India is not producing enough

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Right now, Indian economy is going through a slump, and in the last few months we have seen Indian currency taking a massive hit reducing its value against dollar by nearly 20%.  The growth projections for India's GDP have come down from earlier eight-plus percentages to six-plus percentages – some analysts have even predicted only a five-plus growth rate.  Two months ago, petrol prices were hiked by eight rupees in a single day, the highest increase in Indian history, and already another hike is now announced.   There could be an economic crisis ahead, but we are quite optimistic that this phase will be over soon and that we will go back to getting adjusted to the new and changed environment – that’s the Indian attitude towards solving all the problems – swalpa adjust maadi (adjust a little).

Some analysts attribute this sudden worsening of Indian economy to Euro crisis, while some others blame the policy-paralysis of UPA government.  Many industry heads have been clamoring for Finance Minister of India to bring reforms hoping such an action will somehow bring India back on the track.  And the UPA government has recently reacted to allow FDI into some of the sectors, which is being greeted enthusiastically by the industry body.   But the essential question remains - is the root cause for our flailing economy the lack of reforms or is there something far more fundamental that needs to be corrected?  If we take a look at Indian economy from a macro level we will notice something grossly wrong with the big picture, with the way we are headed, with the way we do things.  There is something drastically wrong with our foundations.

The truth is - most Indians are not involved in producing goods of value.  Instead, most of us are involved in trading, buying and selling stuff without actually producing anything.  Since we are not producing enough as people, we are not earning enough as a country.

No amount of fiscal or policy reforms will make us produce more unless we take up the task of increasing our production, consciously and deliberately.  Leaving it to the natural course of events will not take us in that direction.  In fact, I see a reverse trend, where we are complacently getting out of activities of production, running after what one investor described as ‘low hanging fruits’ – an euphemism for ‘shortcut to immediate but unsustainable financial gain’.

Each of the developed countries, like England, USA, France, Japan, or Germany, have gone through periods of explosive growth at certain point in their past, a phase of rapid industrialization, when these nations transformed themselves from medieval economies to prosperous nations.  During those days, they produced goods on an aggressive pace, consuming lots of raw materials, producing the result of suddenly improving the overall quality of life for its people.

The important items produced and consumed by all industrialized countries during their rapid growth phase is steel and coal. 

                                                                                                
Steel

Production and consumption of steel are the key factors for economic growth of Western Europe and America in the 19^th century. 

There was a tremendous increase in the production of raw material called pig iron.  The growth of pig iron output during 1840 and 1913 was ‘dramatic’.  Britain increased it by ten times during this time.  Though USA and Germany started late, they grew much faster, increasing the production by nearly hundred times in just fifty years from 1870 to 1913.  During the same period, other countries, like France, Belgium, Austria-Hungary, and Russia, grew in production by nearly six times.    

Between 1875 and 1920, American steel production grew from 0.4 million tons to 60 million tons, increasing by nearly hundred times, making USA the dominant world leader in steel.  Germany was not far behind.  Other countries like France and Belgium grew by leaps and bounds.  This ‘explosive’ growth was enabled by major technological breakthroughs, but also assisted by other factors such as protective tariff, continuous and rapid expansion of urban infrastructure, factories, railroads, etc.

Most of these increases in production were accompanied by a series of technological breakthroughs and innovations, in mining and in refining.   The countries realized the importance of technological and engineering advantages which gave them lead over others. 

It is an observed fact that ‘steel consumption increases when economies are growing’.  It is the same for developing countries in modern times.  Yearly growth of steel production in China has doubled from 13% in 1995 to 32% in 2005.  Today most of the global steel is used in China which consumes 45.5%, in comparison to only 20.5% in 2001.

Indian Minister for Steel, Beni Prasad Verma, informed Rajya Sabha that one of the best indicators to measure development on infrastructure is per capita steel consumption, and yet we are actually not moving in that direction.  India is not producing or consuming enough steel (or coal) which formed the bulwark of Industrial Revolution.  Though India took some right steps after Independence, it stands defocussed now, its priorities unclear, running after short term gains losing out on the big picture. 

