Mention India to many CEOs and investors, and they will smile broadly at the thought of its “demographic dividend”.
Two-thirds of India’s population are under-35,and are already swelling the numbers of those in the critical Wealth Creator 25 – 54 age group which drives economic growth. As the chart shows:
India’s median age is just 27 years today. It will still be only 31 years by 2030
The Wealth Creator cohort is already 523m, and will reach 652m by 2030, whilst the Under-25 cohort is over 600m
There are only 169m in the New Old 55+ generation. Although life expectancy in India is now 69 years, it was just 37 years as recently as 1950
Helpfully, a major new survey by India’s Centre for the Study of Developing Societies provides new evidence on the hopes and values of this vast younger generation. It aims:
“At understanding the social and psychological wellbeing of young people….because if the expectations of this growing mass of youth are not addressed on time, then the disappointments of this burgeoning population could translate into social unrest and even violence.”
Its key findings are critically important:
One-third of young people are classed as students, up from just 13% during the last survey in 2007. But many are apparently “studying further to delay entry into the workforce or perhaps as a means of ‘timepass’
There is also a clear caste divide in terms of access to education, with “42% of Upper Caste youth reporting themselves as students, compared to 25% of Dalit youth and just 16% of Adivasi.”
“Agriculture is the largest employer of India’s youth” – and 39% of these young people are lowly-paid hired workers
Unsurprisingly, given this background, nearly 1 in 5 young people are worried about jobs and employment, whilst 1 in 10 worry about inequality and corruption
India’s youth also tend to be conservative – 53% oppose dating before marriage, 45% oppose inter-religious marriages and 36% oppose inter-caste marriages. And the survey adds:
“We also ascertained the youth’s opinion on contentious issues which have been at the centre stage of the ongoing debate over liberty and progressive beliefs – banning of movies which hurt religious sentiments, beef consumption and death penalty. We find that 60% supported banning movies which hurt religious sentiments. 46% object to allowing beef consumption and 49% support retaining capital punishment. These figures clearly indicate that most youngsters remain averse to progressive beliefs on political issues.”
As the Financial Times notes in its comments on the survey:
“Religion retains a powerful grip. Nearly half give religion precedence over science when they clash, while just a third would privilege science over religion….more than half of youths believe women should always listen to their husbands. Nearly two-fifths feel it is inappropriate for a woman to work after marriage, while a significant 38% feel women should not wear jeans.”
Similarly, 40% of young Indian women “favoured the idea of an obedient wife”
The survey evidence confirms a critical paradox about India:
Most young Indians have smartphones and are style-conscious
Yet like most poor people, they are very conservative in their social attitudes, with patriarchy deeply-rooted
It is very easy for non-Indians – seeing television news or making an overnight visit en route to/from China – to simply see the smartphones and fashion, and assume India has now become a middle class society by Western standards. Of course, it does have relatively rich people. But fundamentally, as Indians all know, it remains a very poor country with average earnings just INR 272/day ($4.20) – and less than two-thirds of adults are literate.
There are vast opportunities in India, once one accepts these key facts. These are often focused on helping people to build a better life for themselves – one example, as premier Modi has highlighted, is in providing toilets for the 600m who currently lack access to them.
Hindustan Unilever has understood this basic truth for many years, and has become India’s largest consumer products company as a result. Their mission statement is simple and powerful – “doing well by doing good“.
It is now just over a month since India introduced the biggest currency reform the world has ever seen. In a country of 1.3bn people, it abolished the 2 main banknotes (worth $207bn), that accounted for 86% of all cash in circulation.
At 20:15 hours on 8 November, the government announced that the 500 and 1,000 rupee banknotes (value $7.30 and $14.60) would become invalid at midnight. It had apparently begun planning for the reform last year, with the aim of:
Reducing the role of the black market (thought to be around 20% of GDP)
Expanding the number of taxpayers, as currently only 1% of the population pay tax
Cutting back the availability of funds for terrorists
Moving India towards a digital economy
The problem is that currency reforms are very complex. The euro changeover took 3 years to organise, and covered less than half of India’s population. It was also done publicly, so potential problems could be spotted and solved.
