to justify the "overheated economy" and the "correction" necessary.
The economy has not slowed down. Our confidence and belief has. That's sad.
These think tanks and thought leaders must not make us Indians and Chinese pessimistic. There are 2 billion people in these two countries that are looking to buy the daily basics…good clothes/ shoes/ food/ medicines. Do you think that we can ask these 2 billion people to wait another 50 years because western think tanks think we can only grow at 6% annually?
Do you think they will wait? Do you think social balance will remain in the face of economic disparity over such a long period of time?
A 9% growth is not only possible. It is the bare minimum necessary.
What is my prescription: Quite simply, If we are working in product categories that have less than 10% penetration, we must continuously look for opportunities that double turnover every 4 years. Then, we can expect that in a 25-30 year horizon most Indians and Chinese will be able to afford a lifestyle that people reading this blog can afford today. We are still asking them to wait 25 years.
And it is not about the Indians and Chinese. Its about people who live on this planet. The Africans are poor. The middle east is (in real household income) poor.
Most of the world is poor. And following the west’s predicted growth trajectory is a “self fulfilling sin” that we will commit on mankind.
The west is not used to 9% growths. We Indians have only now seen it happen. But we know it is possible. And it happened because companies in India invested in India.
It happened in India. Let it continue. Let us continue to believe in the power of the human spirit. In the Chinese spirit. And the Indian spirit.
If will happen, only if we believe it can happen.
This note is for various global “think tanks”. The Economist Intelligence Unit/ Global Insight …and many others. I was at a seminar yesterday, and it got me thinking.
Ritu and I have been fortunate. We have lived all our lives in India. We studied in India and began our careers here. But we have had the opportunity of working and living in Western Europe for the last six years.
Some time last year, we both developed a strong urge to return. No matter what, we realized, our professional aspirations could only be achieved where 1 billion people were beginning to grow their GDP at 9%. These are amazing facts. Western Europe (all of it) is about half the size in population and one third in growth.
For most (if not all) people in the work force in Western Europe, 9% growth rates never happened in their lifetimes. This is key to understand how they view high growth in populous countries like India and China. Western Europe continues to be focused on the growth rates in China and India. They are judging whether such high growth rates as sustainable. They are not focusing on the current quality of life in India and how much the growth has to be sustained for living standards to rise to Western European levels.
The “Hindu” rate of growth is no longer relevant. We Indians are already looking beyond that. But the “Christian” acceptance of “sustainable” growth levels is beginning to drive global investment sentiment in India-China. And we need to be very very cautious.
What am I seeing:
- The west is enamored by China’s consistent growth rates over the past 10 years. It has accorded China much respect. It believes China will take its place among the industrial powers of the World.
o However, look at any long term growth forecast for China, and the average growth over the next 25 years (2008-2035) will always be predicted at between 6 and 6.5%. WHY?
How can we decide that 6% is the long term sustainable growth rate? Who has decided this? Were these people predicting China’s decade of 10% average growth?
- The West is equally enamored by the rise of India. 9% GDP growth rate over the past 5 years is wonderful.
o However, look at any long term growth forecast for India, and the average growth over the next 25 years (2008-2035) will always be predicted at between 6 and 6.5%. WHY?
How can we decide that 6% is the long term sustainable growth rate? Who has decided this? Who predicted India’s resurgent growth rates?
Since I do not believe in economic predictions, I will not make one.
In a Q2, 2008 report, the Global Insight suggested the folloing numbers:
India : nominal per capita GDP (USD) of 975$ growing to 8,027$ by 2035. Implying a growth rate of 6%.
China : 2,483$ growing to 25,623$. A growth rate of 6.20%.
Australia: 43,709$ growing to 129,203 $. A growth rate of 3%.
The average Indian is 20 times poorer than the Australian. If India grows at 6% for another 25 years, the average Indian will remain 15 times poorer than an Australian.
WHO HAS DECIDED THE GROWTH RATES THAT CONDEMN INDIANS AND CHINESE TO REMAIN POOR FOR ANOTHER 25 YEARS?
This is not particular to Global Insight. I saw similar numbers from the Economist recently. And i believe this is a deeply entrenched perception about future growth in India and China.
The West cannot digest a consistent 9% growth rate. That’s their problem. What worries me is that the Indian investment community is accepting their predictions. And using the stock market fall to justify the "overheated economy" and the "correction" necessary.