In 2010, India's per capita steel consumption was 52 kg while the world average was 203 kg.  Present Indian consumes less per capita steel than an American of 1800s. Countries like South Korea consume nearly twenty times more than India. 

Not only this, India’s consumption is heavily lopsided in favor of urban India.  Per capita consumption of steel in rural India is only 10Kg, five times less compared to urban India.

Though it is anticipated that Indian steel consumption will grow nearly double to more than 150 million tons by 2020 from the current 70 million tons in 2011, India shows no signs of increasing its steel production. In fact, the growth for 2020 was initially projected at 200 million tons but later revised because of our poor initiatives and conditions. 

While countries like South Korea and Taiwan are increasing their steel consumption at a tremendous rate, India seems to show a dip in its consumption because it is not investing as heavily into its construction and other growth industries. Since India does not spend on infrastructure it has no capacity to grow its economy. 

Though we do not produce and consume enough finished steel we don’t lag behind in production of the raw material, iron ore.  Production of iron ore in India is almost twice that of the internal consumption.  Of the total iron ore production of 208 million tons in 2010, only 111 million tons was consumed domestically, while 97 million tons was exported.  Looks like Indians are far more interested in selling its raw material to other countries than using it for domestic consumption or turning it into finished steel.  India imported 7.4 million tons of finished steel, used for construction and finished goods like automobiles, while it exported only 3.2 million tons in 2009. The recent scams in mining suggest that our politicians are in cahoots with Indian industry robbing this nation of its mineral wealth without creating any value for the country.

Coal

Interestingly, the steel production is dependent on consumption of coal.  Around 70% of global steel production depends directly on coal, where coking coal is converted to coke and then used in blast furnace to smelt iron ore. The rest 30% of global steel is produced in furnaces that use electricity, which is once again produced by coal-fired power plants.  Therefore, production of steel and coal and intricately linked. 

Even though India has one of the largest reservoirs of coal on the planet, it is still the fourth largest importer - importing 105 million tons in 2010.  Coal remains a vital ingredient because 70% of the power in India is generated by coal.

India ranks 25 in the world in per capita consumption of coal by industry and by rail transport while China ranks 1.  The growth rate for coal consumption for China follows a hockey stick while for India it is a steady line, showing the different paths we have taken.  In 2010, China consumed nearly six times more coal than India.  Now in 2012, it is estimated that China consumes half of the world’s coal which amounts to nearly 7 billion tons. 

India is floundering.  While it needs coal to increase its energy output and steel production, it is not producing enough nor consuming enough.  Instead it is embroiled in scams and scandals giving away the natural reserves to private players who are illegally siphoning off coal to be exported to other countries.  It is discovered that nearly 20 millions of tons of coal was exported out of the country as raw material. Some reports indicate that 143 private companies were allotted 83 coal blocks with over 17 billion tons of reserves.

Energy

Most importantly, India does not produce enough energy to sustain the growth of Indian industry - whether it is manufacturing, research or services.  Indian industry continues to be concentrated in top ten cities of India because rest of India does not get adequate power.  Some towns and villages in India get only six hours of power per day.  We are one of most energy starved countries on the planet.  Per capita energy consumption of India is 1/5^th of the world average, consuming only 571 kWh, while a Norwegian consumes 23,500 kWh and an American consumes 13,000 KWh

No wonder human development index (HDI) has direct correlation with per capita energy consumption.  

The power failure is a regular feature in India which has only exacerbated now.  Most Indian villages see power outages for most part of the day.  Industry in the cities depends on battery backups and generators.  Power generated from diesel generators costs Rs. 14 per unit while the power from the installed plants costs only Rs. 4.  A month ago, India went through a major crisis where most of the Northern part of India was in darkness for few days, with outages exceeding 20% of the installed capacity.  This is because of the fuel shortage to the power plants.  In June 2011, nearly 31 thermal power stations maintained 'critical' stock levels while 18 stations were at 'super critical' levels, with only four days of fuel in stock.  The problem is that the production of coal has not increased to meet the increase in installed capacity. 

