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April 23, 2008

The Five Most Important Things About Growth in India

Bruce Greenwald
Robert Heilbrunn Professor of Finance and Asset Management
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Excerpts from a talk given at CBS’s 2008 India Business Conference on April 19.

Indian growth is going to depend overwhelmingly on what happens locally in India. The reason India and China went from being peripheral players in the world market in 1980 to the powerful forces they are today didn’t have to do with changes in the global market. It had to do with local changes in India and China. In places where these changes haven’t taken place — in Russia for example — you see their participation in the global economy is what it always has been: just as a supplier of raw materials.

The reason so many Chinese goods now sell around the world is not because the demand for those goods has suddenly materialized, but because productivity growth in China — and it’s the same in India — enabled it to provide goods and compete successfully in global markets.

This trend is going to get more — not less — important in the future. If there is one enormous antiglobalization trend, it is that local services — education, medical care, housing — are becoming much more important for consumption and therefore economic activity than manufacturing or other kinds of services. There is a limited demand for manufacturers — there are only so many suits of clothes you can own, in the same way there is only so much food you can eat, notwithstanding the rising weights of Americans. Manufacturing, in terms of its importance in employment and economic activity, is going to go the way of agriculture in the 20th century.

This applies also to outsourceable services. Remember, for services to be outsourceable, you have to be able to routinize them. If you can routinize them, you can automate them. If you can automate them, those jobs are ultimately going away. So local services are going become much more important in India and all over the world.

Think locally not globally. Big global markets are extremely competitive. Chinese manufacturers do not make significant profits because they are competing with other Chinese manufacturers. In fact, if you look at the top 25 Chinese companies other than the natural resource companies — this is in terms of profitability and market capitalization — they are all local service companies: power companies, mobile companies, banks and insurance companies. If you can dominate local markets, especially where those local markets are growing, that’s where you’re going to do much better.

This applies to finance too. It is a perpetual surprise to me that overseas investors repeatedly get sucked into the kinds of difficulties that the U.S. has gotten itself in trouble with — mortgages, and before that in many other areas.

Also: when it comes to business profitability, it’s important to think not globally, which is what the propaganda is about, but locally, so that you can take advantage of growth and the benefits of growth are not competed away.

The world is not flat. There are very important differences across economies. If you spend time in India versus China, it’s immediately striking how different those two countries are. If you think about problems in those countries, they are very country-specific. I think when you arrive in India, you see the most important thing that is going to affect growth and the quality of life is actually land-use planning, and there are obviously other economies in which that is not so important.

The most striking thing I learned on my recent trip to India is this: when you sit down with Indian business people, they are superb marketers and business strategists. You talk to them about what they have to do to succeed in different marketplaces, and they are just extraordinarily well trained in talking about that. But if you go to the manufacturing plants, and if you compare these to plants all over the world, they are not particularly strikingly efficient — nothing like Japanese plants, where nobody is basically there and yet they produce enormous output. And you talk to them about that and they say, “Oh well, yes, we’re not very good at manufacturing because Indian workers are creative and not obedient as opposed to Chinese and Japanese workers.”

So if you’re going to think about growth in India and the interactions between India and the world, you have to have an appreciation for the cultural realities, and not only of India but of the different regions in India.

India is not destroying U.S. jobs. It has always been the case that productivity growth has caused the loss of many, many more jobs than the overseas movement of jobs. And nobody — not even the people currently running for president — have suggested that we do away with productivity growth. And I think you ought to keep the same thing in mind when you think about loss of jobs to India.

India is experiencing really the miracle of modern life. It used to be that only a very small stratum of the human race had what we think of as modern standards of living — eating a variety of foods, having the freedom to travel and real entertainment. That is happening in India now, and the most important question to keep in mind at this conference is how to persistently generate the local conditions that will allow that to continue.

Photo Credit: Jasvipul


by Experts on Credit | April 23, 2008 at 4:47 PM

I really enjoyed this post. Very interesting.

by riathareja | April 24, 2008 at 6:48 AM

Investment scenario has certainly undergone a paradigm shift in India. Gone are the days when potential investors used to sought after investment options like equity bonds and park money in shares where your return ranges between 5.55 to 6%. Data showcased by property surveys show that returns from rental incomes on investment in commercial property in Indian metros, is around 10.5%, the highest in the world.The Indian economy and the real estate sector in particular are high on its ride to prosperity. As India’s economic growth curve rises, real estate India has emerged as one of the most appealing investment areas for domestic as well as foreign investors. Indian real estate has huge potential demand in almost every sector, but especially commercial, residential, retail, industrial, hospitality, healthcare etc. But maximum growth is attributed to its growth from the booming IT sector, since an estimated 70 per cent of the new construction is for the IT sector.Selling and buying Indian property is now considered as the most profitable and attractive business opportunity in the present real estate scenario in India. New demands have added to strength of real estate markets across the commercial, residential and retail sectors in India. Not surprisingly, demand for Indian property has been increasing steadily for the past few years and it has exceeded supply.Lower interest rates, easy availability of housing finance, burgeoning income and better job prospects, increase of nuclear families have given a boost to the demand for residential properties in India. The net yields (after accounting for all outgoings) on residential property are currently at 4-6% p.a. However, these investments have benefited from the improving residential capital values. As such, investors can count on potential capital gains to improve their overall returns. Capital values in the residential sector have risen by about 25-40% p.a in the last 2 years.In the present day scenario, if there is any powerful investment tool that brings burgeoning financial returns, it is INDIAN REAL ESTATE!!! Investors should consider the parameters minutely and meticulously to find out why investing in Indian real estate now is the best viable option.For more view- realtydigest.blogspot.com

by Andrew Arbenz | April 25, 2008 at 8:47 AM

Prof. Greenwald's post is very interesting. I think that China and India's success is mainly due to labor arbitrage to those countries from more developed (and expensive) countries, driven by multinational companies. Much of the low cost characteristic of China and India is due to weak employee and environmental protections. A key difference between the two countries, of course, is that China is not a democracy while India is. In the future China and India will lose business to even cheaper countries, such as Vietnam. So, in essence, it's a "race to the bottom" insofar as labor expense is concerned. However, with the current pullback in the Chinese and Indian stock markets, I think that these stock markets are considerably more attractive than they have been for some time. Andrew Arbenz '73 Riverside Capital Management

by Michael Wilson | May 06, 2008 at 1:25 AM

This post is simple but makes wonderful points. Thanks for sharing your thoughts.

by jasmine | May 07, 2008 at 11:54 PM


by Sanjeev Sharma | May 20, 2008 at 11:57 PM

Ria, the high capital appreciation in Indian real estate sounds similar to the US real estate of a few years back.

by Somansh | October 31, 2009 at 11:57 AM

Excellent views given by Prof Bruce Greenwald.

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