By contrast, India’s reform had to be done in secret. And unlike the euro area, India is a very poor country, with median income of just $616. Cash is therefore critically important to individuals, and accounts for 98% of all consumer transactions: 600m people have no access to bank accounts and there are just 18 ATMs per 100k people.
As the Governor of State Bank of India warned in a report when rumours of the plan began to circulate in April:
“If demonetization is being contemplated, a road map needs to be created. It needs to be done in steps and be balanced with creation of necessary electronic and digital infrastructure in the country, coupled with creating awareness and financial literacy for ensuring that the man on the street is not put to undue hardship,” the report said.
Going into the advantages of demonetization, the report said that demonetizing Rs 500 and Rs 1,000 currency notes will bring a huge amount of the funds kept in these denominations into the banking channels and will facilitate a reduction in domestic black money transactions. But this would also be a headache when it comes to logistics.
“At the branch level, the cost of handling cash would zoom and there would be complete chaos as the funds kept in these denominations will be flushed into the banking channels,” the report said. The report goes on to say that introduction of a Rs 5,000 note will also not solve the problem and would continue to result in ATMs running dry several times a day.”
Sadly, it seems that the Bank’s warnings have proved all too accurate:
As of yesterday, the amount of valid currency in circulation is only 42% of the pre-reform amount, as the printing presses only began rolling in late October
Tens of millions of Indians have been standing in bank lines to exchange old notes for new 500 or 2000 rupee notes
One problem is that the new notes are smaller, which means all ATMs have first to be reconfigured – which is estimated to take 45 days
Shortages have been widespread, with the Financial Times’ correspondent reporting a 3 week wait for her local ATMs to start issuing the new notes
The drive towards digitalisation is also hampered as India has just 1.5m point-of-sale (POS) terminals – 1 for every 1785 people, compared to 1 for every 60 people in China
The government has promised to supply 2 POS terminals to every village of 10k people – but there are 100k villages of this size and it will likely take up to 6 months for them to arrive as they will have to ordered from China
The shortage of cash has already forced the government to allow farmers (who are mostly very poor) to use the banned 500 rupee notes to buy seeds for the winter sowing season
Clearly ordinary Indians have suffered the most from the poor execution of the planned reform. But the economy must also be suffering, given that cash is around 12% – 14% of GDP (compared to just 5% in most large economies).
The Japan Times reports: “Consumer goods sales are reported to have dropped by one-third. Trucks are at a standstill. Farmers have difficulty buying seeds and fertilizer and selling crops and perishable produce. The fishing industry is close to collapse. Few villages have ATMs and having to trek into cities and wait in line for hours means the loss of daily wages — as it does for the rickshaw drivers, street vendors, domestic workers and daily laborers in the cities. The construction industry has been badly hit with significant wage implications for its casual workforce.”
The Financial Times reports: ”Gaurav Daga, owner of Oswal Cable Products, imports plastic polymers used to manufacture everything from industrial cables to shoes to automobile components. His clients run across the gamut of India’s manufacturing sector, from large national brands and their big suppliers to small industries.
“His sales have dropped by half since Mr Modi announced the ban on the use of high denomination banknotes, and imposed cash rationing. Several of his big customers — large, national shoe companies with bank accounts and big workforces — have been forced to suspend production, due to their inability to pay their workforce — rural migrants, with neither bank accounts nor smartphones.
“They don’t have money to give to their labourers,” Mr Daga said. “They have it in a bank but they don’t have currency. And you cannot open bank accounts for everyone overnight.”
The Economist reports that India’s rural economy is “seizing up“: “In the second week of the (cash) drought, deliveries of rice to rural wholesale markets were 61% below prior levels. Soyabeans were 77% down and maize 29%. Prices have also collapsed. In Bihar, Scroll’s reporters found desperate farmers selling cauliflower for 1 rupee ($0.01) a kilo, a twelfth of the prior price”.