Production of energy should have been the top priority for India.  Some of the policy makers have suggested that India has to increase its energy production by nearly ten times to meet its energy requirements.  India can produce energy from coal, nuclear and hydro.  CO₂ emissions from India are only 1.7 billion tons per year, which is one twentieth of the world average at 30 billion tons/year.  Renewable energy, though desirable is not viable to generate power to the entire country. In most countries it does not contribute more than 2% of the energy production.  To get enough power using solar panels one has to cover one fourth of barren and uncultivable land in India.

Not only is India lagging in producing growth enablers like steel, coal and energy, which helped countries in West Europe and North America to become the dominant players on the world scene, it does not participate in other high-tech industries which have helped nations like South Korea, Taiwan and Japan to grow rapidly to become developed nations.

Manufacturing

Manufacturing continues to be dominated by the developed countries.  And those countries who aspire to become developed nations increasing their manufacturing output.  Also, there is a correlation between country’s manufacturing output and its total GDP.  As a general rule, a country tries to increase its manufacturing output to increase its GDP.  USA continues to be the world’s largest manufacturer since World War II producing nearly 20% of the world’s manufacturing goods, and is still 45% larger than fast-growing China.  India’s manufacturing output is about 1/6^th of China.  Some of the key manufacturing items are machinery and equipment, industrial supplies, non-auto consumer goods, motor vehicles, and aircrafts. 

One important figure used for performance of a developing country is the contribution of manufacturing output as a share of country’s GDP.   Industrializing countries see an increase in the contribution from manufacturing. 

Currently, most developed countries earn from manufacturing and high-end services, while its dependence on agriculture is negligible. 

 

India continues to depend heavily on agriculture which forms 25% of its GDP while employing 56% of its population.   In most developed countries and other developing countries, there is a migration of its workforce from agriculture to manufacturing and high-end services.  We see that most of the developed countries have significantly low number of people employed in agriculture.  Unless India steps up its manufacturing game such movement out of agriculture will not be possible and therefore the income earning capacity of bulk of the population will continue to be very low.  

The transition from a developing to developed countries also involves emphasis on high-tech manufacturing, like electronics, which increases the income per employee quite considerably.

Electronics

Electronics manufacturing industry transformed the nations like Japan, South Korea, Taiwan, and helped nations like Malaysia, Indonesia and Philippines to break the shackles of poverty to become industrialized nations.  The global electronics industry is at $1.8 trillion making it one of the largest and fastest growing industries in the world.    While India consumes $125 billion worth of electronic goods annually, which is estimated to reach $400 billion by 2020, its current exports stand at a meager $4 billion.  India’s share in the global electronic hardware manufacturing is only 0.7%.

High-tech manufacturing like electronics industry contributes significantly to most of the developed countries’ GDP.  In India it is 1.7% and for countries like South Korea it is 15.1%.

Focus on manufacturing and high-tech manufacturing is extremely important for India to increase its overall GDP, its per capita income, and most importantly to create jobs for lower middle and lower classes of India, thereby increasing the average earning capacity of the common man.  

Though the high-end services industry earns more income per person compared to manufacturing industry, it is still inaccessible to most Indians coming from lower classes with ordinary education. 

                                                                                                                     

A note on IT-ITES Industry

The much touted Indian IT industry employs primarily the English educated, mostly upper middle class Indians completely bypassing the lower classes.   Currently the Indian IT industry earns $70 billion in exports and $30 billion in domestic market employing nearly 2.8 million engineers.   Of this IT-ITES earns $50 billion (excluding BPO and Hardware industry).   Each year India is able to add approximately 250,000 jobs into IT-ITES, BPO and hardware industry.  Since the revenues in this sector are a function of number of employees, Indian IT industry cannot grow more than $10 billion per year.  Therefore, its contribution towards India’s GDP will eventually start decreasing from the current 7%.  Already India leads the pack grabbing 58% of the global sourcing market share, and hence it will be harder to increase its market share any further.  In near future we may even see other countries eating into India’s market share.  Also, any effort to increase the number of graduates by increasing the number of colleges leads to creation of less qualified graduates as already witnessed in the last ten years, thereby not contributing to increase in revenues.

