GTBT - The Rise of India is About More Than Just Population.

: Hubert Walas; Created: 14 December 2023

Indias century.

Each era has its own peculiarities and its own champions. The Second World War and the decades that followed saw the explosive growth of US power. The 1970s and 1980s witnessed the 'Japanese economic miracle'. By contrast, the first two decades of the 21st century were dominated by the great rise of China.

Over the years, for various reasons, Indians have been rather passive spectators of these events. But this is changing. India is now the world's most populous country and, according to various projections, will be two or three times more populous than China by the end of the century. India has recently overtaken the economy of its historic colonisers, the British, to become one of the world's top five economies. India is experiencing steady, high GDP growth. Will the 2020s and the decades to come be dominated by questions about India? All the evidence suggests that it will. But reducing the causes of India's growth only to a generous demographic dividend can be misleading.

What makes the Indian case unique? What is the basis of India's growth, and how does Delhi's path differ from China's?

Indian sub-civilisation

Since the dawn of time, India has been a key location for the formation of human civilisation. Nearly 5,000 years ago, the Indus Valley civilisation was formed along one of the world's longest rivers. The vast Indus Delta is a very fertile area, providing excellent conditions for forming the first organised human communities. Interestingly, the archaeological site of Mehrgarh in present-day Pakistan dates back to 7,000 BC, before the Sumerian civilisation.

For millennia, the geography of the region has determined both its resource wealth and its separation from the rest of the Eurasian supercontinent. To the north, the Indian subcontinent is firmly fenced off by the mighty mountain range of the Himalayas. To the south, the tooth-shaped Indian subcontinent is washed by the waters of the Indian Ocean.

It is a self-sufficient, vast area of more than 4 million square kilometres, with many internal barriers - deserts, rivers, mountains, bays and islands.

These conditions have historically led to two fundamental phenomena. The development of hundreds of different cultures and languages within the Indian subcontinent, which from time to time came together to form a quasi-unified entity. And secondly, the absence of frequent external interference due to geographical barriers. Compared to Europe, for example. There were, of course, exceptions to this rule. For example, Alexander the Great reached India in 326 BC. There was also the Mughal invasion in the 16th century. Both armies crossed the Khyber Pass in modern Pakistan. Whereas the Arabs gradually extended their influence by sea. Nevertheless, the area was generally 'inwardly concentrated'.

Everything changed with the era of geographical exploration and the arrival of the British. From 1600, with the creation of the British East India Company, London gradually subordinated the territory to its interests. It brought enormous wealth to the colonisers and was therefore called 'the jewel in the crown of the empire'.

The quest for independence had been with Indians for centuries, but it was only with the weakening of the British after the Second World War that it became a reality. The year 1947 brought a break from the yoke of London, the unification of more than 500 princely states within India and the partition of the territory into India and Pakistan.

India set out on its own path, but it was an extremely difficult one from the start. Delhi was at the bottom of the economic ladder. This, combined with a rapidly growing population, made the country synonymous with poverty, pollution and lack of education. In the decades that followed, this and the conflict with Pakistan defined India's image in the eyes of the rest of the world. It also prompted millions of Indians to leave the country in search of a better life. The Indian diaspora is now one of the largest in the world. According to some sources, the number may be in excess of 30 million, taking into account people who are second or subsequent-generation expatriates.

There is a lot of truth in this image of India that has been painted by films such as 'Slumdog Millionaire'. The country is still plagued by the problems mentioned above, but this image can be a symbol for India of an era that is now passing.

What is the rationale for this?

The Awakening

One billion four hundred million people. It is the size of India's population that is the first and most important issue when starting to think about India.

The scale is hard to imagine. And there is more to come. The peak of one billion seven hundred million will not be reached until the 2060s. A population peak that China is experiencing right now. This means that by the year 2100, depending on the projections, there will be two to three times as many Indians as Chinese. The average Indian is now 28 years old, while the average Chinese is 39. More than 40 per cent of India's population is under the age of 25.

A massive population naturally translates into impressive macroeconomic indicators. India is already the world's fifth largest economy and will be the third largest by the end of the decade, behind the US and China. It took 31 years for Delhi to build a $3 trillion economy. To grow it by another $3 trillion, Indians will need just seven more years.

But to suggest that India will be the champion of the next decade or decades on the basis of its huge population alone is a rather risky proposition. Of course, it is a key factor in Delhi's rise to prominence, arguably a necessary one. But to escape the image of China's underdeveloped, poor neighbour, something more is needed. And India has that.

But let's start with the basics. Between 2016 and 2022, when most people in the West were busy discussing Donald Trump's presidency or the coronavirus pandemic, the number of Indians living in abject poverty fell from 126 million in 2016 to 15 million in 2022. Over a longer time horizon, this number has fallen by nearly 400 million in the last 30 years.

When people don't have to think about how to get food every minute, their goals and actions naturally change. What’s more, this process has coincided in India with the massive expansion of internet access.