Wood Mackenzie reports that in petrochemicals, “Several producers are exporting chemicals due to lack of domestic demand, and running out of storage/warehouse space. The cash crunch will hit India’s automotive and real estate markets hard….Even if everything goes according to plan and there is sufficient cash available by the end of 2016, we expect impact of demonetisation to be a slowdown for a few quarters, at least.”
India’s Automotive Association has reported: ”2016 Sales Temporarily Disrupted Due to Demonetization”. And oil demand is also being impacted. November volumes were strong, as the government issued a waiver to allow people to stock up using their old banknotes. But December and Q1 are likely to be weaker according to Essar Oil’s CEO. This is very bad news for OPEC, as India is key to global oil demand growth.
Premier Modi has promised the problems will start to be resolved by the end of December, 50 days after the reform began. We must all hope he is right.
China’s slowdown is continuing to reverberate around the world. One way of measuring this is to look at auto sales in countries closely linked to China’s market such as Japan, Russia and Brazil. As the chart shows, they did well during China’s stimulus period, but they are struggling now. By comparison, more self-sufficient India has so far avoided the worst of the storm:
- Japan’s sales fell 24% in January versus 2014, confirming the 1.4% decline in its 2015 GDP
- Russia’s sales almost halved, as its currency collapsed in response to China’s slowdown
- Brazil’s sales were hit even more badly, down 52%, as the political crisis continues to escalate
- Only India was a relative island of calm, seeing its sales rise 7% over the period
Overall, January’s sales in the 4 countries were down by almost a third, 29%, to 800k. And during the 2008 – 2013 period, when China’s stimulus programme went into over-drive, the 4 countries sold 1 in 5 of all cars sold in the world. Today, they are back at just 16% of the global total, close to 2005′s level.
Its easy to overlook these second order impacts. But they are just as important, perhaps even more important collectively, than the direct impact of the slowdown in China itself.
One key issue is that China is aware of its problems, and has been focused for the past 3 years on overcoming them – hence its New Normal policies. But Japan, Russia and Brazil had no thought for the future:
- Japan introduced its own form of stimulus in Abenomics in 2013, even though the previous 20 years of stimulus showed this would inevitably fail
- Brazil and Russia assumed their export revenues would always continue, and allowed corruption to flourish at the expense of economic reform
- Only India has set out on a realistic reform programme since Premier Modi’s election victory in 2014, focused on meeting real needs for toilets and better living conditions
Russia highlights the scale of the reversal. Its real wages (ie adjusted for inflation) fell 11% last year. People don’t buy many cars, or other non-essentials, against this type of background. Yet less than 3 years ago, just as the bubble burst, Boston Consulting had forecast it would be the world’s 5th largest market by 2020, with sales of 4.4m.
These developments create major challenges, even for those not doing direct business with China. They highlight how the chemical industry has reached a fork in the road, just like the auto industry – its major customer. GM’s President, Dan Ammann, put it very well last month, when he warned:
“We think there’s going to be more change in the world of mobility in the next five years than there has been in the last 50 years”
His use of the word “mobility” is also significant. People around the world will still need mobility, but will they need to own cars to achieve this? Probably not, if they live in cities, which most people now do in the wealthy developed economies. Ammann highlighted this in June 2015, when commenting:
“It’s the last thing you should do because you buy this asset, it depreciates fairly rapidly, you use it 3% of the time, and you pay a vast amount of money to park it for the other 97% of the time”.
This paradigm shift is one of the main topics in our new Study – “Demand – the new direction for profit”, which will be published early next month. In it, we focus on describing the new business models needed for future success, and detail practical ways of using these to develop major new revenue and profit streams for the future.