The economy has not slowed down. Our confidence and belief has. That's sad.
These think tanks and thought leaders must not make us Indians and Chinese pessimistic. There are 2 billion people in these two countries that are looking to buy the daily basics…good clothes/ shoes/ food/ medicines. Do you think that we can ask these 2 billion people to wait another 50 years because western think tanks think we can only grow at 6% annually?
Do you think they will wait? Do you think social balance will remain in the face of economic disparity over such a long period of time?
A 9% growth is not only possible. It is the bare minimum necessary.
What is my prescription: Quite simply, If we are working in product categories that have less than 10% penetration, we must continuously look for opportunities that double turnover every 4 years. Then, we can expect that in a 25-30 year horizon most Indians and Chinese will be able to afford a lifestyle that people reading this blog can afford today. We are still asking them to wait 25 years.
And it is not about the Indians and Chinese. Its about people who live on this planet. The Africans are poor. The middle east is (in real household income) poor.
Most of the world is poor. And following the west’s predicted growth trajectory is a “self fulfilling sin” that we will commit on mankind.
The west is not used to 9% growths. We Indians have only now seen it happen. But we know it is possible. And it happened because companies in India invested in India.
It happened in India. Let it continue. Let us continue to believe in the power of the human spirit. In the Chinese spirit. And the Indian spirit.
Thursday, 17 July 2008
Venkat's State of the Union address
1. India is still dependent on the IT sector. This sector has been affected by the global slowdown, but things are not panicky. The “cautious” IT sector has affected the trickle down effect. Unfortunately, no other sector in the Indian economy can counter balance the IT sector for its revenue generating strength.
2. Manufacturing has to grow- especially export linked manufacturing. It is a good sign that foreign investments in manufacturing have been strong and continue to be so.
3. Salary increases of the last 5 years are the buffer for the population against inflation. The blue collar worker will see this disappearing fastest (6-12 months). Unless the economy changes by mid 2009, we will see serious social tensions.
4. Critically, slowdown could become a self fulfilling prophecy in India. We need to be optimistic at this time. Remember that for the per capita GDP of India to catch up to western European standards requires at least 30 years of 9% GDP growth. So lets focus on that and continue to find new opportunities of growing...instead of realigning our growth to western expectations from India's GDP in 2008.
I write this note to help me think through inflation and recession in the Indian context today. It’s a broad brush approach, but the story seems coherent to me and so I go with it.
I have integrated inflation/ exchange rate weakness (the Rupee has weakened in the past few months), the weakness in the US economy (which I hold as the driver of all weakness and strength in the "Western" economies) and the commodities boom (which
need not always be accounted for in the Consumer Price Index inflation numbers.)
I have looked at the impact of the above parameters on the IT sector/ Manufacturing/ Financial sectors/ Agriculture/ retailing and "other services"
I present here my qualitative assessments. These are simply "gut feel"…based on my understanding of the dynamics of various industries.
Comments:
The IT industry over the past few years has expanded significantly into Western Europe. SO while its exposure to the US is still strong, to an extant these are mitigated by the type of contracts with the US (long term, fixed annuity type) as well as emerging exposure to Europe. European economies at this stage (financial sector) seem better positioned than the US financial sector. In addition, since European companies have only just started their "outsourcing" initiatives, there are sufficient low hanging fruits to be gained.
Indian inflation impacts the industry, although earnings are largely export based. Inflation however reduces the buying power of the currency and in that context, impacts the resources allocated to IT purchases both in India and abroad. The exchange rate does have a strong role to play and the recent weakness of the Rupee has been well received.
Again, the commodities boom also does not impact the industry significantly. The US economy however has a very strong impact (although as mentioned before, mitigated by emerging European business).
Manufacturing for the domestic market is very sensitive to inflation and commodity prices. This will see a slowdown in the current economic environment. However export focused manufacturing is completely different and is discussed in the next section.
Services: in a high inflation environment, services are likely to see a slowdown. India's contribution to the global service environment (except IT) is negligible. Healthcare services to foreigners may benefit in a weak exchange rate environment but are adversely affected when the global economy itself is sluggish. Indian consumers will also postpone any not critical expenditures.
Agriculture: If the monsoons are consistent, this sector should perform to a 3-4% growth. Input prices such as fertilizer costs however need to be controlled. Global agriculture produce markets being rightly controlled and subsidized means this sector is usually not impacted by booms and busts in the global economy.
