India needs a new growth model

As we emerge out of COVID pandemic, we face high inflation, rapid de-globalization, increased tariffs and other protectionist tendencies. How can India become a 10 Trillion economy in this new world?

As India evaluates possible growth paths, we realise that the environment around us has changed drastically. To grow thus far, we became the back office of the world. We become software experts but at the back end. We tried to manufacture for global MNCs.

We are not the first at this point. The US went through a growth phase in the 1900s, post World War II Japan, Germany did it. Asian Tigers had their growth phase in the 1990s. But I find most of their growth models were similar and China broke those models.

The path for Indian growth will be tough. The older growth models are broken. India needs a new growth model.

Older Growth models

Various growth models have been prevalent over time.

Colonial Model involved control over the suppliers of raw materials and buyers. The colonizer was the intermediate processor and they controlled the wealth creation. To gain control over the value chain the colonial powers used military force.

American Model used innovation, capacity and competition to build wealth. It involved developing new products (light bulbs), new methods of production (cars), scale (retail) and intense competition to create wealth. In essence, here markets are not controlled. The seed capital for American industry came from being productive suppliers to colonial powers.

Post War European Model is quite similar to that of the American model except that it uses borrowed external capital. It also relied on the expansion of trade across the world but importantly between America and Europe.

Japanese Model used policy liberalization, external capital and ideas but built upon it, first with lower costs and then with superior quality, to deliver competing products to expanding developed markets. Japan had held its advantage by keeping its domestic consumption in check. Two shocks pushed Japan towards innovation – the end of US Dollar -Gold linkage in the 1970s and the Plaza accord in 1985.  

East Asian Model followed the Japanese model but in later stages held their advantage using a devalued currency. The east-Asian crisis required the creation of Dollar reserves allowing them to keep their currencies low. They also benefitted from US guarantee of world order.

China Model is simply the East-Asian model on steroids – a LOT more steroids. So much so that it may have broken the entire system. While East Asian growth was based on private enterprise, the Chinese growth model was based on the government trying to replicate that model at a very large scale and blistering speed. In many products, China installed capacity twice the global demand within just 20 years.

Older growth models are broken

During the 1970s and 1980s Japan almost broke the model. Japanese growth was going to cause large scale unemployment in US because of its actions. But the American response almost pushed Japan to the brink. Treasury Secretary, John Connally, famously said, “Dollar is our currency, but it is your problem”.

But China was way bigger than Japan. China broke the growth model by scale and speed. It did not allow the developed markets to adjust to the new shifting of production centres. The Chinese investment-subsidy model hollowed-out middle class from the entire developed world except, maybe, Germany. This time too, there will be a response -possibly a global response. The trade war and resulting protectionism are going to get worse.

Thus, India has to grow at a time when global growth is sluggish, globalization has plateaued and is likely to reverse. Countries will create barriers to protect domestic markets. India will have to fight for the global consumer, on unfavourable terms, with entrenched players. India will face stiff competition winning in the markets outside India. There is a shortage of consumer demand globally. So, all the top global companies will look to gain from addressing the Indian demand. Within Indian markets too, there will be intense competition. India will not have any advantage except what naturally accrues to it.

Only competitiveness will drive growth

The way to win in this environment is by Competitiveness – exceptional competitiveness.

Indian firms need to be super innovative - create better products that world wants to buy. Most of the iconic Japanese products – Walkman, Casio G-shock, Honda Accord, etc. came in the face of the American response to Japan’s rise. Chinese too intends to follow that strategy. For example, Huawei phones are winning consumer appreciation for innovation in photography.

Indian firms must be super productive - have the best product at the lowest prices. Even today, our firms compete with products from China and across the world which tend to be cheaper despite high import costs. Indian firms need to win this battle.

Indian firms should be able to scale rapidly when their product or service becomes successful. Firms should be able to procure global equipment, skill the manpower and reach the market quickly.

Indian firms also need to be opportunistic. For example, we can leverage the global supply chain created by Amazon and allow our entrepreneurs to sell globally. We must also seek out firms relocating out of China in light of trade tensions.

Building Competitive firms need support

Amazon’s global supply chain allows small businesses from mofussil towns to sell to global consumers. This Amazonification of consumer markets is something we can build out in India in a competitive manner.

Just to help small firms sell through amazon we need to help them set up Amazon sellers page, identify the products trends and create marketing, advertising and outreach strategy. To help firms scale rapidly needs access to risk capital. Thus, building competitiveness requires a network of practitioners, consultants, investors, etc. - an ecosystem. While such talent and capital exist in India, it is not organised effectively.

We have experts to help a bankrupt firm resolve its bankruptcy, but we do not have experts who can help the firm grow. Government should help create this mechanism with help from industry bodies. Bodies such as the Institute of Management Consultants of India (IMCI) should be pushed to help Indian firms in building exceptional competitiveness.

In sum

The path for Indian enterprises is difficult but not impossible. The first step on this path is to understand and acknowledge that our growth cannot come using the old models. The days of being a cheap, high quality, large scale supplier to MNCs are over.  

Just as we are adopting global and domestic training methods to win medals in Olympics, we need to adopt a mix of global and domestic strategies to be globally competitive. If we train hard, we can win in the coming uncertain global environment.

Disclaimer:

The author is advisor to IMCI in a legal capacity.