Wednesday, December 12, 2007

The Globalization Confusion

It is interesting to see people confused by the melting of borders and integration of various economies of the world into a world economy (disclaimer: I do not claim to be the most enlightened one myself). This was well highlighted yesterday while I was interviewing a candidate for a position.

The candidate was very bright (alum of IIT + IIM) and had a wealth of consulting experience (mostly in the US). He was planning to settle in Bangalore after having stayed for around 6 years in Silicon Valley, and it was an obvious interview question to ask what made him decide on Bangalore over the valley. He felt that Bangalore was where all the action was. It was in Bangalore that the new, the next and the greatest would be created in the near future. He felt that in the next few years (maybe 10-15), India will be the place and he wanted to be there at the start. I would not go further into the questions and answers as it is not fair to reveal more on this blog.

You can see many people sold on to the India story. Oft quoted example is the number of cellphone connections where India is adding 3.5 connections per second. People feel that Indian middle class holds a lot of consumption promise. A lot of big names like GM, Microsoft and Google are in India doing RnD. I just wonder aloud:
  • Most (if not all) of the end consumers for MNCs operating in India are in the US or Europe. The are just leveraging the costs from India, not serving the Indian middle class (yet).
  • India has just 30 million Income Tax payers. Even if you magnify this number by 5 to include all the people who do not declare their income, this is abysmally low in a population of 1.1 billion. Considering even 150 million people with incomes above Rs. 150000 (US$ 4250) a year, I would guess a maximum of 20% or 30 million will have incomes in the above Rs. 900,000 (US$22500) a year. Contrast this with 300 million people in the US, out of which at least 60% make more than US$24000 a year. It is simply no comparison. [Update1: Omkar Goswami confirms that the number of income tax returns over INR 10 lakhs for 2005-2006 was 5.62 lakhs. This makes around (only!) 5.5 million people with incomes above 10 laks or US$25000 per annum, even assuming that only 10% people declare their incomes]
    Assuming only 10% of the people earning over INR 10 lakhs declare their incomes, it makes 5.5 million such people]
  • People who talk of the number of mobile phones in India should also talk of the number of opportunities for Banks operating in India. Why is India not such a hot Banking destination with a population of 1.1 billion - why are Bank accounts not multiplying at even half the rate of mobile phones? Why are the Citibanks and BoAs not scampering to expand their network, reach and business in India? Or what about Credit Cards? Cars? Talking of Indian population is not the same as talking of business opportunities.
It is easy to be blinded. One important thing to know for any business is to understand who is their customer and what she wants. If sitting in India, serving US customers equips you to hype about the India story, you are in for a rude awakening.


Anshu Sharma said...

I congratulate you on bringing some metrics to light here. I am very sanguine about India's prospects too but it behooves all of us to base them on reality.
India is growing rapidly at over 8-9% and US at only 3-4%.
10% of $1 trillion = $100 billion
4% of $11 trillion= $440 billion

This means India will add $100 billion to its GDP this year, and US will add $440 billion.

Yes, compounding works wonders over decades. I am very upbeat on India but I am also optimistic about the US and global economy.

Nitin Goyal said...

Even with compounding (assuming these growth rates remain consistent for 10 years):
India's GDP: 1 trillion becomes 2.6 trillion (10% growth p.a), value added in the 10th year= 260 billion.
US' GDP: 11 trillion becomes 16.3 trillion (4% growth p.a.), value added in the 10th year = 650 billion.

Only if this is sustainable over 10 years. I would not bet on it.The issue here is that if there is no domestic consumption, India simply cannot break free.

Anshu Sharma said...

Small error in your update - 5.5 lakhs is 0.55 million and not 5.5 million. So the number of tax payers in India with over 10 lakh in income (USD 25,000) is 550,000 (or half a million).
The consumption in India is driven by asset price growth (bubble) further leveraged by cheap and easy credit.
I am wildly optimistic that incomes are growing in India and that will lead to more consumption. In particular there will be millions more added to the 1 lakh to 10 lakh (USD 2.5K to 25K) in annual income segment.
Businesses that capitalize on this segment (such as Tata Motors and Reliance Communications) would have good upside with minimal risk.


Nitin Goyal said...

No - the number of 5.5 million is correct assuming that only 10% of the people making over 10 lakhs an annum declare their incomes.

Somehow I am still not so bullish on these numbers. Lets see how it pans out.

Born2Conquer said...

If we can contain inflation in India and utilize the tax-payers money properly, then we can beat US and other countries.

Anonymous said...

Nitin, greetings from Israel.

I can't even find a smart word to add to the wisdom and good taste displayed on your article and the comments of the other readers.

Yesterday I received a cyber-offer from some dude in the US. He was trying to convince me (and I supect, at this moment, he is trying to convince others) to invest on the fastest growing and most promissing business on this galaxy ........ financial services in India......

Long life to India. Peace, abundance and prosperity. I haven't been to your country yet. My son and my daughter had ...... and God willing, in the near futur I'll be there.

Keep up with your activities and keep up with this blog.

Herzlia, Israel