So what's the problem?
The problem I see stems as follows.
1. The IT industry is being cautious. Not panicky. Cautious. This is not a bad thing in itself. But today, this sector is the value creator and distributor in the Indian economy. No other sector takes college graduates from cycles to motor cycles as quickly as the IT sector. When they slow down hiring, we're effectively getting less demand for clothes, machines, white goods (these grads need to set up their apartments).....the whole trickle down effect is reduced.
2. As mentioned, domestic manufacturing is affected. But the bright side is manufacturing for the export market. This continues to boom. Here India has two big advantages that continue to attract FDI in manufacturing.
1. Low cost labour.
2. Well educated engineers that can provide a base for R and D.
In tight global economic conditions, these strengths will be amplified and manufacturing for the export market should continue to boom . Companies will continue to see more benefits in establishing themselves in low cost countries. This is the best bet against rising commodity and raw material prices. Particularly fuel costs.
I see the world moving more to smaller, more efficient cars. India is well on its way to be the global hub for small cars. The govt is motivated to make this happen. In the next 5 years, this "export" oriented manufacturing will become a counter balance to the IT sector.
Going beyond cars, India has the opportunity to extend its manufacturing and design strengths to white goods, low cost furnishing , aeroplanes, ships. Indian design frugality can apply to a wide range of industries.
The FDI investment in 2008 has not slowed, tell us all the major banks. There is a rather large silver lining to the current economic environment of grey clouds. No country has developed itself without a strong manufacturing set up at some point in its history. India needs the same, more so given its large population of less educated persons. Now is the time to be optimistic and take initiatives.
In my view, the economy should start to panic when Infosys, TCS and Wipro start to lay off employees. This has not yet happened. These three represent for India what the performance of GE and Walmart mean for the US. Sure, they are delaying hiring, but as long as mass lay offs are not yet in the news, I have confidence. Again, this will ring true for the next 5-10 years, till our export manufacturing competence develops.
3. Finally then to inflation. 12% is a very high rate. Yet, I don’t see around me panic. Apart from the political parties organising rallies and protests, I don’t see a spontaneous expression of anguish from the public. (perhaps the anguish is being saved for the elections). Why? Here is my understanding. I believe that he top 10% of the Indian economy working in high end jobs has seen its salary grow so quickly in the past 5 years that they are immune to 10% inflation. Salaries in this segment have increased between 3-5 times in the past 5 years. So there is a buffer against inflation.
Then, lets look at the families that are dependent on agriculture (the rural poor). If I look at the Consumer Price Index basket (listed below), it consists of veggies, fruits, milk, eggs, cereals, pulses, house rent, electricity etc. The farmer's family usually does not pay for these items. It generates them within the household. And India's intensive agriculture sells into the market only the surplus after domestic requirements are taken care off. In a cynical way, I say that this segment is inflation resistant. What will affect them is now their inability to buy next order goods such as TVs and refrigerators. This is an element that appears in the lower rate of manufacturing growth this year.
But it’s the segment of population between these two extremes that I believe is at highest risk. The blue collar worker. One who has seen his salary increase but not as much. One for whom the buffer against inflation is the lowest. Indeed I would add that recent growth in manufacturing and retail has shifted a lot of labour from manual sectors to the organised sector. People dependent on agriculture growing at 3-4% have moved to the manufacturing sector growing at 9-10%, reaping the accompanying benefits. However their benefits have been less than those at the top end (knowledge workers).
In conclusion the summary of this story that I would like to leave behind is the following:
1. India is still dependent on the IT sector. This sector has been affected by the global slowdown, but things are not panicky. The “cautious” IT sector has affected the trickle down effect. Unfortunately, no other sector in the Indian economy can counter balance the IT sector for its revenue generating strength.
2. Manufacturing has to grow- especially export linked manufacturing. It is a good sign that foreign investments in manufacturing have been strong and continue to be so.
3. Salary increases of the last 5 years are the buffer for the population against inflation. The blue collar worker will see this disappearing fastest (6-12 months). Unless the economy changes by mid 2009, we will see serious social tensions.
4. Critically, slowdown could become a self fulfilling prophecy in India. We need to be optimistic at this time. Remember that for the per capita GDP of India to catch up to western European standards requires at least 30 years of 9% GDP growth. So lets focus on that and continue to find new opportunities of growing...instead of realigning our growth to western expectations from India's GDP in 2008.