Though the Indian IT industry employs the cream of Indian graduates, an average employee in this industry continues to earn far less compared to someone in US.  An average employee at three companies in US, Apple, Cisco and Microsoft earns nearly 25 times more than that of an average employee at top three India IT companies, TCS, Infosys, and Wipro.

Not only does its employee earn lot less than his counterpart in the developed world, the Indian IT-ITES industry does not create a sustainable ecosystem.  For example, a company like Boeing conducts business with thousands of engineering companies which depend on it for their survival.  Most technology companies in US conduct business with many smaller companies - sourcing components, products and technology from them.  They also tend to invest and acquire affiliated companies.  In India, the only companies this IT-ITES industry tends to spawn are catering, security, cab services, etc.  

Our fascination with this industry is mainly because of its attractiveness to Indian upper middle class which sends it kids to engineering colleges and then into Indian software services industry.  Otherwise, Indian IT industry can never be the main source for generation of employment for most of Indian middle and lower classes.

Policy-paralysis or short-sightedness?

The general malaise is not just the paralysis of policy as described by Indian media.  It is far deeper and far serious.  The problem is that Indians are not thinking big, not thinking long-term.  The problem is myopia, accompanied by greed. 

One look at city planning, its sanitary system, and its road construction reflects this short-sightedness.  The sewage system cannot sustain a single rain, and the roads need to be repaired every three months.  New townships are constructed with narrow roads that block all the traffic.  A big mall exits right onto a traffic junction; and a bus stop is situated right on the ramp that enters the freeway.   First a highway is built to connect the city to the airport which takes few years, and then within a year it is completely broken up make another elevated roadway.  High rise apartments open into narrow streets.  There are no parks, no recreational facilities or sports complexes.  There are no playgrounds for children to play.

India releases a National Telecom Policy which includes an ambitious plan to promote domestic industry, but telecom companies are plagued with bureaucracies of archaic laws from a Telegraph Act that ails from 1885.   Indian Manufacturing Policy and Indian Semiconductor Policy are fraught with lacunae, missing the important pieces of puzzle to form a complete picture.

Short-sightedness is everywhere- either it is city building or policy formulation. 

India is not connecting its villages and towns with wide roads; it is not building railway tracks for high speed trains.  No factories can be set up in villages because there is no power, no water and no connectivity.   Cities are besieged with variety of problems making them unsustainable for overall growth.   India economy has nowhere to go but flounder.

Indian private industry

You would assume that such short-sightedness is confined only to the Indian administrators, bureaucrats and politicians.   You would somehow believe that the Indian private industry is immune from it.  But in reality even the Indian entrepreneurs and private investors are not thinking big or long-term.   The malaise to think small, think short-term and be greedy pervades the Indian entrepreneur ecosystem as well.

Just take a look at the startups that have been invested in the last ten years.  Most of them happen to be online trading companies which do not produce anything.  These startups are taking up the easy task of just buying and selling already produced goods instead of creating new ones.  They sell movie tickets online, bus tickets online, and even sports apparel online.  Instead of creating companies that make affordable diapers for Indian babies or sanitary napkins for Indians girls, they create companies that sell imported diapers online.  A new diaper company in India would not only decrease the cost of diapers for the consumers, but they could be customized for Indian conditions – the way Indian families raise kids and those suitable for Indian weather conditions.   Not only that, such a company would create an ecosystem that would employ hundreds of workers and help twenty odd companies to depend on it, thereby creating a larger ecosystem.

There’s a quote from the movie Wall Street that is relevant here. A father who works in an aircraft industry advices his stock broker son:

Create, instead of living off the buying and selling of others.