The world, as we see from the second order impacts of China’s slowdown, is dividing into Winners and Losers. There really is no going back to the BabyBoomer-led economic SuperCycle. And whilst all change is uncomfortable, the experience of Japan, Russia and Brazil suggests that failure to change can produce an even more unpleasant result.
The blog is delighted to be able to congratulate Indian Oil (IOC) on becoming the first company to commit to building toilets in India. In response to Premier Modi’s appeal, the chairman of India’s bggest refiner, B. Ashok, last week personally began to build toilets at a school near its refinery in Mathura in Uttar Pradesh state.
IOC have already committed to builidng 1000 toilets for girls. Even better is that Oil and Natural Gas Corporation (ONGC) along with GAIL, Bharat Petroleum and Hindustan Petroleum are also planning to participate. ONGC said in a statement:
“The project has been launched in 2 schools in Ganjam and 8 schools in Gajapati districts of Odisha and in 10 schools near ONGC work centres in Tamil Nadu, Andhra Pradesh, Gujarat, Assam and Tripura. The mission is to achieve total sanitation in India over a period of next five years”
The key driver behind this activity is Modi’s policy of targeting sanitation for all within 10 years. This is an enormous task, as around 600 million Indians curently have no access to toilets. As a result, they have to defecate in the fields, as the picture above shows. This not only transmits disease, but also puts women at risk of rape by forcing them to defecate at night-time.
This is why the blog is so supportive of the premier’s initiative. Providing sanitation is likely to prove the best possible way of boosting India’s long-term growth potential. And it also creates a virtuous circle for manufacturers, as it creates a major new market for polymers – worth at least $10bn.
It hopes that more companies will now follow IOC’s lead. India has some of the best demographics in the world, and its economy could therefore have excellent growth rates in the next few decades. But it will not achieve its potential unless its people are fit and healthy.
Modi’s campaign also highlights how a focus on real needs, such as proper sanitation, will be the key to success as the world enters today’s New Normal
The Indian Prime Minister’s address on Independence Day is the major event of the political year, equal to the US President’s ‘State of the Union’ speech. It was particularly important this year as India has a new reforming prime minister in Narendra Modi.
It it is thus hugely significant that top of his agenda was opening up the country to foreign business, and the need for toilets, as the Financial Times reports:
“I want to tell the world, ‘come, make in India’,” he said from the walls of the 17th-century Red Fort in Delhi in his first Independence Day speech. “We have the skills, we have the strength, we have the people.”
Modi then focused on toilets, and confirmed that the government was targeting sanitation for all in 10 years:
“I don’t know if people will appreciate my talking about dirt and toilets from the Red Fort. But I come from a poor family. I have seen poverty, and the attempt to give dignity to the poor starts from there”
The need is truly desperate, as the chart above shows from the World Health Organisation. They suggest that 597 million people still defecate outside in India. This vast number equals 10% of the world’s total population. It is also 10 times more than 2nd-placed Indonesia, where 54m have no access to toilets.
The blog knows that most companies are currently not set up to focus on critical issues like this. But that is no reason to ignore the potential. There are not many $10bn markets where competition is currently non-existent, and where the technology and know-how required are available immediately.
Equally important is that the alternative of hoping for traditional growth markets to recover looks very much like wishful thinking:
- The market for luxury goods in China is looking very weak with the anti-graft campaign in full gear. And China was half of the global luxury market in 2013
- The Eurozone economy is already weakening again, whilst the German Bundesbank is warning it will be hit by the increase in global tension in the Ukraine and elsewhere
- US auto and housing markets face major question marks with the West having reached ‘peak car’ levels and US housing markets already slowing down
Of course, moving into this new market represents a challenge. But it is also likely to be a stepping-stone to further, currently untapped markets focused on basic needs, as we described in Chapter 7 of ‘Boom, Gloom and the New Normal’.
As such, it will provide valuable learning experience for the future. And it will also be a lot more satisfying than banging your head against a brick-wall, now the profitable markets of the SuperCycle have now gone ex-growth.