Comments and feedback welcome.
-------------------------------------------------------
NOTE: CPI Index: The total expenditure on consumption of goods and services was divided into the following groups/sub-groups:
I- Food :
(a). Cereals & Products (d).Meat, Fish & Eggs
(b).Pulses & Products (e).Milk & Milk Products
(c).Oils & Fats (f).Condiments & Spices
(g).Vegetables & Fruits (h).Other Food
II-Pan, Supari, Tobacco & Intoxicants;
III-Fuel & Light :
IV-Housing;
V-Clothing, Bedding & Footwear, and
VI-Miscellaneous :
(a).Medical Care & Effects
(b).Education, Recreation & Amusement
(c).Transport & Communication
(d).Personal Care & Effects
(e).Others
2. Manufacturing has to grow- especially export linked manufacturing. It is a good sign that foreign investments in manufacturing have been strong and continue to be so.
3. Salary increases of the last 5 years are the buffer for the population against inflation. The blue collar worker will see this disappearing fastest (6-12 months). Unless the economy changes by mid 2009, we will see serious social tensions.
4. Critically, slowdown could become a self fulfilling prophecy in India. We need to be optimistic at this time. Remember that for the per capita GDP of India to catch up to western European standards requires at least 30 years of 9% GDP growth. So lets focus on that and continue to find new opportunities of growing...instead of realigning our growth to western expectations from India's GDP in 2008.
I write this note to help me think through inflation and recession in the Indian context today. It’s a broad brush approach, but the story seems coherent to me and so I go with it.
I have integrated inflation/ exchange rate weakness (the Rupee has weakened in the past few months), the weakness in the US economy (which I hold as the driver of all weakness and strength in the "Western" economies) and the commodities boom (which
need not always be accounted for in the Consumer Price Index inflation numbers.)
I have looked at the impact of the above parameters on the IT sector/ Manufacturing/ Financial sectors/ Agriculture/ retailing and "other services"
I present here my qualitative assessments. These are simply "gut feel"…based on my understanding of the dynamics of various industries.
Comments:
The IT industry over the past few years has expanded significantly into Western Europe. SO while its exposure to the US is still strong, to an extant these are mitigated by the type of contracts with the US (long term, fixed annuity type) as well as emerging exposure to Europe. European economies at this stage (financial sector) seem better positioned than the US financial sector. In addition, since European companies have only just started their "outsourcing" initiatives, there are sufficient low hanging fruits to be gained.
Indian inflation impacts the industry, although earnings are largely export based. Inflation however reduces the buying power of the currency and in that context, impacts the resources allocated to IT purchases both in India and abroad. The exchange rate does have a strong role to play and the recent weakness of the Rupee has been well received.
Again, the commodities boom also does not impact the industry significantly. The US economy however has a very strong impact (although as mentioned before, mitigated by emerging European business).
Manufacturing for the domestic market is very sensitive to inflation and commodity prices. This will see a slowdown in the current economic environment. However export focused manufacturing is completely different and is discussed in the next section.
Services: in a high inflation environment, services are likely to see a slowdown. India's contribution to the global service environment (except IT) is negligible. Healthcare services to foreigners may benefit in a weak exchange rate environment but are adversely affected when the global economy itself is sluggish. Indian consumers will also postpone any not critical expenditures.
Agriculture: If the monsoons are consistent, this sector should perform to a 3-4% growth. Input prices such as fertilizer costs however need to be controlled. Global agriculture produce markets being rightly controlled and subsidized means this sector is usually not impacted by booms and busts in the global economy.
So what's the problem?
The problem I see stems as follows.
1. The IT industry is being cautious. Not panicky. Cautious. This is not a bad thing in itself. But today, this sector is the value creator and distributor in the Indian economy. No other sector takes college graduates from cycles to motor cycles as quickly as the IT sector. When they slow down hiring, we're effectively getting less demand for clothes, machines, white goods (these grads need to set up their apartments).....the whole trickle down effect is reduced.
2. As mentioned, domestic manufacturing is affected. But the bright side is manufacturing for the export market. This continues to boom. Here India has two big advantages that continue to attract FDI in manufacturing.