This brings us to one of the most important statistics of the current decade. In 2009, about 5% of Indians had access to the Internet - about 60 million people. According to the Digital 2022: India report, India already had around 790 million internet users, or 57% of the population. By 2030, it will be over 90% - that's over one billion two hundred million people. The most in the world.

Of course, almost a billion Chinese are also connected to the internet, so what's all the fuss about? Firstly, the improvement of China's internet network has also been part of the country's economic success in recent years. However, there is a rather significant difference between India and China. One is that Indians... speak English. And that changes everything. The Chinese, despite being the largest national group on the internet for the time being, are essentially cut off from the rest of the world. Even if you get around the geo-restrictions with a VPN, there is still a language barrier.

The language barrier that for a big part of the Indian population is nonexistent - and this means that 700 million new users have joined the 'Western' internet in the last decade, with another 500 million to follow in the next few years.

Why is this so important? Because the internet is the biggest ‘opportunities equaliser' in the world. Wikipedia gives you access to the world's biggest encyclopaedia, Google and Youtube are the world's biggest universities, and podcasts on Spotify let you listen to the world's most influential people in business, physics or the media. All for free. And all in English. A teenager who went hungry every day a few years ago, for example, now has access to a knowledge base that a member of India's richest caste could only dream of three decades ago. Of course, the starting point is still extremely low, but now, with the help of the internet and AI, breaking out of poverty and attaining at least middle-class status is no longer just a dream.

There is another aspect whose importance cannot be overlooked. The great Indian emigration, motivated by the search for a better life, was directed mainly to the United States. The children of these emigrants were already born or brought up in the US, and their drive for money, technology and business was extraordinary. This is illustrated by the representation of Indians at the top of major US companies. Alphabet, Microsoft, Novartis, Adobe, IBM - these are just the top five of the twenty-seven billion-dollar-plus companies headed by Indians. And yet, beyond the CEO positions, there are thousands of developers, entrepreneurs or angel investors like Naval Ravikant or Balaji Srinivasan who serve as role models for the millions of Indians who are just getting connected to the digital world.

The numbers are beginning to show the change that is taking place. In 2016, there were 452 start-ups in India; by 2022, there were 84,000 such companies. Combined venture capital funding of start-ups in 2021 and 2022 reached $64 billion, more than the entire previous eight years between 2012 and 2020, when $54 billion was raised.

But importantly, this change is being felt not only by Indian entrepreneurs, but also by civil servants. None of this would have happened without India Stack.

During a visit to India, Bill Gates commented on the India Stack, saying: “India is on the cusp of leapfrogging!” And it truly is; considering it is the only country in the world offering such an open and secure API, India is certainly looking at taking the Digital India campaign to a whole new level.”

What is Gates talking about? India Stack has such a fundamental impact on the potential development of India that we need to take a moment to look at it.

Digital foundation

In 2009, not only did 5% of Indians have access to the internet, but only 17% of them had a bank account. Hundreds of millions of people were cut off from the financial system, resulting in a huge loss of productivity, tax revenue and socio-economic development. In addition, in 2009, 400 million Indians had no identity document at all!

Also in 2009, the Aadhaar system, which means 'foundation' in Hindi, was launched, ushering in a sea change. The first of the three layers of India stack, Aadhaar is the world's largest biometric system, described by World Bank chief economist Paul Romer as the world's most advanced identity document.

A few years later, Aadhaar eKYC was introduced, which is essentially an electronic authentication system. On top of this comes the second layer of the India Stack - the Unified Payments Interface, or UPI for short - which is a real-time electronic payment system. As boring as it sounds, and without going into detail, the impact of eKYC and UPI has been unprecedented, and the statistics show it.

Analysis by the Bank of International Settlements shows that it typically takes 46 years to bring 80% of the population into the financial system. India achieved this in seven years, and we are talking about a country of over a billion people. World Bank estimates that Aadhaar e-KYC has reduced the cost of onboarding a new customer for banks and financial institutions from $23 to 15 cents. So we are talking about a cost reduction of 15,000%. As a result, the local telecom giant Reliance Jio acquired 100 million customers within six months of implementing e-KYC. Such numbers are insane and are unlikely to be repeated in the future.

Whereas the Unified Payments Interface - UPI, in four years, has become the fifth largest payment system in the world in terms of volume, after Visa, WeChat Pay, Mastercard and Paypal. And in terms of real-time payment records, India has been first since 2020. The operating system is again based on a central body, the National Payments Corporation of India, which licenses banks to use the technology.

The final layer of the India Stack brings all this data together. The Data Empowerment and Protection Architecture, or DEPA, is also the legal framework that defines how much of this data can be shared so that individuals or companies can protect it or use it for their own benefit. It is all encrypted and passes through an account aggregator, which acts as both a broker and a policeman in the exchange of data between different entities.

This is a very general characterisation of the system that has transformed India. A fuller description can be found in the article The Internet Country on Tigerfeathers Substack, link in the description.