Indian entrepreneurs and Indian investors are consistently failing to back big ideas.  They are sticking to clichéd, run of the mill, hackneyed, tried and tested recipes to create and promote those companies which are not risk takers, and those which don’t have long term vision.   

A story from 1800s

Here is a nice story from 1800s.  After initial successes of telegraphy, one entrepreneur based in New York, Cyrus Field, took up the idea of laying a submarine cable across Atlantic Ocean to connect North America and England.  Such a venture had no precedent and it was fraught with many risks.  Yet, there were people who invested 350,000 pounds in such a venture.  A 2500 mile cable was ordered.  They used warships to lay the cable from both sides so that it could be connected in the middle.   However, 400 miles off the coast, the cable snapped and fell to the seabed.

Cyrus Field did not give up.  He tried again.  This time the cable was connected in the middle of Atlantic but very soon the cable parted.  Described as a businessman with ‘vision in abundance’, Field went back to the board to raise more money for the next attempt.  This time at last, the Atlantic telegraph cable was laid.  On 16 August 1856, Queen Victoria sent the first transatlantic message to the American President James Buchanan.  Her ninety-eight word message took sixteen hours to tap out using Samuel Morse’s newly developed code.

But within four weeks, the messages began to fade and soon the line went silent. 

Nine years later, in 1865, Cyrus Field and his Atlantic Telegraph Company found new investors for yet another attempt.  Armed with better cable and a ship that can carry the entire length, they set out again.  After laying 1200 miles, the cable snapped.   But they were not deterred.  Cyrus Field and his directors saw this as a ‘setback not a failure’.   More money was raised for another attempt with improved cable.

This time the transatlantic cable was laid successfully.  The Times described the heroes as ‘the benefactors of their race’.  Queen knighted them, including one of the directors, William Thomson, who later became famous Lord Kelvin.   US Congress gave Cyrus Field a gold medal, and English newspapers called him Lord Cable.  The transatlantic cable revolutionized the business of news and market, and went onto change the world.

I describe this story because I don’t see such a story ever happening in India.  Such risks and perseverance would not be taken up either by Indian entrepreneurs or Indian investors. 

But then history is made of such ventures.  Economies have grown because of such engineering breakthroughs and efforts led by entrepreneurs and investors who ventured into unknown and unchartered territories. 

Problem

India lacks vision.  It is not able to think big.  It is not able to take risks.  And that I see as a far more fundamental problem as to why our economy does not increase the quality of life of our people. 

India is not investing in high tech manufacturing like electronics, semiconductors or telecommunications.  It is not investing in toy making industry, or plastics, or cooking utensils or kitchenware or furniture.  It is not producing agriculture or construction equipment.  It is not producing advanced surgical or medical equipment.

There is no passion for engineering; there is no pride in building better and beautiful things.  There is no joy in creating something wonderful.  There is no glory in perseverance; there is no reward for hard work.  India is a story of short cuts and quick money. 

India has consistently failed to make better cities, promote better technology, and pursue great ideas.  While some countries build long bridges, big dams and fast trains, India continues to flounder.  While some countries build enterprises that produce technology, valuable goods and machinery, India builds companies that trade goods produced by others. 

India has the potential to become a major economic force, but what it needs is the right attitude.

Way forward

India cannot skip these fundamental steps.  India has to go back to the basics and get it right.  It has no other option.  It has to witness its Industrial Revolution, it has to see its Eisenhower’s freeways, it has to see its modern city building with underground sanitation and metro transport.  It has to go through the phase of manufacturing basic goods and then the luxury goods. 

India has to create a generation of Indians who aspire to build beautiful things.  It has to inculcate a spirit of celebrating excellence instead of wallowing in mediocrity.  It has to produce engineers who dream to become engineers instead of just aspiring to become the bean counters.  India has to build and construct.  India has to lay emphasis on engineering, create more structures and products, invest in research and technology.   It has to stop running after low hanging fruits and instead plants trees and forests that produce more, which give itself sustainable advantage in increasing its earning and thereby increase the quality of life of its people substantially.