1. Low cost labour.
2. Well educated engineers that can provide a base for R and D.
In tight global economic conditions, these strengths will be amplified and manufacturing for the export market should continue to boom . Companies will continue to see more benefits in establishing themselves in low cost countries. This is the best bet against rising commodity and raw material prices. Particularly fuel costs.
I see the world moving more to smaller, more efficient cars. India is well on its way to be the global hub for small cars. The govt is motivated to make this happen. In the next 5 years, this "export" oriented manufacturing will become a counter balance to the IT sector.
Going beyond cars, India has the opportunity to extend its manufacturing and design strengths to white goods, low cost furnishing , aeroplanes, ships. Indian design frugality can apply to a wide range of industries.
The FDI investment in 2008 has not slowed, tell us all the major banks. There is a rather large silver lining to the current economic environment of grey clouds. No country has developed itself without a strong manufacturing set up at some point in its history. India needs the same, more so given its large population of less educated persons. Now is the time to be optimistic and take initiatives.
In my view, the economy should start to panic when Infosys, TCS and Wipro start to lay off employees. This has not yet happened. These three represent for India what the performance of GE and Walmart mean for the US. Sure, they are delaying hiring, but as long as mass lay offs are not yet in the news, I have confidence. Again, this will ring true for the next 5-10 years, till our export manufacturing competence develops.
3. Finally then to inflation. 12% is a very high rate. Yet, I don’t see around me panic. Apart from the political parties organising rallies and protests, I don’t see a spontaneous expression of anguish from the public. (perhaps the anguish is being saved for the elections). Why? Here is my understanding. I believe that he top 10% of the Indian economy working in high end jobs has seen its salary grow so quickly in the past 5 years that they are immune to 10% inflation. Salaries in this segment have increased between 3-5 times in the past 5 years. So there is a buffer against inflation.
Then, lets look at the families that are dependent on agriculture (the rural poor). If I look at the Consumer Price Index basket (listed below), it consists of veggies, fruits, milk, eggs, cereals, pulses, house rent, electricity etc. The farmer's family usually does not pay for these items. It generates them within the household. And India's intensive agriculture sells into the market only the surplus after domestic requirements are taken care off. In a cynical way, I say that this segment is inflation resistant. What will affect them is now their inability to buy next order goods such as TVs and refrigerators. This is an element that appears in the lower rate of manufacturing growth this year.
But it’s the segment of population between these two extremes that I believe is at highest risk. The blue collar worker. One who has seen his salary increase but not as much. One for whom the buffer against inflation is the lowest. Indeed I would add that recent growth in manufacturing and retail has shifted a lot of labour from manual sectors to the organised sector. People dependent on agriculture growing at 3-4% have moved to the manufacturing sector growing at 9-10%, reaping the accompanying benefits. However their benefits have been less than those at the top end (knowledge workers).
In conclusion the summary of this story that I would like to leave behind is the following:
1. India is still dependent on the IT sector. This sector has been affected by the global slowdown, but things are not panicky. The “cautious” IT sector has affected the trickle down effect. Unfortunately, no other sector in the Indian economy can counter balance the IT sector for its revenue generating strength.
2. Manufacturing has to grow- especially export linked manufacturing. It is a good sign that foreign investments in manufacturing have been strong and continue to be so.
3. Salary increases of the last 5 years are the buffer for the population against inflation. The blue collar worker will see this disappearing fastest (6-12 months). Unless the economy changes by mid 2009, we will see serious social tensions.
4. Critically, slowdown could become a self fulfilling prophecy in India. We need to be optimistic at this time. Remember that for the per capita GDP of India to catch up to western European standards requires at least 30 years of 9% GDP growth. So lets focus on that and continue to find new opportunities of growing...instead of realigning our growth to western expectations from India's GDP in 2008.
Comments and feedback welcome.
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NOTE: CPI Index: The total expenditure on consumption of goods and services was divided into the following groups/sub-groups:
I- Food :
(a). Cereals & Products (d).Meat, Fish & Eggs
(b).Pulses & Products (e).Milk & Milk Products
(c).Oils & Fats (f).Condiments & Spices
(g).Vegetables & Fruits (h).Other Food
II-Pan, Supari, Tobacco & Intoxicants;
III-Fuel & Light :
IV-Housing;
V-Clothing, Bedding & Footwear, and
VI-Miscellaneous :
(a).Medical Care & Effects
(b).Education, Recreation & Amusement
(c).Transport & Communication
(d).Personal Care & Effects
(e).Others
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