Nevertheless, the end result is that we have 700 million Indians connected to the Internet, with another 500 million to come in the next few years. We also have one of the best biometric-financial-digital systems in the world.

Soon, more than a billion people from one of the poorest countries in the world will be competing in a single market with the rest of the English-speaking world, offering their services at a fraction of the cost. And it's not just the services of programmers or IT in general. With the incredible growth of AI, VR and visual technologies, a whole new spectrum of remote services is opening up. India will be a major beneficiary. After all, who is most hungry to take advantage of this technological solstice, and who is best positioned to do so?

The digital world versus the physical world

Of course, nothing is ever black and white, and the world is much more nuanced. India has many hurdles ahead. In addition to the digital sphere, we have a physical one, and in this, Delhi continues to struggle with many issues.

India Stack shows that India is trying to reform internally and is succeeding. However, bloated bureaucracy, a biased legal and tax system and corruption mean that India remains a difficult place to do business. This is also shown by its 63rd place in the Ease of doing business ranking.

This is particularly evident in the manufacturing sector, whose contribution to GDP creation is very low given the country's potential. Compared to its neighbours China, Bangladesh or Vietnam, where manufacturing accounts for between 22% and 28% of GDP, India's share of manufacturing in GDP is only 13% and has been declining for several years. The services sector, on the other hand, accounts for more than 50% of GDP.

8 million young Indians enter the labour market each year. However, only half of adult Indians are employed, compared to ⅔ of Chinese. Of those who are employed, 90 per cent are in jobs without regular pay, stable hours or benefits. In 2021, 10 million people applied for 35,000 jobs in the Indian Railways. That meant 300 applicants for every job.

For this reason, some analysts are sceptical about India's ability to seize the opportunity presented by the decoupling of Western, particularly US, companies from China. On paper, India is an ideal candidate - the world's largest young population, low costs per worker and converging perceptions of China are obvious advantages. On the other hand, as Arvind Subramanian and Josh Felman note in Foreign Policy: "In August 2022, nearly 80 percent of the $160 billion increase in the capitalisation of India's stock market went to one conglomerate - the Adani Group, whose founder suddenly became the world's third richest person. In other words, the playing field may not be level for all.

Nevertheless, it can be argued that India Stack is the beginning of a larger process of simplification and harmonisation of rules and laws that have built up over the years. It will take many years, but the process is already underway. Both the World Bank and the International Monetary Fund are upbeat about India's future, despite the problems mentioned.

The former stated that "India is better positioned for global tensions than other major emerging economies". The IMF, on the other hand, pointed out that "successful implementation of broad-based reforms and higher-than-expected dividends from digitalisation could boost India's medium-term growth potential."

The country's rapidly improving infrastructure could also influence positive sentiment. Spending is on the verge of breaking the $100 billion a year mark. The country is slowly completing its road network thanks to the Bharatmala project. The initiative is behind schedule but is expected to involve the construction of 34,000 kilometres of roads and highways. The cost of the project is estimated at $130 billion. The Sagarmala project, on the other hand, aims to upgrade and build new ports and create special coastal economic zones. The cost? $116 billion.

One sign that things are changing - even in manufacturing - is the actions of the world's most valuable company - Apple.

Apple's manufacturing operations in India are just getting started. The company is outsourcing iPhone production to plants in southern India. Around 3 million units were produced in India in 2021, which may look poor compared to 230 million in China. However, given the improving domestic conditions in India and the fact that the company can spend 50% less on payouts than in China, the gap is sure to narrow.

In September, Apple announced that it plans to manufacture 5 to 10 per cent of its new iPhone 14 models in India. In November, Foxconn - the manufacturer of Apple devices - announced that it would build a $20 billion semiconductor plant in India with a local partner.

A demographic dividend, especially one as large as India's, undoubtedly gives strength to the political centre that wields power over it. But the real strength of the state comes not from the consolidation of the resources of millions of poor citizens, but from the collective of strong individuals.

India has millions, but so far the vast majority, of poor people. But the last few years have been about laying the foundations for productivity growth at the individual level. Lifting millions out of extreme poverty, increasing access to the internet and reducing barriers, combined with the growth in entrepreneurship that the India Stack provides, is a combination that is hard to ignore.

Of course, the country still has a myriad of structural problems, but if we cut through the pervasive noise and reflect on the key drivers of growth, there is much to suggest that India has what it takes.

With this kind of introduction to the subject of India, which has been missing from this channel, I invite you today to an episode in which we look at how Delhi and the Modi government are exploiting this potential that they are inevitably aware of. Why do we see India so close to Russia, which is more or less China's junior partner? And will the potential described in this material be lost with the nationalist turn of the Indian People's Party of prime minister Modi? All this will soon be discussed.

Sources:

Hubert Walas

Founder of Good Times Bad Times, author.

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The Rise of India is About More Than Just Population.

Indian sub-civilisation

The Awakening

Digital foundation

The digital world versus the physical world

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