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Rediff.com  » Business » How scales have tilted in India's favour

How scales have tilted in India's favour

By T N Ninan
December 16, 2006 12:44 IST
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Nandan Nilekani talks about how reaching an annual sales figure of a billion dollars took Infosys 23 years; the second billion took only 23 months. I don't know if the third billion has been reached in 23 weeks, but sometimes it seems that anything is possible - given the way scale is changing for Indian companies.

Take real estate. By one industry estimate, all of India's big cities had 40 million square feet of commercial space as recently as 2003, before the construction boom got under way.

Now the industry is adding 40 million square feet each year! And so a KP Singh of DLF, virtually unknown outside of Delhi and Gurgaon a decade ago, is set to become among the wealthiest Indians once his company goes public in a few months.

The story in telephones is better known: all of India had 5 million telephone connections when the reforms began in 1991; now it is sometimes adding 5 million new connections a month.

Look in almost any direction, and the change in scale becomes apparent. In the first decade since civil aviation was thrown open to private airlines, India's airlines between them did not add much more than five aircraft to their combined fleet strength each year.

Now it is getting to the stage where we are adding that many new aircraft every month.

All of India even now has only 60,000 hotel rooms that are officially counted; since even some city states in the region have many times more than that, don't be surprised if the extreme shortage of hotel rooms today leads to an explosion of new hotel construction.

Steel consumption per head is expected to multiply four- or five-fold in the next decade. Exports were $18 billion in 1991; now we do that in less than two months.

One can go on, but it sounds a plausible story when someone says that an ICICI Bank director told him about a gloomy board meeting - because business had grown only 36 per cent!

Two questions come to mind. First, is this sustainable? And second, what will be the most important constraints that need to be removed if this story is to continue?

To take up the first question, India's middle class (defined as those who come from families with more than Rs 200,000 per year as income) rose in number from 15 million people to 100 million, between 1991 and 2005.

It should be easy enough to guess that that number will treble in the next decade, and reach 300 million - and their average income will be significantly more than that of today's 100 million.

In other words, the consumption basket of the middle class will probably multiply four- or five-fold over the next decade, which translates into annual growth of about 20 per cent. That certainly suggests another scale change over the next decade - which is what many companies are getting ready for. They know that if they don't invest today, they will not be able to take the market tomorrow. To be sure, there is some froth today as markets bubble up, but even after a cooling down is over and done with, it will be hard to deny that the strength of the underlying structural change is morphing India's business sector into something that would have been unrecognisable even a decade ago.

As for constraints, it is becoming increasingly obvious that the primary constraint will not be the physical infrastructure - for so long everyone's bugbear - but a shortage of human resources.

The sharp escalation in employee costs across sectors tells the story clearly: construction firms can't find engineers because software has sucked them all up, the tourism industry cannot get qualified people, the BPO sector is perennially stretched, accounting firms are astonished at the speed with which salaries are going up in their market, and so on.

This would be a happy problem to have, except for the fact that India has vast armies of unemployed. The challenge is to match their skill-sets with what the job market requires.

It is an issue that has not received enough attention so far, and if the neglect continues a heavy price will be paid by the economy as a whole.

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T N Ninan
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